<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-55807
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HOST MARRIOTT, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
DELAWARE 7011 52-2095412
(PRIMARY STANDARD INDUSTRIALCLASSIFICATION CODE NUMBER)
(I.R.S.
(STATE OR OTHER EMPLOYERIDENTIFICATION
JURISDICTIONOF NO.)
INCORPORATION OR
ORGANIZATION)
10400 FERNWOOD ROAD BETHESDA, MARYLAND 20817 (301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
CHRISTOPHER G. TOWNSEND GENERAL COUNSEL HOST MARRIOTT, L.P. 10400 FERNWOOD
ROAD BETHESDA, MARYLAND 20817 (301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. WARREN GORRELL, JR., ESQ. BRUCE W. GILCHRIST, ESQ. HOGAN & HARTSON L.L.P.
555 THIRTEENTH STREET, N.W. WASHINGTON, D.C. 20004-1109 (202) 637-5600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DATED AUGUST 7, 1998
PROSPECTUS/CONSENT SOLICITATION STATEMENT
HOST MARRIOTT, L.P.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., EASTERN TIME,
ON , 1998, UNLESS EXTENDED.
Host Marriott Corporation ("Host") has adopted a plan to restructure its
business operations so that it will qualify as a real estate investment trust
("REIT"). As part of this restructuring (the "REIT Conversion"), Host and its
consolidated subsidiaries will contribute their full-service hotel properties
and certain other businesses and assets to Host Marriott, L.P. (the "Operating
Partnership") in exchange for units of limited partnership interest in the
Operating Partnership ("OP Units") and the assumption of liabilities. The sole
general partner of the Operating Partnership will be Host Marriott Trust ("Host
REIT"), the entity into which Host will merge as part of the REIT Conversion.
Host REIT expects to qualify as a REIT beginning with its first full taxable
year after closing of the REIT Conversion, which Host REIT currently expects to
be the year beginning January 1, 1999.
Following the REIT Conversion and the Blackstone Acquisition (defined
herein), the Operating Partnership and its subsidiaries initially will own
outright, or have controlling interests in, approximately 120 full-service
hotels operating primarily under the Marriott, Ritz-Carlton, Four Seasons,
Swissotel and Hyatt brand names (the "Hotels").
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") eight limited partnerships (the
"Partnerships") that own full-service hotels in which Host or its subsidiaries
are general partners. As more fully described in this Prospectus/Consent
Solicitation Statement (the "Consent Solicitation"), limited partners of those
Partnerships that participate in the Mergers will receive either OP Units or,
at their election, unsecured % Callable Notes due December 15, 2005 issued by
the Operating Partnership ("Notes"), in exchange for their partnership
interests in such Partnerships (with respect to the Partnerships, those limited
partners of the Partnerships who are unaffiliated with Host are referred to
herein as the "Limited Partners").
Beginning one year after the Mergers, Limited Partners will have the right to
redeem their OP Units at any time and receive, at the election of Host REIT,
either freely tradable, New York Stock Exchange listed Common Shares of Host
REIT on a one-for-one basis (subject to adjustment) or cash in an amount equal
to the market value of such shares (the "Unit Redemption Right").
See "Risk Factors" beginning on page 27 for material risks relevant to an
investment in the OP Units or the Notes, including:
. To the extent that the anticipated benefits of the REIT Conversion are
reflected in the value of Host's common stock before the Effective Date,
such benefits will not be shared with the Limited Partners.
. No independent representative was retained to negotiate on behalf of the
Limited Partners. If one had been, the terms of the Mergers may have been
more favorable to the Limited Partners.
. Other conflicts of interest exist in connection with structuring the
Mergers and the REIT Conversion which may result in decisions that do not
fully reflect the interests of all Limited Partners.
. Host's shareholders and the Blackstone Entities, and not the Limited
Partners, will benefit from any appreciation in the value of the shares of
SLC common stock distributed in connection with the REIT Conversion.
. There is no assurance that the value of the OP Units or Notes to be
received by the Limited Partners in connection with the Mergers will equal
the fair market value of their Partnership Interests.
. Limited Partners who retain OP Units will not be able to redeem them
pursuant to the Unit Redemption Right until one year following the
Mergers. Until then, Limited Partners will bear the risk of illiquidity.
. There will be no public market for the Notes. The deemed value of the OP
Units will exceed the principal amount of the corresponding Notes in all
Partnerships.
. The receipt of a Note in exchange for OP Units will be a taxable
transaction and will result in "phantom income" for a Limited Partner with
a "negative capital account" with respect to his Partnership Interest.
<PAGE>
. The expected initial cash distributions to the Limited Partners of MHP
and MHP2 following the Mergers will be significantly less than the
estimated cash distributions of MHP and MHP2 for 1998.
. The Mergers involve a fundamental change in the nature of the investment
of a Limited Partner from an investment in a finite-life, fixed-portfolio
partnership into an investment in an infinite-life real estate company
which will own and acquire additional hotels.
. There is uncertainty at the time of voting as to the exact size and
leverage of the Operating Partnership and the exact number of OP Units
that may be received in the Mergers.
. The Operating Partnership will be substantially dependent for its revenue
upon the Lessees and upon Marriott International, Inc. and its
subsidiaries and other companies that manage the Hotels and will have
limited control over the operations of the Hotels.
. Approval of the Merger by the requisite vote of the Limited Partners in a
Partnership will bind all Limited Partners of such Partnership.
. The Mergers will result in the Limited Partners being exposed to the
general risks of ownership of hotels, leverage and the lack of
restrictions on indebtedness of the Operating Partnership.
. Actual or constructive ownership of more than of 9.8% of the number or
value of Host REIT's outstanding Common Shares and of more than 4.9% of
the value of the OP Units (other than by Host REIT or The Blackstone
Group) is prohibited, subject to waiver or modification by Host REIT or
the Operating Partnership, as the case may be, in certain limited
circumstances.
. If the REIT Conversion does not occur in time for Host REIT to elect REIT
status effective January 1, 1999, the effectiveness of Host REIT's
election could be delayed until January 1, 2000, which would result in
Host REIT continuing to pay corporate-level income taxes in 1999 and
could cause the Blackstone Acquisition not to be consummated.
. There are a variety of events and transactions that could cause a Limited
Partner to recognize all or a part of the gain that otherwise should be
deferred by the retention of OP Units received in the Mergers.
. Atlanta Marquis, Hanover, MHP and PHLP are required to sell some of their
personal property to an affiliate of the Operating Partnership in the
Mergers, which may (although it is not expected to) cause Limited
Partners of such Partnerships (except Hanover) to recognize a relatively
modest amount of taxable income as a result thereof (which income could
be offset with any unused passive loss carryforwards).
. Taxation of Host REIT as a regular corporation if it fails to qualify as
a REIT, or taxation of the Operating Partnership as a corporation if it
fails to qualify as a partnership for federal income tax purposes, would,
among other things, result in a material decrease in cash available for
distribution and a material reduction in the value of the Common Shares
and OP Units.
. No assurance can be provided that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to Host REIT's qualification as a REIT
or the federal income tax consequences of such qualification.
THE GENERAL PARTNERS OF THE PARTNERSHIPS BELIEVE THAT THE MERGERS PROVIDE
SUBSTANTIAL BENEFITS AND ARE FAIR TO THE LIMITED PARTNERS OF EACH PARTNERSHIP
AND RECOMMEND THAT ALL LIMITED PARTNERS VOTE FOR THE MERGERS. SEE "BACKGROUND
AND REASONS FOR THE MERGERS AND THE REIT CONVERSION--REASONS FOR THE MERGERS."
Concurrently with the REIT Conversion, the Operating Partnership will
acquire from The Blackstone Group and a series of funds controlled by
Blackstone Real Estate Partners (collectively, the "Blackstone Entities")
ownership of, or controlling interests in, twelve hotels and a mortgage loan
secured by a thirteenth hotel in exchange for a combination of cash, OP Units,
the assumption of liabilities and other consideration (the "Blackstone
Acquisition").
The number of OP Units to be allocated to each Partnership will be based
upon (i) its respective Exchange Value (as defined herein) and (ii) the price
attributed to an OP Unit following the Mergers, determined as described herein
(but in no event greater than $ per OP Unit). See "Determination of
Exchange Values and Allocation of OP Units." The principal amount of Notes
that Limited Partners may elect to receive in exchange for the OP Units
received in a Merger will be based upon their Partnership's Note Election
Amount (as defined herein). See
ii
<PAGE>
"Description of the Notes." The estimated Exchange Values and Note Election
Amounts set forth in this Consent Solicitation may increase or decrease as a
result of various adjustments, and will be finally calculated shortly before
the closing of the Mergers (the "Effective Date"). The Exchange Values will
exceed the Note Election Amounts for all of the Partnerships.
Because REITs are not permitted under current federal income tax law to
derive revenues directly from the operation of hotels, the Operating
Partnership will lease the Hotels to lessees (the "Lessees") that will operate
the Hotels under the existing management agreements and pay rent to the
Operating Partnership, as more fully described herein. The Lessees generally
will be indirect controlled subsidiaries of HMC Senior Communities, Inc.
("SLC"), which currently is a wholly owned subsidiary of Host. SLC will become
a separate public company when Host distributes the common stock of SLC and
other consideration to its existing shareholders and the Blackstone Entities
in connection with Host's distribution of its accumulated earnings and profits
("E&P"), which Host REIT is required to do in order to qualify as a REIT.
Shares of Host REIT and SLC will become separately traded securities and the
companies will operate independently. There will be no overlap between the
boards of Host REIT and SLC. There will be a substantial overlap of
shareholders of the two companies initially, but this likely will diverge over
time.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/CONSENT SOLICITATION. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS CONSENT SOLICITATION IS DIRECTED ONLY TO THE LIMITED PARTNERS OF THE
PARTNERSHIPS DESCRIBED HEREIN AND IS NOT TO BE CONSIDERED AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO OR FROM ANYONE TO WHOM
DELIVERY OF THIS CONSENT SOLICITATION IS NOT AUTHORIZED BY THE OPERATING
PARTNERSHIP IN CONNECTION WITH THE SOLICITATION OF CONSENTS FOR THE MERGERS.
THIS CONSENT SOLICITATION DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THE OP UNITS AND NOTES REFERRED TO HEREIN. THIS CONSENT SOLICITATION IS
ONLY AUTHORIZED FOR DELIVERY TO LIMITED PARTNERS WHEN ACCOMPANIED BY ONE OR
MORE SUPPLEMENTS RELATING TO THE PARTNERSHIPS IN WHICH SUCH LIMITED PARTNERS
HOLD INTERESTS.
THE DATE OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT IS , 1998.
iii
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Certain,
but not necessarily all, of such forward-looking statements can be identified
by the use of forward-looking terminology, such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereof or comparable terminology. All forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual transactions, results, performance or achievements of the
Operating Partnership to be materially different from any future transactions,
results, performance or achievements expressed or implied by such forward-
looking statements. Among the factors that could affect such forward-looking
statements are: (i) national and local economic and business conditions that
will, among other things, affect demand for hotels and other properties, the
level of rates and occupancy that can be achieved by such properties and the
availability and terms of financing; (ii) the ability to maintain the
properties in a first-class manner (including meeting capital expenditure
requirements); (iii) the ability of the Operating Partnership to compete
effectively in areas such as access, location, quality of accommodations and
room rate structures; (iv) the ability of the Operating Partnership to acquire
or develop additional properties and the risk that potential acquisitions or
developments may not perform in accordance with expectations; (v) the ability
of Host to obtain required consents of shareholders, lenders, debt holders,
partners and ground lessors of Host and its affiliates and of other third
parties in connection with the REIT Conversion; (vi) changes in travel
patterns, taxes and government regulations which influence or determine wages,
prices, construction procedures and costs; (vii) governmental approvals,
actions and initiatives, including the need for compliance with environmental
and safety requirements, and changes in laws and regulations or the
interpretation thereof; (viii) the effects of tax legislative action; and (ix)
in the case of Host REIT, the timing of Host REIT's election to be taxed as a
REIT and the ability of Host REIT to satisfy complex rules in order to qualify
for taxation as a REIT for federal income tax purposes and to operate
effectively within the limitations imposed by these rules. Although the
Operating Partnership believes the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained or that any deviations will
not be material. The Operating Partnership undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY................................................................... 1
Certain Key Definitions................................................. 1
Overview................................................................ 3
Risk Factors............................................................ 5
The REIT Conversion..................................................... 11
The Mergers............................................................. 15
Reasons for the Mergers................................................. 17
Determination of Exchange Values and Allocation of OP Units............. 19
Description of the Notes................................................ 20
Fairness Analysis and Opinion........................................... 21
Recommendation.......................................................... 21
Solicitation Materials.................................................. 21
Voting Procedures....................................................... 21
Federal Income Tax Consequences......................................... 22
Summary Financial Information........................................... 25
RISK FACTORS.............................................................. 27
Risks and Effects of the Mergers......................................... 27
Conflicts of Interest................................................... 27
Absence of Arm's Length Negotiations.................................... 28
Exchange Value May Not Equal Fair Market Value of the Partnerships'
Hotels................................................................. 28
Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to Limited Partners.............................................. 28
Price of OP Units Might Be Less than the Fair Market Value of the Part-
nership Interests...................................................... 28
Inability of Limited Partners to Redeem OP Units for One Year........... 29
Value of the Notes Will Be Less than the Exchange Value................. 29
Reduced Cash Distributions for Certain Limited Partners................. 29
Changes in Fairness Opinion............................................. 29
Fundamental Change in the Nature of Investment.......................... 29
Exposure to Market and Economic Conditions of Other Hotels.............. 30
Limited Partners Have No Cash Appraisal Rights.......................... 30
Uncertainties as to the Size and Leverage of the Operating Partnership.. 30
Other Uncertainties at the Time of Voting............................... 30
Lack of Control over Hotel Operations................................... 30
Expiration of the Leases and Possible Inability to Find Other Lessees... 31
Requisite Vote of Limited Partners of Partnerships Binds All Limited
Partners............................................................... 31
Substantial Indebtedness of the Operating Partnership................... 31
No Limitation on Debt................................................... 31
Timing of the REIT Conversion........................................... 32
Individual Assets May Outperform the Operating Partnership's Portfolio.. 32
Leases Could Impair the Sale or Other Disposition of the Operating
Partnership's Hotels................................................... 32
Management Agreements Could Impair the Sale or Other Disposition of the
Operating Partnership's Hotels......................................... 32
No Control over Major Decisions......................................... 32
Foregoing Potential Benefits of Alternatives to the REIT Conversion..... 33
No Partner Liability.................................................... 33
Dilution................................................................ 33
Risks of Ownership of OP Units and Common Shares......................... 33
Inability to Remove Host REIT as General Partner of the Operating
Partnership............................................................ 33
Restrictions on Transfer of OP Units.................................... 34
Limitations on Acquisition of OP Units and Common Shares and Change in
Control................................................................ 34
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Possible Adverse Consequences of Limits on Ownership of Common Shares... 35
Possible Differing Fiduciary Duties of General Partners and Host REIT... 35
Effect on Common Share Price of Shares Available for Future Sale........ 36
Current Host Common Stock Price May Not Necessarily Be Indicative of the
Price of Host REIT Common Shares Following the REIT Conversion......... 36
Effect on Common Share Price of Market Conditions....................... 36
Effect on Common Share Price of Earnings and Cash Distributions......... 36
Effect on Common Share Price of Market Interest Rates................... 37
Effect on Common Share Price of Unrelated Events........................ 37
Dependence on External Sources of Capital............................... 37
Risks of Ownership of the Notes.......................................... 37
The Notes Are Unsecured................................................. 37
No Public Market for the Notes.......................................... 37
Limited Protection for Noteholders in the Event of a Restructuring or
Similar Transaction.................................................... 37
Risks of Operation....................................................... 37
Competition in the Lodging Industry..................................... 37
General Real Estate Investment Risks.................................... 38
Rental Revenues from Hotels Subject to Prior Rights of Lenders.......... 38
Possible Underperformance of New Acquisitions........................... 38
Seasonality............................................................. 39
Illiquidity of Real Estate.............................................. 39
Limitations on Sale or Refinancing of Certain Hotels.................... 39
Hotels Subject to Ground Leases May Affect the Operating Partnership's
Revenues............................................................... 39
Dependence of the Operating Partnership upon SLC........................ 39
Federal Income Tax Risks................................................. 39
Tax Consequences of the Mergers......................................... 39
Effects of Subsequent Events upon Recognition of Gain................... 41
Sale of Personal Property May Result in Gain to Certain Partnerships.... 41
Election to Receive Notes............................................... 42
Exercise of Unit Redemption Right....................................... 42
Failure of Host REIT to Qualify as a REIT............................... 42
Other Tax Liabilities................................................... 44
Failure of the Operating Partnership to Qualify as a Partnership........ 44
Limited Partners Need to Consult with Their Own Tax Advisors............ 44
Miscellaneous Risks..................................................... 44
Dependence upon Key Personnel........................................... 44
Potential Litigation Related to the REIT Conversion..................... 45
Lack of Control Over Non-Controlled Subsidiaries........................ 45
Risk Involved in Investments through Partnerships or Joint Ventures...... 45
Change in Laws.......................................................... 46
Uninsured Loss.......................................................... 46
Americans with Disabilities Act......................................... 46
Other Regulatory Issues................................................. 46
Possible Environmental Liabilities...................................... 46
CONFLICTS OF INTEREST..................................................... 47
Substantial Benefits to Related Parties.................................. 47
Affiliated General Partners.............................................. 47
Leasing Arrangements..................................................... 47
Different Tax Consequences upon Sale or Refinancing of Certain Hotels.... 48
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Partnership Agreement.................................................... 48
Absence of Arm's Length Negotiations; No Independent Representative...... 48
Potential AAA Conflicts.................................................. 48
Policies with Respect to Conflicts of Interest........................... 48
BACKGROUND AND REASONS FOR THE MERGERS AND THE REIT CONVERSION............ 49
Background of the Partnerships........................................... 49
Background of the Mergers and the REIT Conversion........................ 53
Reasons for the Mergers.................................................. 54
Reimbursements and Distributions to the General Partners................. 57
Alternatives to the Mergers.............................................. 57
Recommendation of the General Partners................................... 61
DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF OP UNITS............... 62
Overview................................................................. 62
Methodology for Determining Exchange Values.............................. 62
Price of OP Units to Pay Exchange Values to Limited Partners............. 69
Valuation of General Partners' Interests in the Partnerships and
Allocation of OP Units to the General Partners.......................... 69
FAIRNESS ANALYSIS AND OPINION............................................. 71
Fairness Analysis........................................................ 71
Fairness Opinion......................................................... 73
THE MERGERS AND THE REIT CONVERSION....................................... 76
General.................................................................. 76
The REIT Conversion...................................................... 76
The Mergers.............................................................. 80
Conditions to Consummation of the Mergers................................ 82
Conditions to Consummation of the REIT Conversion........................ 82
Right to Exclude Partnerships............................................ 82
Extension, Amendment and Termination of the Mergers...................... 82
Effect of REIT Conversion on Non-Participating Partnerships.............. 83
Expenses................................................................. 83
Accounting Treatment..................................................... 84
BUSINESS AND PROPERTIES................................................... 85
Business of the Operating Partnership.................................... 85
General.................................................................. 85
Business Objectives...................................................... 86
Business Strategy........................................................ 86
Hotel Lodging Industry................................................... 89
Hotel Lodging Properties................................................. 90
Hotel Properties......................................................... 94
1998 Acquisitions........................................................ 96
Blackstone Acquisition................................................... 96
Investments in Affiliated Partnerships................................... 96
Marketing................................................................ 97
Competition.............................................................. 97
Relationship with HM Services............................................ 98
Relationship with Marriott International; Marriott International
Distribution............................................................ 98
Employees................................................................ 98
Environmental and Regulatory Matters..................................... 99
Legal Proceedings........................................................ 99
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
The Leases............................................................... 100
The Management Agreements................................................ 104
Noncompetition Agreements................................................ 107
Indebtedness............................................................. 108
DISTRIBUTION AND OTHER POLICIES........................................... 111
Distribution Policy...................................................... 111
Investment Policies...................................................... 111
Financing Policies....................................................... 112
Lending Policies......................................................... 113
Conflicts of Interest Policies........................................... 113
Policies with Respect to Other Activities................................ 114
SELECTED FINANCIAL DATA................................................... 115
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION...................................................... 117
Lack of Comparability Following the Consolidation........................ 117
Historical Results of Operations......................................... 117
First Two Quarters 1998 Compared to First Two Quarters 1997
(Historical)............................................................ 117
1997 Compared to 1996 (Historical)....................................... 119
1996 Compared to 1995 (Historical)....................................... 120
Pro Forma Results of Operations.......................................... 122
100% Participation with No Notes Issued--First Two Quarters 1998 Compared
to First Two Quarters 1997 (Pro Forma).................................. 122
100% Participation with Notes Issued--First Two Quarters 1998 Compared to
First Two Quarters 1997 (Pro Forma)..................................... 123
100% Participation with No Notes Issued--1997 Compared to 1996 (Pro
Forma).................................................................. 125
100% Participation with Notes Issued--1997 Compared to 1996 (Pro Forma).. 126
Liquidity and Capital Resources.......................................... 127
MANAGEMENT................................................................ 135
Trustees and Executive Officers of Host REIT............................. 135
Committees of the Board of Trustees...................................... 137
Compensation of Trustees................................................. 137
Executive Compensation................................................... 138
Employment Agreements.................................................... 140
Comprehensive Stock Incentive Plan....................................... 140
Stock Purchase Plan...................................................... 141
401(k) Plan.............................................................. 141
Deferred Compensation Plan............................................... 141
Limitation of Liability and Indemnification.............................. 141
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 143
Relationship Between Host and Marriott International..................... 143
Relationship Between Host and Host Marriott Services Corporation......... 146
PRINCIPAL SECURITY HOLDERS............................................... 148
DESCRIPTION OF OP UNITS................................................... 150
General.................................................................. 150
Formation................................................................ 150
Purposes, Business and Management........................................ 150
Host REIT May Not Engage in Other Businesses; Conflicts of Interest...... 151
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Distributions; Allocations of Income and Loss............................ 151
Borrowing by the Operating Partnership................................... 152
Reimbursement of Host REIT; Transactions with Host REIT and its
Affiliates.............................................................. 152
Liability of Host REIT and Limited Partners.............................. 152
Exculpation and Indemnification of Host REIT............................. 153
Sales of Assets.......................................................... 153
Removal or Withdrawal of Host REIT; Transfer of Host REIT's Interests.... 153
Certain Voting Rights of Holders of OP Units During the First Year
following the Mergers................................................... 154
Restrictions on Transfers of Interests by Limited Partners............... 154
Unit Redemption Right.................................................... 155
No Withdrawal by Limited Partners........................................ 156
Issuance of Limited Partnership Interests................................ 156
Meetings; Voting......................................................... 156
Amendment of the Partnership Agreement................................... 156
Books and Reports........................................................ 157
Power of Attorney........................................................ 157
Dissolution, Winding Up and Termination.................................. 158
Ownership Limitation..................................................... 158
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.............................. 159
General.................................................................. 159
Common Shares............................................................ 159
Preferred Shares......................................................... 160
Power to Issue Additional Common Shares and Preferred Shares............. 160
Restrictions on Ownership and Transfer................................... 160
Changes in Control Pursuant to Maryland Law.............................. 163
DESCRIPTION OF THE NOTES.................................................. 164
General.................................................................. 164
Principal and Interest................................................... 165
Optional Redemption...................................................... 165
Limitations on Incurrence of Debt........................................ 166
Merger, Consolidation or Sale............................................ 167
Events of Default, Notice and Waiver..................................... 167
Modification of the Indenture............................................ 168
Satisfaction and Discharge............................................... 170
No Conversion Rights..................................................... 170
Governing Law............................................................ 170
COMPARISON OF OWNERSHIP OF PARTNERSHIP INTERESTS, OP UNITS AND
COMMON SHARES............................................................ 171
ERISA CONSIDERATIONS...................................................... 194
FEDERAL INCOME TAX CONSEQUENCES........................................... 195
Introduction............................................................. 195
Summary of Tax Opinions.................................................. 196
Tax Status of the Operating Partnership.................................. 198
Tax Consequences of the Mergers.......................................... 199
Tax Treatment of Limited Partners Who Exercise Their Right to Make the
Note Election........................................................... 213
Tax Treatment of Limited Partners Who Hold OP Units Following the
Mergers................................................................. 214
Federal Income Taxation of Host REIT Following the Mergers............... 225
Taxation of Taxable U.S. Shareholders of Host REIT Generally............. 237
Backup Withholding for Host REIT Distributions........................... 239
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Taxation of Tax-Exempt Shareholders of Host REIT.......................... 239
Taxation of Non-U.S. Shareholders of Host REIT............................ 240
Tax Aspects of Host REIT's Ownership of OP Units.......................... 243
Other Tax Consequences for Host REIT and Its Shareholders................. 244
VOTING PROCEDURES.......................................................... 245
Distribution of Solicitation Materials.................................... 245
FIRPTA Certification or Withholding Certificate Required.................. 245
No Special Meetings....................................................... 246
Required Vote and Other Conditions........................................ 246
EXPERTS.................................................................... 248
LEGAL MATTERS.............................................................. 249
AVAILABLE INFORMATION...................................................... 249
GLOSSARY................................................................... 251
FINANCIAL STATEMENTS....................................................... F-1
</TABLE>
APPENDICES
Appendix A--Form of Amended and Restated Agreement of Limited Partnership
of Host Marriott, L.P.
Appendix B--Fairness Opinion of American Appraisal Associates, Inc.
Appendix C--Form of Tax Opinion of Hogan & Hartson L.L.P. with respect to
the Mergers
Appendix D--Form of Tax Opinion of Hogan & Hartson L.L.P. with respect to
Qualification of Host REIT as a REIT
Appendix E--Estimated Adjusted Basis of Limited Partners in Partnership
Interests and "Share" of Limited Partners in Partnership
Liabilities
x
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SUMMARY
This Summary is qualified in its entirety by the more detailed information
appearing elsewhere in this Prospectus/Consent Solicitation Statement,
including the appendices and supplements hereto (this "Consent Solicitation"),
and is presented solely to provide an overview of the transactions described in
detail in the remainder of this Consent Solicitation and of the business and
investment considerations and risks related to the proposed transactions.
Prospective investors are advised not to rely on this Summary, but to carefully
review this entire Consent Solicitation.
The information contained herein, unless otherwise indicated, assumes the
REIT Conversion (as defined herein) occurs, all Partnerships (as defined
herein) participate and no Notes (as defined herein) are issued (the "Full
Participation Scenario").
CERTAIN KEY DEFINITIONS
The following terms have the meanings set forth below. See the "Glossary" at
page 251 for the definitions of other capitalized terms used in this Consent
Solicitation.
"Host"........................ Host Marriott Corporation, a Delaware
corporation, and either the general partner or
an affiliate of the general partner of each
Partnership, or, as the context may require,
Host Marriott Corporation together with its
subsidiaries or any of such subsidiaries.
"Host REIT"................... Host Marriott Trust, a Maryland real estate
investment trust, which will be the sole
general partner of the Operating Partnership
and the successor to Host, or, as the context
may require, Host Marriott Trust together with
its subsidiaries or any of such subsidiaries.
"Operating Partnership"....... Host Marriott, L.P., a Delaware limited
partnership, or, as the context may require,
such entity together with its subsidiaries,
including the Non-Controlled Subsidiaries (as
defined herein), or any of them; also means
Host when used to describe such entity on a pro
forma basis before the REIT Conversion.
"Company"..................... Host with respect to periods prior to the REIT
Conversion, and Host REIT and the Operating
Partnership with respect to the period after
the REIT Conversion.
"Partnership"................. Any of Atlanta Marriott Marquis II Limited
Partnership, a Delaware limited partnership
("Atlanta Marquis"); Desert Springs Marriott
Limited Partnership, a Delaware limited
partnership ("Desert Springs"); Hanover
Marriott Limited Partnership, a Delaware
limited partnership ("Hanover"); Marriott
Diversified American Hotels, L.P., a Delaware
limited partnership ("MDAH"); Marriott Hotel
Properties Limited Partnership, a Delaware
limited partnership ("MHP"); Marriott Hotel
Properties II Limited Partnership, a Delaware
limited partnership ("MHP2"); Mutual Benefit
Chicago Marriott Suite
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Hotel Partners, L.P. ("Chicago Suites"), a
Rhode Island limited partnership; and Potomac
Hotel Limited Partnership, a Delaware limited
partnership ("PHLP"); or, as the context may
require, any such entity together with its
subsidiaries, or any of such subsidiaries.
"General Partner"............. The general partner of a Partnership, each of
which general partners is a wholly owned,
direct or indirect subsidiary of Host (except
in the case of PHLP, in which Host is the
general partner).
"Limited Partners"............ The limited partners, excluding those
affiliated with Host, of the Partnerships.
"Partnership Interests"....... The interests of the Limited Partners in their
respective Partnerships.
"OP Units".................... The limited partnership interests in the
Operating Partnership.
"Note"........................ An unsecured % Callable Note due December 15,
2005 of the Operating Partnership which a
Limited Partner, having so elected at the time
of voting, can receive at the time of the
Mergers in exchange for OP Units, with a
principal amount equal to the Note Election
Amount of the Limited Partner's Partnership
Interest.
"SLC"......................... HMC Senior Communities, Inc., a Delaware
corporation, or, as the context may require,
such entity together with the Lessees (as
defined herein) and its other subsidiaries or
any of them, which currently is a wholly owned
subsidiary of Host but will become a separate
public company as part of the REIT Conversion
when Host REIT distributes the common stock of
SLC, cash and possibly other consideration to
Host REIT's shareholders and the Blackstone
Entities as part of Host REIT's required
earnings and profits distribution.
"Non-Controlled
Subsidiaries"................. The one or more taxable corporations in which
the Operating Partnership will own 95% of the
economic interest but no voting stock and which
will hold various assets contributed by Host
and its subsidiaries to the Operating
Partnership, which assets, if owned directly by
the Operating Partnership, would jeopardize
Host REIT's status as a REIT.
"Private Partnership"......... A partnership (other than a Partnership) or
limited liability company that owns one or more
full-service Hotels and that, prior to the REIT
Conversion, is partially but not wholly owned
by Host or one of its subsidiaries. The Private
Partnerships are not participating in the
Mergers.
"Hotel Partnership"........... Any Partnership or Private Partnership.
"Merger"...................... The proposed merger of a subsidiary of the
Operating Partnership (a "Merger Partnership")
into a Partnership pursuant to this
2
<PAGE>
Consent Solicitation, in which the Partnership
is the surviving entity.
"REIT Conversion"............. (i) The contribution by Host of its wholly
owned Hotels, substantially all of its
interests in the Hotel Partnerships and certain
other businesses and assets to the Operating
Partnership, (ii) the refinancing and amendment
of the debt securities and certain credit
facilities of Host substantially in the manner
described herein, (iii) the Mergers (if and to
the extent consummated), (iv) the acquisition
(whether by merger or otherwise) by the
Operating Partnership of certain Private
Partnerships or interests therein, (v) the
Blackstone Acquisition (if and to the extent
such acquisition is consummated), (vi) the
creation and capitalization of the Non-
Controlled Subsidiaries, (vii) the merger of
Host into Host REIT and subsequent distribution
by Host REIT of SLC common stock, cash and
possibly other consideration to Host REIT's
shareholders and the Blackstone Entities,
(viii) the leasing of the Hotels to
subsidiaries of SLC or others and (ix) such
other related transactions and steps occurring
prior to, substantially concurrent with or
within a reasonable time after the Effective
Date as may be necessary or desirable to
complete the transactions contemplated herein
or otherwise to permit Host REIT to elect to be
treated as a REIT for federal income tax
purposes.
OVERVIEW
This Consent Solicitation is being furnished to the Limited Partners of each
Partnership to solicit their approval of a Merger of their Partnership with a
subsidiary of the Operating Partnership, which has been formed primarily to
continue and expand the full-service hotel ownership business of Host,
operating together with its general partner, Host REIT, as an umbrella
partnership REIT (an "UPREIT"). If the requisite consent to a Merger of a
Partnership is obtained, and the other conditions for consummation of a Merger
(including completion of the REIT Conversion) are satisfied or waived, the
Operating Partnership will acquire such Partnership (a "Participating
Partnership") by merger and the Limited Partners of such Participating
Partnership will receive OP Units or, at their election, Notes in exchange
therefor.
The General Partners and the Operating Partnership believe that participation
in the Mergers will provide the following benefits to Limited Partners:
. The opportunity to receive regular cash distributions per OP Unit equal
to the distributions paid on each Host REIT Common Share;
. Participation in the operations of a larger, more diverse, publicly
traded enterprise with growth opportunities and lower leverage;
. The ability, at any time beginning one year following the Mergers, to
liquidate their investment in the Operating Partnership for cash at a
price equal to the price of Host REIT Common Shares or, at the election
of Host REIT, freely tradeable Host REIT Common Shares; and
. The deferral of recognition of at least a substantial portion of any
built-in taxable gain attributable to their Partnership Interests until
such time as each Limited Partner elects to trigger such gain.
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<PAGE>
Host and the General Partners are proposing the Mergers in connection with a
plan adopted by Host to restructure its business operations so that it will
qualify as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). Host REIT expects to qualify as a REIT
beginning with its first taxable year commencing after the closing of the REIT
Conversion, which currently is expected to be the year commencing January 1,
1999. Host's reasons for engaging in the REIT Conversion include the following:
. Host believes the REIT structure will provide superior operating results
through changing economic conditions and all phases of the hotel economic
cycle.
. Host believes the REIT Conversion will improve its financial flexibility
and allow it to continue to strengthen its balance sheet by reducing its
overall debt to equity ratio over time.
. As a REIT, Host believes it will be able to compete more effectively with
other public lodging real estate companies that already are organized as
REITs and to improve investor understanding of its operations, thus
making performance comparisons with its peers more meaningful.
. By becoming a dividend paying company, Host believes its shareholder base
will expand to include investors attracted by yield as well as asset
quality.
. Host believes the adoption of the UPREIT structure will facilitate the
tax-deferred acquisition of other hotels (such as in the case of the
Blackstone Acquisition and the Mergers).
The primary business objectives of the Operating Partnership and Host REIT
will be to (i) achieve long-term sustainable growth in "Funds From Operations"
(defined as net income (or loss) computed in accordance with generally accepted
accounting principles ("GAAP"), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures) per OP Unit or Common Share, (ii) increase asset values by
improving and expanding the initial Hotels, as appropriate, (iii) acquire
additional existing and newly developed upscale and luxury full-service hotels
in targeted markets, (iv) develop and construct upscale and luxury full-service
hotels and (v) potentially pursue other real estate investments.
If the REIT Conversion is consummated as contemplated, the Operating
Partnership initially will own, or have controlling interests in, approximately
120 full-service hotels, located throughout the United States and Canada
containing approximately 57,500 rooms and operating primarily under the
Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names (the
"Hotels").
As the first step in a strategy to acquire non-Marriott as well as Marriott
branded hotels, Host has entered into an agreement with various affiliates of
The Blackstone Group and a series of funds controlled by Blackstone Real Estate
Partners (collectively, the "Blackstone Entities") to acquire from the
Blackstone Entities ownership of, or controlling interests in, twelve upscale
and luxury full-service hotel properties (the "Blackstone Hotels") and certain
other related assets (including a mortgage loan secured by an additional hotel)
in exchange for a combination of cash, the assumption or repayment of debt, OP
Units, shares of SLC common stock and possibly other consideration with an
estimated aggregate value at the time of the agreement of approximately $1.735
billion (the "Blackstone Acquisition"). The interests in the Blackstone Hotels
will be contributed to the Operating Partnership as part of the REIT
Conversion. The Blackstone Hotels will be leased to Lessees that are
subsidiaries of SLC and will continue to be managed under their existing
management agreements. See "Business and Properties--Blackstone Acquisition."
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<PAGE>
The following table sets forth certain information as of June 19, 1998 (or,
in the case of average daily rate, average occupancy and revenues per available
room ("REVPAR"), for the twenty-four weeks then ended ("First Two Quarters
1998")) for the Hotels that are expected to comprise the Operating
Partnership's initial full-service lodging portfolio:
<TABLE>
<CAPTION>
NUMBER NUMBER AVERAGE
OF OF DAILY AVERAGE
CURRENT OWNER HOTELS ROOMS RATE OCCUPANCY REVPAR(1)
------------- ------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Atlanta Marquis(2)(3).............. 1 1,671 $138.66 69.1% $ 95.81
Desert Springs(2).................. 1 884 214.47 79.7 170.93
Hanover(2)......................... 1 353 142.62 71.5 101.97
MHP(2)(4).......................... 2 2,127 176.75 85.0 150.24
MHP2(2)(5)......................... 4 3,411 152.56 80.4 122.66
Chicago Suites..................... 1 256 159.98 82.0 131.18
MDAH............................... 6 1,692 114.66 77.0 88.29
PHLP(6)............................ 8 3,181 117.81 81.1 95.54
Blackstone Hotels.................. 12 5,520 175.53 72.0 126.41
Host (historical)(6)(7)............ 101 49,019 145.04 78.6 114.02
Host (pro forma)(6)(8)............. 123 57,558 145.74 77.9 113.61
</TABLE>
- --------
(1) REVPAR is a commonly used indicator of market performance of hotels. REVPAR
measures daily room revenues generated on a per room basis by combining the
average daily room rate charged and the average daily occupancy achieved.
REVPAR excludes food and beverage and other ancillary revenues generated by
the hotel.
(2) Currently included in Host's consolidated financial statements.
(3) Atlanta Marquis has an 80% residual interest in the Atlanta Marriott
Marquis and for 1998 is expected to receive substantially all of the cash
flow from the hotel.
(4) Includes Marriott's Harbor Beach Resort, in which MHP owns a 50.5%
interest.
(5) Includes the Santa Clara Marriott, in which MHP2 owns a 50% interest and
Host owns the remaining 50% interest.
(6) Includes the Tampa Westshore Marriott and the Raleigh Crabtree Marriott,
which are currently consolidated by Host. A subsidiary of Host provided
100% non-recourse financing totaling approximately $35 million to PHLP, in
which Host owns the sole general partner interest, for the acquisition of
these two hotels.
(7) Includes the hotels owned by Atlanta Marquis, Desert Springs, Hanover, MHP
and MHP2.
(8) Includes the hotels owned by all Hotel Partnerships and the Blackstone
Hotels, assuming the Full Participation Scenario.
RISK FACTORS
The following is a summary of the material risks associated with the Mergers.
This summary is qualified in its entirety by the detailed discussion in the
section entitled "Risk Factors" contained in this Consent Solicitation. Some of
the significant matters that Limited Partners should consider carefully
include:
. Substantial Benefits to Related Parties. Host REIT and its subsidiaries
will realize substantial benefits from the Mergers and the REIT
Conversion, including savings from a substantial reduction in corporate-
level income taxes expected as a result of the REIT Conversion. To the
extent that the anticipated benefits of the REIT Conversion are reflected
in the value of Host's common stock before the Effective Date, such
benefits will not be shared with the Limited Partners. Because of Host's
significant ownership position in certain Partnerships (including Atlanta
Marquis, Desert Springs, Hanover, MHP and MHP2), the failure of one or
more of these Partnerships to participate in a Merger likely would
require that Host contribute some or all of its ownership interest in the
Non-Participating Partnership to a taxable Non-Controlled Subsidiary,
which would materially reduce the benefit to Host of the REIT Conversion
as it applies to that interest.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Limited Partners. Although the
General Partners have obtained the Appraisals (as defined herein) and the
Fairness Opinion (as defined herein) from American Appraisal Associates,
Inc., an
5
<PAGE>
independent, nationally recognized hotel valuation and financial advisory
firm ("AAA"), AAA has not negotiated with the General Partners or Host and
has not participated in establishing the terms of the Mergers.
Consequently, the terms and conditions of the Mergers may have been more
favorable to the Limited Partners if such terms and conditions were the
result of arm's length negotiations.
. Other Conflicts of Interest. The Mergers, the REIT Conversion and the
recommendations of the General Partners involve the following conflicts
of interest because of the relationships among Host, the Operating
Partnership, the General Partners and SLC: (i) the General Partners,
which are all subsidiaries of Host (except for PHLP, in which Host is the
General Partner), must assess whether the terms of a Merger are fair and
equitable to the Limited Partners of its Partnership, which involves
considerations for Host and its subsidiaries that are different from
those that affect the Limited Partners, (ii) the terms of the Leases of
the Hotels, including the Participating Partnerships' Hotels, will be
determined by Host, which will distribute the common stock of SLC, the
parent of the Lessees, to its shareholders after such terms have been set
and (iii) the terms of the Partnership Agreement, including provisions
which benefit Host REIT, have been determined by Host. Such conflicts may
result in decisions that do not fully reflect the interests of all
Limited Partners.
. Exchange Value May Not Equal Fair Market Value of the Partnerships'
Hotels. Each Limited Partner of a Participating Partnership who retains
OP Units will receive consideration with a deemed value equal the
Exchange Value of such Limited Partner's Partnership Interest. The
determination of the Exchange Value of each Partnership involves numerous
estimates and assumptions. There is no assurance that the Exchange Value
of a Partnership will equal the fair market value of the Hotels and other
assets contributed by such Partnership. See "Determination of Exchange
Values and Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to Limited Partners. Host REIT will receive in the aggregate a
number of OP Units (including OP Units allocated to the General Partners
of the Partnerships) equal to the number of shares of Host common stock
outstanding on the Effective Date (and, if Host has outstanding shares of
preferred stock at the time of the REIT Conversion, a corresponding
number of preferred partnership interests in the Operating Partnership),
which should fairly represent the market value of Host REIT but may not
be equal to the fair market or net asset value of the Hotels and other
assets that Host will contribute to the Operating Partnership. The
Partnerships will receive OP Units in the Mergers with a deemed value
equal to the Exchange Value of such Partnership. The different methods of
allocating OP Units may result in Limited Partners not receiving the fair
market value of their Partnership Interests and Host REIT receiving a
higher percentage of the interests in the Operating Partnership. See
"Determination of Exchange Values and Allocation of OP Units."
. Price of OP Units Might Be Less than the Fair Market Value of the
Partnership Interests. The price of an OP Unit, for purposes of the
Mergers and the REIT Conversion, will be equal to the average closing
price on the NYSE of a Host REIT Common Share for the first 20 trading
days after the Effective Date of the Mergers (but in no event greater
than $ per share). It is likely that, over time, the value of the
publicly traded Common Shares of Host REIT (and therefore the value of
the OP Units) will diverge from the deemed value of the OP Units used for
purposes of the Mergers. This could result in the Limited Partners
receiving OP Units with an actual value that is less than either the
price of the OP Units for purposes of the Mergers or the fair market
value of their Partnership Interests.
. Inability of Limited Partners to Redeem OP Units for One Year. Limited
Partners who elect to retain OP Units received in the Mergers will be
unable to redeem such OP Units for one year following the Mergers. Until
then, Limited Partners will bear the risk of illiquidity.
. Value of the Notes Will be Less Than the Exchange Value. At the same time
that he votes on the Merger of his Partnership, each Limited Partner also
may elect to receive, at the time of the Merger in exchange
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<PAGE>
for OP Units, an unsecured, seven-year Note of the Operating Partnership
with a principal amount equal to the Note Election Amount of his
Partnership Interest. The deemed value of the OP Units will exceed the
principal amount of the corresponding Notes in all Partnerships (because
the Exchange Values will be higher than the Note Election Amounts) and
there is no assurance that the Note a Limited Partner receives will have a
value equal to either (i) the fair market value of the Limited Partner's
share of the Hotels and other assets owned by his Partnership or (ii) the
principal amount of the Notes. There will be no public market for the
Notes. If the Notes are sold, they may sell at prices substantially below
their issuance price. Noteholders are likely to receive the full principal
amount of a Note only if they hold the Note to maturity, which is December
15, 2005, or if the Operating Partnership repays the Notes prior to
maturity. Because the Notes are unsecured obligations of the Operating
Partnership, they will be effectively subordinated to all secured debt of
the Operating Partnership and all obligations of both the Participating
Partnerships and the Operating Partnership's other subsidiaries. See
"Description of the Notes." As of June 19, 1998, on a pro forma basis
assuming the Full Participation Scenario, the Operating Partnership would
have had aggregate consolidated debt of approximately $5.1 billion to
which the Notes were effectively subordinated or which rank equally with
such Notes.
. Reduced Cash Distributions for Certain Limited Partners. The expected
initial annual cash distributions of the Operating Partnership to the
Limited Partners of MHP and MHP2 per Partnership Unit (from $4,015 to
$4,417 and $5,968 to $6,565, respectively) will be less than the
estimated cash distributions of MHP and MHP2 per Partnership Unit ($9,500
and $21,564, respectively) for 1998.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Mergers and the REIT Conversion involve a
fundamental change in the nature of a Limited Partner's investment from
holding an interest in one or more Partnerships, some of which were
structured as tax shelter or tax credit investments, and each of which is
a finite-life entity and has a fixed portfolio of one or more Hotels and
distributes the cash flow from the operation of such Hotels to its
Limited Partners, to holding an interest in an infinite-life, operating
real estate company with a portfolio of approximately 120 Hotels that
(i) collects and distributes to its limited partners rents received from
the Lessees (which will bear the risks and receive the direct benefits of
the Hotels' operations), (ii) has the ability to acquire additional
hotels, (iii) is able to reinvest proceeds from sales or refinancings of
existing Hotels in other hotels and (iv) has a publicly traded general
partner. In addition, each Limited Partner's investment will change from
one that allows a Limited Partner to receive a return of capital in the
form of distributions from any net proceeds of a sale or refinancing of a
Partnership's assets to an investment in which a Limited Partner likely
would realize a return of capital only through the exercise of the Unit
Redemption Right. A Limited Partner's share of the liquidation proceeds,
if any, from the sale of a Partnership's Hotel or Hotels could be higher
than the amount realized upon exercise of the Unit Redemption Right (or
payments on any Note received by a Limited Partner who elects to exchange
his OP Units for such Note). An investment in the Operating Partnership
may not outperform an investment in any individual Partnership. See
"Comparison of Ownership of Partnership Interests, OP Units and Common
Shares."
. Exposure to Market and Economic Conditions of Other Hotels. As a result
of the Mergers, Limited Partners in Participating Partnerships who elect
to retain OP Units will own interests in a much larger enterprise with a
broader range of assets than any of the Partnerships individually. A
material adverse change affecting the Operating Partnership's assets will
affect all Limited Partners regardless of whether a particular Limited
Partner previously was an investor in such affected assets. Each
Partnership owns discrete assets, and the Mergers and the REIT Conversion
will significantly diversify the types and geographic locations of the
Hotels in which the Limited Partners will have interests. As a result,
the Hotels owned by the Operating Partnership may be affected differently
by economic and market conditions than those Hotel(s) previously owned by
an individual Partnership.
. Limited Partners Have No Cash Appraisal Rights. Limited Partners of
Participating Partnerships who vote against the Merger will not have a
right to receive cash based upon an appraisal of their Partnership
Interests.
7
<PAGE>
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The Limited Partners cannot know at the time they vote on a
Merger the exact size and amount of leverage of the Operating
Partnership. Host is an existing operating company that regularly issues
and repays debt, acquires additional hotels and disposes of existing
hotels. Also, some or all of the Partnerships may elect not to
participate in a Merger (a "Non-Participating Partnership"). In addition,
outside partners in certain Private Partnerships may not consent to a
lease of their partnership's Hotel(s). In either such case, Host will
contribute its interests in such Partnerships and Private Partnerships to
the Operating Partnership, but the Operating Partnership may, in turn,
contribute such interests to a Non-Controlled Subsidiary, which will be
subject to corporate-level income taxation. Host also may repurchase
outstanding securities or issue new debt or equity securities prior to
the consummation of the Merger and the REIT Conversion.
. Other Uncertainties at the Time of Voting. There are several other
uncertainties at the time the Limited Partners must vote on the Mergers,
including (i) the exact Exchange Value for each Partnership (which will
be adjusted for changes in lender and capital expenditure reserves,
indebtedness, deferred maintenance and other items prior to the Effective
Date), (ii) the price of the OP Units for purposes of the Mergers, which
will be determined by reference to the post-Merger trading prices of Host
REIT's Common Shares and which, together with the Exchange Value, will
determine the number of OP Units the Limited Partners of each
Participating Partnership will receive and (iii) the exact principal
amount of the Notes that may be received in exchange for OP Units, which
cannot be known until after the vote on the Mergers. For these reasons,
the Limited Partners cannot know at the time they vote on a Merger these
important aspects of the Merger.
. Current Host Common Stock Price May Not Necessarily Be Indicative of the
Price of Host REIT Common Shares Following the REIT Conversion. Host's
current stock price is not necessarily indicative of how the market will
value Host REIT Common Shares following the REIT Conversion. The current
stock price of Host reflects the current market valuation of Host's
current business and assets (including the SLC common stock and the cash
or securities to be distributed in connection with the REIT Conversion)
and not the business and assets of Host REIT following the REIT
Conversion.
. Lack of Control over Hotel Operations. Due to current federal income tax
law restrictions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Operating Partnership will lease virtually all
of its consolidated Hotels to the Lessees, which will operate the Hotels
by continuing to retain the Managers pursuant to the Management
Agreements. The Operating Partnership will not operate the Hotels or
participate in the decisions affecting the daily operations of the
Hotels. The Operating Partnership will have only a limited ability to
require the Lessees or the Managers to operate or manage the Hotels in
any particular manner and no ability to govern any particular aspect of
their day-to-day operation or management. Therefore, the Operating
Partnership will be dependent for its revenue upon the ability of the
Lessees and the Managers to operate and manage the Hotels.
. Expiration of the Leases and Possible Inability to Find Other
Lessees. The Leases will expire seven to ten years after the Effective
Date, and there can be no assurance that such Leases will be renewed (or
if renewed, will be renewed on terms as favorable to the Operating
Partnership). If the Leases are not renewed, the Operating Partnership
will be required to find other lessees, which lessees must meet certain
requirements set forth in the Management Agreements. There can be no
assurance that satisfactory lessees could be found or as to the terms and
conditions on which the Operating Partnership would be able to renew the
Leases or enter into new leases with such lessees.
. Requisite Vote of Limited Partners of Partnerships Binds All Limited
Partners. For each Partnership, approval of a Merger by the requisite
vote of the Limited Partners, as described in "Voting Procedures--
Required Vote and Other Conditions," will cause the Partnership to
participate in the Merger and will bind all Limited Partners of such
Partnership, including Limited Partners who voted against or abstained
from voting with respect to the Merger.
8
<PAGE>
. Competition in the Lodging Industry. The profitability of the Hotels is
subject to general economic conditions, the management abilities of the
Managers (including primarily Marriott International), competition, the
desirability of particular locations and other factors relating to the
operation of the Hotels. The full-service segment of the lodging
industry, in which virtually all of the Hotels operate, is highly
competitive, and the Hotels generally operate in geographical markets
that contain numerous competitors. The Hotels' success will be dependent,
in large part, upon their ability to compete in such areas as access,
location, quality of accommodations, room rate structure, the quality and
scope of food and beverage facilities and other services and amenities.
The lodging industry, including the Hotels (and thus the Operating
Partnership), may be adversely affected in the future by (i) national and
regional economic conditions, (ii) changes in travel patterns, (iii)
taxes and government regulations which influence or determine wages,
prices, interest rates, construction procedures and costs, (iv) the
availability of credit and (v) other factors beyond the control of the
Operating Partnership.
. Substantial Indebtedness of the Operating Partnership. The Operating
Partnership will have substantial indebtedness. As of June 19, 1998, on a
pro forma basis assuming the Full Participation Scenario, the Operating
Partnership had outstanding indebtedness totaling approximately $5.1
billion, which represents a % debt-to-total market capitalization ratio
on a pro forma basis at such date (based upon a price per Common Share of
Host REIT of $ ). The Operating Partnership's business is capital
intensive, and it will have significant capital requirements in the
future. The Operating Partnership's leverage level could affect its
ability to (i) obtain financing in the future, (ii) undertake
refinancings on terms and subject to conditions deemed acceptable by the
Operating Partnership, (iii) make distributions to partners, (iv) pursue
its acquisition strategy or (v) compete effectively or operate
successfully under adverse economic conditions.
. No Limitation on Debt. There are no limitations in Host REIT's or the
Operating Partnership's organizational documents which limit the amount
of indebtedness either may incur, although both the Notes and the
Operating Partnership's other debt instruments will contain certain
restrictions on the amount of indebtedness that the Operating Partnership
may incur.
. Rental Revenues from Hotels Subject to Rights of Lenders. In accordance
with the mortgage loan agreements with respect to outstanding
indebtedness of certain Hotel Partnerships, the rental revenues received
by such Hotel Partnerships under certain Leases first will be used to
satisfy the debt service on such outstanding indebtedness with only the
cash flow remaining after debt service being available to satisfy other
obligations of the Hotel Partnership (including paying property taxes and
insurance, funding the required FF&E reserves for the Hotels and capital
improvements and paying debt service with respect to unsecured debt) and
to make distributions to holders of OP Units.
. Ownership Limitations. No person or group may own, actually or
constructively (as determined under the applicable Code provisions), (i)
in excess of 9.8% of the number or value of outstanding Common Shares of
Host REIT or (ii) in excess of 4.9% of the value of the OP Units (other
than Host REIT and The Blackstone Group), subject to waiver or
modification by Host REIT or the Operating Partnership, as the case may
be, in certain limited circumstances.
. Timing of the REIT Conversion. If the REIT Conversion does not occur in
time for Host REIT to elect REIT status effective January 1, 1999, the
effectiveness of Host REIT's election could be delayed to January 1,
2000, which would result in Host REIT continuing to pay corporate-level
income taxes in 1999 and could cause the Blackstone Acquisition not to be
consummated.
. Effect of Subsequent Events upon Recognition of Gain. Even though the
Limited Partners of the Participating Partnerships (other than those who
elect to receive a Note in exchange for OP Units) generally are not
expected to recognize significant taxable gain at the time of the
Mergers, there are a variety of events and transactions (including the
sale of one or more of the Hotels or the reduction of indebtedness
securing one or more of the Hotels) that could cause a Limited Partner to
recognize all or a part of the gain that otherwise has been deferred
through the REIT Conversion. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Effect of Subsequent Events." Certain Hotels
9
<PAGE>
(including the Blackstone Hotels) will be covered by agreements with third
parties which will restrict the Operating Partnership's ability to dispose
of those properties or refinance their debt. In addition, if Atlanta
Marquis participates in the Mergers, the Operating Partnership will
succeed to an existing agreement that will restrict its ability to dispose
of the Atlanta Marquis Hotel or to refinance the debt secured by such
Hotel without compensating certain outside partners for the resulting
adverse tax consequences. As for the remaining initial properties
(including the Hotels owned by the Partnerships), the partnership
agreement of the Operating Partnership, which is substantially in the form
attached hereto as Appendix A (the "Partnership Agreement"), does not
impose any restrictions on the Operating Partnership's ability to dispose
of the Hotels or to refinance debt secured by the Hotels (but the
Operating Partnership is obligated to pay any taxes Host REIT incurs as a
result of such transactions). In addition, the Partnership Agreement
provides that Host REIT, as general partner of the Operating Partnership,
is not required to take into account the tax consequences of the limited
partners in deciding whether to cause the Operating Partnership to
undertake specific transactions (but the Operating Partnership is
obligated to pay any taxes that Host REIT incurs as a result of such
transactions) and the limited partners have no right to approve or
disapprove such transactions. See "Description of OP Units--Sales of
Assets."
. Sale of Personal Property May Result in Gain to Limited Partners in
Certain Partnerships. In order to facilitate the participation of Atlanta
Marquis, Hanover, MHP and PHLP in the Mergers without adversely affecting
Host REIT's qualification as a REIT, the Operating Partnership will
require, as part of the Mergers, that Atlanta Marquis, Hanover, MHP and
PHLP sell a portion of the personal property associated with the Hotels
owned by such Partnerships to a Non-Controlled Subsidiary. These sales
will be taxable transactions and, with the exception of the sale by
Hanover, may (although are not expected to) result in an allocation of a
relatively modest amount of ordinary recapture income by each Partnership
to its Limited Partners. This income, if any, will be allocated to each
Limited Partner in the same proportion and to the same extent that such
Limited Partner was allocated any deductions directly or indirectly
giving rise to the treatment of such gains as recapture income. A Limited
Partner who receives such an allocation of recapture income would not be
entitled to any special distribution from his Partnership in connection
with the sale of personal property.
. Election to Exchange OP Units for Notes. A Limited Partner who elects to
receive a Note in connection with the Mergers in exchange for his OP
Units will be treated as having made a taxable disposition of his
Partnership Interest. A Limited Partner who receives a Note may be
eligible to defer at least a portion, but not all, of that gain under the
"installment sale" rules. A Limited Partner with a "negative capital
account" with respect to his Partnership Interest who elects to receive a
Note will recognize "phantom income" in that amount at the time of the
Mergers in any event. See "Federal Income Tax Consequences--Tax Treatment
of Limited Partners Who Exercise Their Right to Make the Note Election."
. Failure of Host REIT to Qualify as a REIT for Tax Purposes. Taxation of
Host REIT as a corporation if it fails to qualify as a REIT, and Host
REIT's subsequent liability for federal, state and local taxes on its
income and property, would, among other things, have the effect of
reducing cash available for distribution to Host REIT's shareholders and
materially reducing the value of the Common Shares and OP Units.
. Failure of the Operating Partnership to Qualify as a Partnership for Tax
Purposes. Taxation of the Operating Partnership as a corporation if it
fails to qualify as a partnership and the Operating Partnership's
subsequent liability for federal, state and local income taxes would,
among other things, have the effect of reducing cash available for
distribution to holders of OP Units, would cause Host REIT to fail to
qualify as a REIT for tax purposes and would cause the holders of OP
Units to recognize substantial taxable gain at the time the Operating
Partnership ceases to qualify as a partnership.
. Failure of the Leases to Qualify as Leases. If one or more of the Leases
of the Hotels to the Lessees were to be disregarded for tax purposes (for
example, because a Lease was determined to lack economic substance), Host
REIT would fail to qualify as a REIT and the Operating Partnership might
be treated as
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<PAGE>
a corporation for federal income tax purposes, which would have a material
adverse impact on the Limited Partners and the value of the OP Units.
. Change in Tax Laws. No assurance can be provided that new legislation,
Treasury Regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to Host REIT's
qualification as a REIT or the federal income tax consequences of such
qualification.
. Limited Partners Need to Consult with Their Own Tax Advisors. Because
the specific tax attributes of a Limited Partner and the facts regarding
such Limited Partner's interest in his Partnership could have a material
impact on the tax consequences to such Limited Partner of the Mergers,
the subsequent ownership and disposition of OP Units or Notes and/or the
subsequent ownership and disposition of Common Shares, it is essential
that each Limited Partner consult with his own tax advisors regarding the
application of federal, foreign and state and local tax laws to such
Limited Partner's personal tax situation.
. Effect of Possible Classification as a Publicly Traded Partnership on
Passive Losses. There is a significant possibility that the Operating
Partnership could be classified as a "publicly traded partnership," in
which event the Limited Partners would not be able to use suspended
passive activity losses from other investments (including from the
Partnerships) to offset income from the Operating Partnership. It is
estimated that each Limited Partner in Atlanta Marquis, Chicago Suites,
Desert Springs, MDAH and MHP who purchased his Partnership Interest at
the time of the original offering of such Interests, has held such
Partnership Interest continuously since that time and whose Partnership
Interest has been his only investment in a passive activity, would have a
passive activity loss carryforward as of December 31, 1998.
. Host's Substantial Deferred Tax and Contingent Liabilities. Host will
have substantial deferred tax liabilities that are likely to be
recognized in the next ten years (notwithstanding Host REIT's status as a
REIT), and the IRS could assert substantial additional liabilities for
taxes against Host for taxable years prior to the time Host REIT
qualifies as a REIT. Under the terms of the REIT Conversion and the
Partnership Agreement, the Operating Partnership will be responsible for
paying (or reimbursing Host REIT for the payment of) all such tax
liabilities as well as any other liabilities (including contingent
liabilities and liabilities attributable to litigation that Host REIT may
incur) whether such liabilities are incurred by reason of Host's
activities prior to the REIT Conversion or the activities of Host REIT
subsequent thereto.
THE REIT CONVERSION
The transactions summarized below collectively constitute the REIT
Conversion. If the required approvals for the various transactions are obtained
and other conditions to the different steps in the REIT Conversion are
satisfied or waived, these transactions are expected to occur at various times
prior to the end of 1998 (or as soon thereafter as practicable). The Mergers of
the Participating Partnerships are expected to occur at the final stage of the
REIT Conversion.
. Contribution of Host's Lodging Assets to the Operating Partnership. As a
preliminary step, at various times during 1998, Host will contribute its
wholly owned full-service hotel assets, substantially all of its
interests in the Hotel Partnerships and its other assets (excluding its
senior living assets and the cash to be distributed to its shareholders)
to the Operating Partnership in exchange for (i) a number of OP Units
equal to the number of outstanding shares of common stock of Host at the
time of the REIT Conversion, (ii) preferred partnership interests in the
Operating Partnership corresponding to any shares of Host preferred stock
outstanding at the time of the REIT Conversion and (iii) the assumption
by the Operating Partnership of all liabilities of Host (including past
and future tax liabilities), other than liabilities of SLC. Following
these contributions, the Operating Partnership and its subsidiaries will
directly own all of Host's wholly owned hotels and all of Host's
interests in the Hotel Partnerships and Host's other assets (excluding
its senior living assets and the cash to be distributed to its
shareholders).
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<PAGE>
. Debt Refinancing. In August 1998, Host refinanced $1.55 billion of
outstanding public bonds (the "Bond Refinancing") through offers to
purchase such debt securities for cash and a concurrent solicitation of
consents to amend the terms of the debt securities to permit the
transactions constituting the REIT Conversion. Host obtained the funds
for the Bond Refinancing primarily from the issuance of new debt
securities and a new $1.25 billion credit facility (the "New Credit
Facility"). See "Business and Properties--Indebtedness."
. Treatment of Convertible Preferred Securities. Prior to the Effective
Date, Host will seek the consent of holders of the $550 million of
outstanding Quarterly Income Preferred Securities ("Convertible Preferred
Securities") to the REIT Conversion. In the REIT Conversion, the
Operating Partnership will assume primary liability for repayment of the
convertible subordinated debentures of Host underlying the Convertible
Preferred Securities. As the successor to Host, Host REIT also will be
liable on the debentures and the debentures will become convertible into
Common Shares, but the Operating Partnership will have primary
responsibility for payment of the debentures, including all costs of
conversion. Upon conversion by a Convertible Preferred Securities holder,
the Operating Partnership will acquire Common Shares from Host REIT in
exchange for an equal number of OP Units and distribute the Common Shares
to the Convertible Preferred Securities holder. As a result of the
distribution of SLC common stock and cash to Host REIT shareholders in
connection with the merger of Host into Host REIT, the conversion ratio
of the Convertible Preferred Securities will be adjusted pursuant to the
anti-dilution provisions of the debentures. See "Business and
Properties--Indebtedness."
. The Mergers. On the Effective Date, each Participating Partnership will
merge with a Merger Partnership. The Participating Partnerships will be
the surviving entities of the Mergers and will continue in existence as
indirect subsidiaries of the Operating Partnership. In the Mergers, each
Limited Partner will receive a number of OP Units with a deemed value
equal to the Exchange Value of his respective Partnership Interests. If,
at the time of the vote on the Merger of his Partnership, a Limited
Partner elects to receive a Note in exchange for OP Units, such Limited
Partner will, upon receipt of his OP Units, tender such OP Units to the
Operating Partnership in exchange for a Note with a principal amount
equal to the Note Election Amount of his Partnership Interests. The
General Partners and their affiliates will also receive OP Units in
exchange for their interests in the Partnerships, which such entities
will continue to be wholly owned subsidiaries of Host REIT. Partnerships
that do not participate in a Merger will continue as separate
partnerships, but the Operating Partnership would contribute some or all
of the interests in certain of these Partnerships (such as Atlanta
Marquis, Desert Springs, Hanover, MHP and MHP2) that it receives from
Host and its subsidiaries to a Non-Controlled Subsidiary.
. Restructuring of the Private Partnerships. The Operating Partnership will
acquire the partnership interests from unaffiliated partners of certain
Private Partnerships in exchange for OP Units and, accordingly, will own
all of the interests in those Private Partnerships. For those Private
Partnerships in which the unaffiliated partners have not elected to
exchange their interests for OP Units, (i) the Operating Partnership will
be a partner in the partnership if the unaffiliated partners consent to a
Lease of the partnership's Hotel(s) to a Lessee or (ii) if the requisite
consents to enter into a Lease are not obtained, the Operating
Partnership may transfer its interest in such partnership to a Non-
Controlled Subsidiary.
. The Blackstone Acquisition. On the Effective Date, the Operating
Partnership will acquire from the Blackstone Entities ownership of, or
controlling interests in, twelve hotels and two mortgage loans, one
secured by one of the acquired hotels and one secured by an additional
hotel. In addition, Host will acquire a 25% interest in the Swissotel
management company from the Blackstone Entities, which Host REIT will
transfer to SLC in connection with the distribution of SLC common stock
to Host REIT shareholders and the Blackstone Entities. In exchange for
these assets, the Operating Partnership will issue approximately 43.7
million OP Units, assume or repay debt and make cash payments totaling
approximately $862 million and distribute up to 18% of the shares of SLC
common stock to the Blackstone Entities.
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<PAGE>
. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold various
assets (not exceeding 20% of the assets of the Operating Partnership)
contributed by Host and its subsidiaries to the Operating Partnership,
the direct ownership of which by the Operating Partnership could
jeopardize Host REIT's status as a REIT. These assets primarily will
consist of partnership or other interests in hotels which are not leased,
certain furniture, fixtures and equipment used in the Hotels and certain
international hotels in which Host owns interests. In exchange for the
contribution of these assets to the Non-Controlled Subsidiaries, the
Operating Partnership will receive nonvoting common stock representing
95% of the total economic interests of the Non-Controlled Subsidiaries.
In addition, the Operating Partnership and, prior to the Mergers
(assuming they participate in the Mergers), Atlanta Marquis, Hanover, MHP
and PHLP, will sell to a Non-Controlled Subsidiary an estimated $200
million in value of personal property associated with certain Hotels for
notes or cash that has been contributed or loaned to the Non-Controlled
Subsidiary by the Operating Partnership, or a combination thereof. The
Operating Partnership could not lease this personal property to the
Lessees without potentially jeopardizing Host REIT's qualification as a
REIT. The Non-Controlled Subsidiary will lease such personal property to
the applicable Lessees. The Host Marriott Incentive Compensation
Statutory Trust, the beneficiaries of which will be certain employees of
Host REIT and a designated charity (the "Incentive Compensation Trust"),
will acquire all of the voting common stock representing the remaining 5%
of the total economic interests, and 100% of the control, of each Non-
Controlled Subsidiary. See "The Mergers and the REIT Conversion--The REIT
Conversion."
. Leases of Hotels. The Operating Partnership, its subsidiaries and its
controlled partnerships, including the Participating Partnerships, will
lease virtually all of their Hotels to the Lessees pursuant to leases
with initial terms ranging from seven to ten years (the "Leases"). See
"Business and Properties--The Leases." The leased Hotels will be operated
by the Lessees under their existing brand names pursuant to their
existing Management Agreements, which will be assigned to the Lessees for
the terms of the applicable Leases but under which the Operating
Partnership will remain obligated. See "Business and Properties--The
Management Agreements."
. Host REIT Merger and Shareholder Distribution. Host will merge into Host
REIT upon obtaining shareholder approval of the merger. Pursuant to the
merger agreement, Host shareholders will receive, for each share of Host
common stock, one Host REIT Common Share. Immediately following the
merger, each shareholder of Host REIT will receive, for each common share
of Host REIT, a taxable distribution consisting of a fraction of a share
of common stock of SLC and cash or securities in an amount to be
determined. The aggregate value of the SLC common stock and cash or
securities to be distributed to Host REIT shareholders is currently
estimated to be approximately $400 to $550 million (approximately $2.00
to $2.75 per share). The actual amount of the distribution will be based
upon the estimated amount of accumulated earnings and profits of Host as
of the last day of its taxable year ending on or immediately following
the Effective Date. See "The REIT Conversion and the Mergers--The REIT
Conversion--Host REIT Merger and Shareholder Distribution." In addition,
under the terms of the Blackstone Acquisition, the Blackstone Entities
are entitled to receive a pro-rata distribution to the extent they did
not elect to receive additional OP Units in lieu thereof. The
distribution to the Blackstone Entities will approximate $80 million to
$115 million if the REIT Conversion is consummated. Following the
distribution, SLC's principal assets will include the senior living
assets of Host, which are expected to consist of 31 retirement
communities, a 25% interest in the Swissotel management company acquired
from the Blackstone Entities and controlling interests in the Lessees.
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<PAGE>
Following the REIT Conversion, assuming the Full Participation Scenario, the
organizational structure of Host REIT will be as follows:
[FLOW CHART APPEARS HERE]
- --------
(1) Immediately following the merger of Host into Host REIT and the
distribution of SLC common stock to Host REIT's shareholders and the
Blackstone Entities, the shareholders of SLC will consist of the
shareholders of Host REIT and the Blackstone Entities. The common ownership
of the two public companies, however, will diverge over time.
(2) Represents Limited Partners and others who retain OP Units and do not
receive Notes; excludes Host and its subsidiaries.
(3) The Operating Partnership will own all or substantially all of the equity
interests in the Participating Partnerships, certain Private Partnerships
and other Host subsidiaries that own Hotels, both directly and through
other direct or indirect, wholly owned subsidiaries of the Operating
Partnership or Host REIT. Host will contribute its partial equity interests
in the Non-Participating Partnerships and those Private Partnerships whose
partners have not elected to exchange their interests for OP Units to the
Operating Partnership, and the Operating Partnership will either hold such
partial interests or contribute them to the Non-Controlled Subsidiaries.
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<PAGE>
Conditions to Consummation of the REIT Conversion. The consummation of the
REIT Conversion is subject to the satisfaction or waiver of a number of
conditions, including the conditions set forth below.
. Host Shareholder Approval. Shareholders owning 66 2/3% of the outstanding
shares of Host's common stock shall have approved the merger of Host into
Host REIT.
. REIT Qualification. Host's Board of Directors shall have determined,
based upon the advice of counsel, that Host REIT can elect to be treated
as a REIT for federal income tax purposes effective no later than the
first full taxable year commencing after the REIT Conversion.
. NYSE Listing. The Common Shares shall have been approved for listing on
the NYSE.
. Consents of Partners of Other Partnerships. Host shall have received
consents from outside partners in Private Partnerships to a lease of the
Hotels owned by such Private Partnerships to the extent required to
enable Host REIT to qualify as a REIT.
. Third-Party Consents. Host shall have received all required third-party
consents to the REIT Conversion, including consents of lenders, Marriott
International and certain of its subsidiaries and ground lessors, and
consents to transfer material operating licenses and permits and the
Management Agreements.
. No Adverse Tax Legislation. The United States Congress shall not have
enacted legislation, or proposed legislation with a reasonable
possibility of being enacted, that would have the effect of (i)
substantially impairing the ability of Host REIT to qualify as a REIT or
the Operating Partnership to qualify as a partnership (ii) substantially
increasing the federal tax liabilities of Host REIT resulting from the
REIT Conversion or (iii) substantially reducing the expected benefits to
Host REIT resulting from the REIT Conversion. The determination that this
condition has been satisfied will be made by Host, in its discretion.
THE MERGERS
Issuance of OP Units. If Limited Partners holding the requisite percentage of
outstanding Partnership Interests in a Partnership vote to approve a Merger,
then such Participating Partnership will merge with a Merger Partnership, with
the Participating Partnership being the surviving entity. Each Limited Partner
of the Participating Partnership will receive OP Units with an aggregate deemed
value equal to the Exchange Value of such Limited Partner's Partnership
Interests. The General Partners and their affiliates that own limited partner
interests in the Partnership also will receive OP Units in exchange for their
general and limited partner interests in the Partnerships. The price attributed
to an OP Unit, the Exchange Value of each Partnership and the allocation of OP
Units will be established in the manner described in detail under
"Determination of Exchange Values and Allocation of OP Units."
Right to Exchange OP Units for Notes. At the time they vote on the Merger of
their Partnership, Limited Partners can elect to tender the OP Units they will
receive in the Merger (if their Partnership approves the Merger) to the
Operating Partnership in exchange for Notes. The principal amount of the Note
received by a Limited Partner will be equal to the Note Election Amount of his
Partnership Interest, which will be less than the value of the OP Units that
such Limited Partner otherwise would have received (because the Note Election
Amount will be less than the Exchange Value for all Partnerships). Holders of
Notes will receive interest payments on a semi-annual basis on June 15 and
December 15 of each year. Such election will, however, cause a Limited Partner
to recognize gain at the time he receives the Note. See "Description of the
Notes" and "Federal Income Tax Consequences--Tax Treatment of Limited Partners
Who Exercise Their Right to Make the Note Election."
1998 Distributions. Limited Partners at the Effective Date of the Mergers who
retain OP Units will receive cash distributions from their respective
Partnerships for all of 1998 and, if the Mergers do not occur in 1998,
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<PAGE>
any portion of 1999 prior to the Mergers for which they do not receive a cash
distribution from the Operating Partnership. Cash distributions will be made by
each Partnership in accordance with its partnership agreement on or before June
1, 1999 in respect of 1998 operations and, if the Mergers do not occur prior to
January 1, 1999, within 90 days after the Effective Date of the Mergers in
respect of any 1999 operations. Limited Partners at the Effective Date of the
Mergers who receive a Note in exchange for OP Units will participate in the
same distributions from the Partnerships as Limited Partners who retain OP
Units but will not receive any distributions from the Operating Partnership
with respect to periods after the Effective Date of Mergers.
Ownership Interests of Host in the Partnerships. The table below sets forth
the current ownership interests of Host in the Partnerships. Following the REIT
Conversion, assuming all of the Partnerships participate in the Mergers, the
Partnerships will be wholly owned by the Company.
<TABLE>
<CAPTION>
PARTNERSHIP LIMITED PARTNER INTERESTS GENERAL PARTNER INTERESTS
----------- ------------------------- -------------------------
<S> <C> <C>
Atlanta Marquis.......... Class A 0.28% 0.42%
Class B 100.0
Chicago Suites........... 0 1
Desert Springs........... 0 1
Hanover.................. 47.62 5
MDAH..................... 0.48 1
MHP...................... 48.33 1
MHP2..................... 52.62 1
PHLP..................... 0.06 1
</TABLE>
Vote Required for Merger. In the case of Atlanta Marquis, a majority of Class
A limited partner interests must vote to approve the Merger. Host and its
affiliates own 0.28% of the outstanding Class A limited partner interests. In
the case of each of Chicago Suites and PHLP, the approval required for each
Merger is a majority of the outstanding limited partner interests in such
Partnership. There are no restrictions on the ability of Host to vote its
limited partner interests; however, Host owns no limited partner interests in
Chicago Suites and only 0.06% of the outstanding limited partner interests in
PHLP. In MDAH, a majority of limited partner interests must vote to approve the
Merger. Host is not entitled to vote its 0.48% limited partner interest in MDAH
on the Merger. In the case of Desert Springs, Hanover, MHP and MHP2, a majority
of the limited partner interests held by Limited Partners must be present in
person or by proxy for the vote to be recognized and a majority of the limited
partner interests actually voting on the Merger must vote for the Merger to
approve it. Host is required to vote its limited partner interests in Hanover,
MHP and MHP2 in the same manner as the majority of the other limited partner
interests actually voting on the matter vote. Host or its subsidiaries own
47.62%, 48.33% and 52.62% of the limited partner interests in Hanover, MHP and
MHP2, respectively. Host does not own any limited partner interests in Desert
Springs. The approval of the Merger by the requisite percentage of limited
partner interests of a Partnership will cause the Partnership to participate in
the Merger and will bind all Limited Partners of such Partnership, including
Limited Partners who voted against or abstained from voting with respect to the
Merger. See "Voting Procedures--Required Vote and Other Conditions."
Amendments to Partnership Agreements. In order to consummate each Merger as
currently proposed, there are a number of amendments required to be made to the
partnership agreements of the Partnerships. A vote in favor of a Merger will be
deemed to constitute consent to such amendments. The effectiveness of such
amendments will be conditioned upon the Partnership's participation in a
Merger. The required amendments include (i) permitting the Partnership to enter
into the Leases with the Lessees; (ii) reducing to one the number of appraisals
of the fair market value of a Partnership's Hotel(s) that the Partnership must
provide to the Limited Partners before the General Partner can cause a
Partnership to sell its assets to the General Partner or an affiliate and (iii)
other amendments required to delete obsolete references, reflect the passage of
time or allow the transactions constituting the Mergers or otherwise necessary
or desirable to consummate the Mergers and the REIT Conversion.
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<PAGE>
Effective Time of the Mergers. The effective time of each Merger (the
"Effective Time") will be after the merger of Host into Host REIT becomes
effective (but within one day thereof), which is expected to occur during the
final stage of the REIT Conversion. This is expected to occur on or about
December 30, 1998, subject to satisfaction or waiver of the conditions to the
REIT Conversion.
Conditions to Consummation of the Mergers. Participation by each Partnership
in a Merger is subject to the satisfaction or waiver of certain conditions,
including, among other things, consent of (i) Limited Partners holding the
requisite percentage of Partnership Interests in such Partnership (as described
above) and (ii) certain lenders and other third parties. Each Merger also is
contingent upon the consummation of the remainder of the required portions of
the REIT Conversion.
Merger Expenses. All costs and expenses incurred in connection with the
proposed Mergers (the "Merger Expenses"), including transfer and recordation
taxes and fees, whether or not the Mergers are approved by the Partnerships,
will be borne by the Operating Partnership, which will also bear all other
costs and expenses incurred by Host and its subsidiaries in connection with the
REIT Conversion (the "REIT Conversion Expenses"). See "The Mergers and the REIT
Conversion--Expenses."
REASONS FOR THE MERGERS
The Mergers are being proposed at this time for three principal reasons:
. First, the General Partners believe that the expected benefits of the
Mergers to the Limited Partners, as set forth below, outweigh the risks
of the Mergers to the Limited Partners, as set forth in "Risk Factors."
. Second, the General Partners believe that participation in the REIT
Conversion through the Mergers is better for the Limited Partners than
the alternatives of continuing each Partnership as a standalone entity,
liquidating the Partnership, reorganizing the Partnership into a
standalone REIT or pursuing a merger of one or more Partnerships with
another REIT. See "Determination of Exchange Values and Allocation of OP
Units" and "Background and Reasons for the Mergers and the REIT
Conversion--Alternatives to the Mergers."
. Third, Host is proposing the Mergers at this time to each Partnership
because consummation of the Merger as to each Partnership will enable
Host to obtain the full benefits of the REIT Conversion with respect to
its interests in such Partnership, while also giving the other partners
of the Partnership the opportunity to enjoy the benefits of the REIT
Conversion. See "Risk Factors--Risks and Effects of the Mergers--
Conflicts of Interest--Substantial Benefits to Related Parties."
The expected benefits from the Mergers to the Limited Partners include the
following:
. Enhanced Liquidity of Investment. The REIT Conversion will offer Limited
Partners significantly enhanced liquidity with respect to their
investments in the Partnerships because, commencing one year following
the Mergers, Limited Partners who retain OP Units will be able to
exercise their Unit Redemption Right at any time, subject to certain
limited exceptions. Host has approximately 204 million shares of common
stock outstanding and is expected to have a total common equity market
capitalization of approximately $ billion after giving effect to the
estimated $ million earnings and profits distribution (based on Host's
$ closing price per share on the NYSE on , 1998). The exercise of
the Unit Redemption Right, however, generally would result in recognition
of taxable income or gain at that time.
. Public Market Valuation of Assets. In most instances, the units of
limited partnership interest of each Partnership ("Partnership Units")
currently trade at a discount to the net asset value of the Partnership's
assets. In contrast, the General Partners believe that by exchanging
interests in their existing, non-traded, finite-life limited partnerships
with a fixed portfolio for interests in an infinite-life real estate
company
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focused primarily on a more diverse and growing full-service hotel
portfolio and providing valuation based upon publicly traded Common Shares
of Host REIT, the Limited Partners will have the opportunity to
participate in the recent trend toward ownership of real estate through a
publicly traded entity, which, in many instances, has resulted in market
valuations of public real estate companies in excess of the estimated net
asset values of those companies. There can be no assurance, however, that
the Common Shares of Host REIT will trade at a premium to the private
market values of the Operating Partnership's assets or that the relative
pricing differential will not change or be eliminated in the future. Also,
the benefit of Host's conversion to a REIT will not be shared by the
Limited Partners if and to the extent that such benefit is reflected in
the market valuation of Host's common stock prior to the REIT Conversion.
. Regular Quarterly Cash Distributions. The General Partners expect that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units. Host expects that these distributions will be
higher than the estimated cash distributions for 1998 of all Partnerships
except MHP and MHP2, and in any event, the ability to receive
distributions quarterly and in regular amounts would be enhanced. For
additional information regarding historical and estimated future
distributions for the Partnerships, see "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers."
. Substantial Tax Deferral. The General Partners expect that Limited
Partners of the Participating Partnerships who do not elect to receive
Notes in exchange for OP Units generally should be able to obtain the
benefits of the Mergers while continuing to defer recognition for federal
income tax purposes of at least a substantial portion, if not all, of the
gain with respect to their Partnership Interests that otherwise would be
recognized in the event of a liquidation of the Partnership or a sale or
other disposition of its assets in a taxable transaction (although
Limited Partners in Atlanta Marquis, MHP and PHLP may (although are not
expected to) recognize a relatively modest amount of ordinary income as
the result of required sales of personal property by each such
Partnership to a Non-Controlled Subsidiary in order to facilitate Host
REIT's qualification as a REIT). Thereafter, such Limited Partners
generally should be able to defer at least a substantial portion of such
built-in gain until they elect to exercise their Unit Redemption Right or
one or more of the Hotels currently owned by their Partnership are sold
or otherwise disposed of in a taxable transaction by the Operating
Partnership or the debt now secured by such Hotels is repaid, prepaid or
substantially reduced. The federal income tax consequences of the Mergers
are highly complex and, with respect to each Limited Partner, are
dependent upon many variables, including the particular circumstances of
such Limited Partner. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers." Each Limited Partner is urged to consult
with his own tax advisors as to the consequences of a Merger in light of
his particular circumstances.
. Risk Diversification. Participation in a Merger, as well as future hotel
acquisitions by the Operating Partnership, will reduce the dependence
upon the performance of, and the exposure to the risks associated with,
any particular Hotel or group of Hotels currently owned by an individual
Partnership and spread such risk over a broader and more varied
portfolio, including more diverse geographic locations and multiple
brands. See "Business and Properties--Business Objectives."
. Reduction in Leverage and Interest Costs. It is expected that the
Operating Partnership will have a significantly lower leverage to value
ratio than any of the Partnerships currently, which have leverage ratios
that exceed 55% and typically average between 75% and 80% (calculated as
a percentage of Appraised Value), resulting in interest and debt service
savings and greater financial stability.
. Growth Potential. The General Partners believe that the Limited Partners,
by owning interests in a publicly traded real estate company focused
primarily on a more diverse and growing upscale and luxury full-service
hotel portfolio, will be able to participate in growth opportunities that
would not otherwise be available to them.
. Greater Access to Capital. With publicly traded equity securities, a
larger base of assets and a substantially greater equity value than any
of the Partnerships individually, Host REIT expects to have
18
<PAGE>
greater access to the capital necessary to fund the Operating
Partnership's operations and to consummate acquisitions on more attractive
terms than would be available to any of the Partnerships individually.
This greater access to capital should provide greater financial stability
to the Operating Partnership and reduce the level of risk associated with
refinancing existing loans upon maturity, as compared to the Partnerships
individually.
DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF OP UNITS
Following consummation of the REIT Conversion, OP Units will be owned by the
following groups:
. Host REIT, which will receive in the aggregate a number of OP Units
equal to the number of outstanding shares of common stock of Host, in
exchange for the contribution of its full-service hotel assets and other
assets (excluding its senior living assets and the cash to be distributed
to its shareholders), subject to all liabilities of Host (including past
and future tax liabilities), other than liabilities of SLC. The aggregate
number of OP Units received by Host REIT will include the OP Units
attributable to the interests of the General Partners and their
affiliates in the Partnerships, valued in substantially the same manner
as the OP Units attributable to the Limited Partners. On a pro forma
basis, as of June 19, 1998, Host REIT would have received approximately
204 million OP Units, based upon the number of outstanding shares of Host
common stock at that time. If Host issues any shares of preferred stock
prior to the REIT Conversion, Host REIT also will receive a number of
preferred partnership interests in the Operating Partnership equal to the
number of outstanding shares of preferred stock.
. The Blackstone Entities, which will receive approximately 43.7 million OP
Units in exchange for the contribution of the Blackstone Hotels and
certain other related assets, subject to certain liabilities.
. Limited Partners of the Participating Partnerships, who will receive in
the Mergers a number of OP Units based upon the Exchange Values of their
respective Partnership Interests, determined as summarized below.
. Partners unaffiliated with Host in certain Private Partnerships, who have
agreed to exchange their interests in their Private Partnerships for OP
Units based upon the value of their interests in their Private
Partnerships, as determined by negotiation with Host.
In the Mergers, the Limited Partners of each Participating Partnership will
receive in exchange for their Partnership Interests a number of OP Units with
an aggregate deemed value equal to the Exchange Value of their Partnership
Interests. The price of an OP Unit for this purpose will be equal to the
average closing price on the NYSE of a Host REIT Common Share for the 20
trading days after the Effective Date of the Mergers (but in no event greater
than $ per share). The closing price per share of Host common stock on the
NYSE was $ on , 1998.
The Exchange Value of a Partnership is equal to the greatest of its Adjusted
Appraised Value, Continuation Value and Liquidation Value, each of which has
been determined as follows:
. Adjusted Appraised Value. The General Partners have retained AAA to
determine the market value of each of the Hotels as of March 1, 1998,
(the "Appraised Value"). The "Adjusted Appraised Value" of a Partnership
equals the Appraised Value of its Hotels, adjusted as of the Final
Valuation Date (as defined herein) for lender reserves, capital
expenditure reserves, existing indebtedness (including a "mark to market"
adjustment to reflect the fair market value of such indebtedness),
certain deferred maintenance costs, deferred management fees and transfer
and recordation taxes and fees.
. Continuation Value. The General Partners have adopted estimates prepared
by AAA for each Partnership of the discounted present value, as of
January 1, 1998, of the limited partners' share of estimated future cash
distributions and estimated net sales proceeds (plus lender reserves)
assuming that the Partnership continues as an operating business for
twelve years and its assets are sold on December 31, 2009 for their then
estimated market value (the "Continuation Value").
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<PAGE>
. Liquidation Value. The General Partners have estimated for each
Partnership the net proceeds to limited partners resulting from the
assumed sale as of December 31, 1998 of the Hotels(s) of the Partnership,
each at its Adjusted Appraised Value (after eliminating any "mark to
market" adjustment and adding back the deduction for transfer taxes and
fees, if any, made in deriving the Adjusted Appraised Value) less (i)
estimated liquidation costs, expenses and contingencies equal to 2.5% of
Appraised Value and (ii) prepayment penalties or defeasance costs, as
applicable (the "Liquidation Value").
For a complete description of the above methodologies, see "Determination of
Exchange Values and Allocation of OP Units--Methodology for Determining
Exchange Values." Each of the three valuation methodologies is dependent upon a
number of estimates, variables and assumptions, including the assumptions used
by AAA in preparing the Appraised Values of the Hotels, as well as varying
market conditions. No assurance can be given that the estimated values would be
accurate under actual conditions. See "Background and Reasons for the Mergers
and the REIT Conversion--Alternatives to the Mergers."
The following table sets forth the estimated Exchange Value of each
Partnership (based upon the greatest of its Adjusted Appraised Value,
Continuation Value and Liquidation Value), the estimated minimum and pro forma
number of OP Units to be received and the estimated Note Election Amount for
each Partnership, all on a per Partnership Unit basis as of the Initial
Valuation Date. The estimated Exchange Values set forth below may increase or
decrease as a result of various adjustments, which will be finally calculated
immediately prior to the closing of the Mergers but will not change as a result
of less than all of the Partnerships participating in the Mergers.
ESTIMATED EXCHANGE VALUES, NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
(ALL AMOUNTS ON A PER PARTNERSHIP UNIT BASIS)(1)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
ESTIMATED MINIMUM PRO FORMA
ADJUSTED ESTIMATED ESTIMATED ESTIMATED NUMBER OF NUMBER OF NOTE
APPRAISED CONTINUATION LIQUIDATION EXCHANGE OP OP ELECTION
PARTNERSHIP VALUE VALUE VALUE VALUE(2) UNITS(3) UNITS(4) AMOUNT(5)
----------- --------- ------------ ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $ 41,991 $ 45,425 $ 406 $ 45,425 2,271 $ 27,255
Chicago Suites.......... 33,471 24,184 31,467 33,471 1,674 31,468
Desert Springs.......... 40,880 33,536 27,617 40,880 2,044 27,617
Hanover................. 123,202 98,090 88,474 123,202 6,160 88,474
MDAH.................... 109,216 89,340 98,343 109,216 5,461 98,345
MHP..................... 140,032 141,425 124,261 141,425 7,071 124,261
MHP2.................... 237,334 212,032 205,140 237,334 11,867 205,140
PHLP.................... 0 5,040 0 5,040 252 3,024
</TABLE>
- --------
(1) A Partnership Unit in all of the Partnerships except Chicago Suites
($35,000) and PHLP ($10,000) represents an original investment of $100,000.
(2) Estimated Exchange Value is equal to the greatest of estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value.
(3) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers.
(4) Assumes the price of an OP Unit is $20.00, which is the price used for
purposes of the pro forma financial statements.
(5) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 60% of the Exchange Value (the "Note Election
Amount").
DESCRIPTION OF THE NOTES
At the same time they vote on the Mergers, Limited Partners who prefer to
exchange their OP Units for a Note must indicate their preference on the
Consent Form. Even if a Limited Partner votes against the Merger, he still may
choose to exchange his OP Units for a Note in the event the Merger is approved.
A Limited Partner of a Participating Partnership who fails to vote will receive
and retain OP Units. Each Limited Partner in a
20
<PAGE>
Participating Partnership who elects to exchange his OP Units for a Note will
immediately tender the OP Units he receives upon consummation of the Merger to
the Operating Partnership for the Note. The Notes will (i) be unsecured
obligations of the Operating Partnership, (ii) have a principal amount equal to
the Note Election Amount of a Limited Partner's Partnership Interests, (iii)
mature on December 15, 2005 (approximately seven years after the closing of the
Mergers), (iv) bear interest at % per annum, which was determined based on
120% of the applicable federal rate as of the Record Date (estimated to be
approximately 6.68% as of August 7, 1998), payable semi-annually on June 15 and
December 15 each year, (v) provide for optional prepayment at any time without
penalty and mandatory prepayment of principal from a ratable portion of the net
proceeds (after repayment of debt, sales expenses and deferred management fees)
realized from any sale of any Hotels formerly owned by the Limited Partner's
Partnership and from certain excess refinancing proceeds and (vi) provide for
the payment of the remaining principal balance at maturity. See "Description of
the Notes."
FAIRNESS ANALYSIS AND OPINION
Fairness Analysis. The General Partners believe that the Mergers provide
substantial benefits and are fair to the Limited Partners of each Partnership
and recommend that all Limited Partners vote for the Mergers. In arriving at
this conclusion, the General Partners have relied primarily on the following
factors, as well as other factors described under "Fairness Analysis and
Opinion--Fairness Analysis:" (i) their view that the expected benefits of the
Mergers for the Limited Partners outweigh the risks and potential detriments of
the Mergers to the Limited Partners (see "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers"); (ii) their view
that the value of the OP Units allocable to the Limited Partners on the basis
of the Exchange Value established for each Partnership represents fair
consideration for the interests held by the partners of such Partnership and is
fair to the Limited Partners from a financial point of view; and (iii) the
fairness opinion of AAA, as described below.
Fairness Opinion. AAA, an independent, nationally recognized hotel valuation
and financial advisory firm, has rendered the fairness opinion (the "Fairness
Opinion"), attached as Appendix B to this Consent Solicitation, which sets
forth the Appraised Values of the Hotels and concludes that: (i) the Exchange
Value and the methodologies and underlying assumptions used to determine the
Exchange Value, the Adjusted Appraised Value, the Continuation Value and the
Liquidation Value of each Partnership (including, without limitation, the
assumptions used to determine the various adjustments to the Appraised Values
of the Hotels) are fair and reasonable, from a financial point of view, to the
Limited Partners of each Partnership; and (ii) the methodologies used to
determine the value of an OP Unit and the allocation of the equity interest in
the Operating Partnership to be received by the limited partners of each
Partnership are fair and reasonable to the Limited Partners of each
Partnership. See "Fairness Analysis and Opinion--Fairness Opinion."
RECOMMENDATION
FOR THE REASONS STATED HEREIN, THE GENERAL PARTNERS BELIEVE THAT THE MERGERS
PROVIDE SUBSTANTIAL BENEFITS AND ARE FAIR TO THE LIMITED PARTNERS OF EACH
PARTNERSHIP AND RECOMMEND THAT ALL LIMITED PARTNERS VOTE FOR THE MERGERS. SEE
"FAIRNESS ANALYSIS AND OPINION--FAIRNESS ANALYSIS."
SOLICITATION MATERIALS
This Consent Solicitation (including the accompanying transmittal letter),
together with the consent form (the "Consent Form"), constitute the
"Solicitation Materials" being distributed to Limited Partners to obtain their
consents to the Mergers.
The date of first distribution of this Consent Solicitation is , 1998.
VOTING PROCEDURES
The voting procedures applicable to Limited Partners of each Partnership are
set forth in this Consent Solicitation under the heading "Voting Procedures--
Required Vote and Other Conditions."
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<PAGE>
A Limited Partner may mark the Consent Form to vote "FOR," "AGAINST" or
"ABSTAIN" with respect to participation in a Merger by his Partnership. THE
FAILURE OF A LIMITED PARTNER OF ATLANTA MARQUIS, CHICAGO SUITES, MDAH AND PHLP
TO VOTE OR AN ABSTENTION WILL HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER
HAD VOTED HIS PARTNERSHIP INTERESTS "AGAINST" A MERGER. THE FAILURE OF A
LIMITED PARTNER OF DESERT SPRINGS, HANOVER, MHP AND MHP2 TO VOTE WILL MEAN THAT
SUCH LIMITED PARTNER'S PARTNERSHIP INTEREST WILL NOT BE COUNTED FOR PURPOSES OF
ESTABLISHING THE NUMBER OF LIMITED PARTNER INTERESTS REQUIRED TO RECOGNIZE THE
VOTE AND MAY AFFECT THE MANNER IN WHICH HOST IS REQUIRED TO VOTE ITS LIMITED
PARTNER INTERESTS. AN ABSTENTION BY A LIMITED PARTNER OF DESERT SPRINGS,
HANOVER, MHP AND MHP2 WILL BE COUNTED FOR PURPOSES OF ESTABLISHING THE NUMBER
OF LIMITED PARTNER INTERESTS REQUIRED TO HAVE THE VOTE RECOGNIZED BUT WILL
EFFECTIVELY BE COUNTED AS A VOTE "AGAINST" A MERGER.
The period during which consents will be solicited pursuant to this Consent
Solicitation (the "Solicitation Period") will commence on the date this Consent
Solicitation and the other Solicitation Materials are first distributed to the
Limited Partners and will continue until the later of (i) , 1998 or (ii)
such later date as the Operating Partnership may elect, in its sole and
absolute discretion. Any Consent Form RECEIVED by the Operating Partnership (in
original or by facsimile) prior to 5:00 p.m., Eastern time, on the last day of
the Solicitation Period will be effective, provided that such Consent Form has
been properly signed. FOR ALL OF THE PARTNERSHIPS, A CONSENT FORM THAT IS
PROPERLY SIGNED BUT NOT MARKED WILL BE VOTED "FOR" THE MERGERS. A Limited
Partner who has submitted a Consent Form may withdraw or revoke the Consent
Form at any time prior to the expiration of the Solicitation Period.
Investor Lists. Under Rule 14a-7 of the Exchange Act, each Partnership is
required, upon the written request of a Limited Partner, to provide to the
requesting Limited Partner (i) a statement of the approximate number of Limited
Partners in such Limited Partner's Partnership; and (ii) the estimated cost of
mailing a proxy statement, form of proxy or other similar communication to such
Limited Partners. In addition, a Limited Partner has the right, at his option,
either to (a) have his Partnership mail (at the Limited Partner's expense)
copies of any proxy statement, proxy form or other soliciting material
furnished by the Limited Partner to the Partnership's Limited Partners
designated by the Limited Partner; or (b) have the Partnership deliver to the
requesting Limited Partner, within five business days of the receipt of the
request, a reasonably current list of the names, addresses and class of units
held by the Partnership's Limited Partners. The right to receive the list of
Limited Partners is subject to the requesting Limited Partner's payment of the
cost of mailing and duplication at a rate of $0.15 per page. See "Voting
Procedures--Required Vote and Other Conditions--Investor Lists."
FEDERAL INCOME TAX CONSEQUENCES
Tax Consequences of the Mergers. Based upon certain assumptions and
representations of the General Partners, the Operating Partnership, Host and
Host REIT, Hogan & Hartson L.L.P., counsel to Host, Host REIT and the Operating
Partnership, has opined that, except for any gain attributable to the sale of
personal property to a Non-Controlled Subsidiary, the Mergers will not result
in the recognition of taxable gain or loss at the time of the Mergers to a
Limited Partner (i) who does not exercise his Unit Redemption Right on a date
sooner than the date two years after the date of the consummation of the
Mergers; (ii) who does not receive a cash distribution (or a deemed cash
distribution resulting from relief from liabilities, including as a result of
the prepayment of indebtedness associated with the Limited Partner's
Partnership) in connection with the Mergers or the REIT Conversion in excess of
such Limited Partner's aggregate adjusted basis in his Partnership Interest at
the time of the Mergers; (iii) who does not elect to receive a Note; (iv) who
is not required to recognize gain by reason of an election by other Limited
Partners in his Partnership to receive Notes in exchange for their OP Units
(which, in counsel's opinion, described below, should not be the result of such
election); and (v) whose "at risk" amount does not fall below zero as a result
of the Mergers or the REIT Conversion.
With respect to the foregoing potential exceptions to nonrecognition
treatment, Hogan & Hartson L.L.P. has opined as follows: (i) it is more likely
than not that a Limited Partner's exercise of the Unit Redemption
22
<PAGE>
Right more than one year after the date of consummation of the REIT Conversion
but less than two years after such date will not cause the Merger itself to be
a taxable transaction for such Limited Partner (or for the other Limited
Partners of such Partnership); (ii) although the matter is not free from doubt,
a Limited Partner who does not elect to receive a Note in connection with the
Mergers should not be required to recognize gain by reason of another Limited
Partner's exercise of such election; and (iii) a Limited Partner's relief from
Partnership liabilities allocable to such Limited Partner in connection with
the Mergers or the REIT Conversion (including as a result of the repayment of
Partnership indebtedness in connection with the REIT Conversion) will not cause
such Limited Partner to recognize taxable gain at the time of the REIT
Conversion unless (and only to the extent that) the amount thereof exceeds such
Limited Partner's adjusted basis in his Partnership Interest at the time of the
Mergers. See "Federal Income Tax Consequences--Summary of Tax Opinions." An
opinion of counsel, however, does not bind the Internal Revenue Service (the
"IRS") or the courts, and no assurance can be provided that any such opinion
will not be challenged by the IRS or will be sustained by a court if so
challenged. With one exception, neither Host REIT, the Operating Partnership,
nor the General Partners have sought any ruling from the IRS with respect to
the consequences of the Mergers or the REIT Conversion. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--IRS Ruling Request Regarding
Allocation of Partnership Liabilities."
With respect to the Limited Partners' relief from Partnership liabilities in
connection with the Mergers and REIT Conversion, the General Partners and the
Operating Partnership have determined, based upon the intended allocation of
Operating Partnership liabilities following the REIT Conversion and certain
information compiled by the General Partners, that no Limited Partner whose
adjusted basis in his Partnership Interest is the same as or greater than the
basis of a Limited Partner who purchased his Partnership Interest in the
original offering by the Partnership of the Partnership Interests and who has
held such Partnership Interest at all times since (referred to herein as an
"Original Limited Partner's Adjusted Basis") will recognize taxable gain at the
time of the Mergers as a result either of relief from Partnership liabilities
allocable to such Limited Partner or a reduction in his "at risk" amount below
zero. See "Federal Income Tax Consequences--Tax Consequences of the Mergers--
Relief from Liabilities/Deemed Cash Distribution." A Limited Partner whose
adjusted basis in his Partnership Interest is less than the Original Limited
Partner's Adjusted Basis for that Partnership, however, could recognize gain,
depending upon his particular circumstances.
Even though a Limited Partner whose adjusted basis in his Partnership
Interest is the same as or greater than the Original Limited Partner's Adjusted
Basis for that Partnership is not expected to recognize gain at the time of the
REIT Conversion, a variety of events and transactions subsequent to the REIT
Conversion could cause the Limited Partner to recognize all or part of the gain
that has been deferred through the REIT Conversion. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Effect of Subsequent Events."
The Partnership Agreement expressly provides that Host REIT is not required to
take into account the tax consequences for the limited partners of the
Operating Partnership in deciding whether to cause the Operating Partnership to
undertake specific transactions (but the Operating Partnership is obligated to
pay any taxes that Host REIT incurs as a result of such transactions) and the
limited partners have no right to approve or disapprove such transactions. See
"Description of OP Units--Sales of Assets."
The particular tax consequences of the Mergers and the REIT Conversion for a
Limited Partner will depend upon a number of factors related to the tax
situation of that individual Limited Partner and the Partnership of which he is
a Limited Partner, including, without limitation, such factors as the Limited
Partner's adjusted tax basis in his Partnership Interest, the extent to which
the Limited Partner has unused passive losses with respect to his Partnership
Interest or other investments generating passive activity losses that could
offset income arising from the Mergers and the REIT Conversion, the amount of
income (if any) required to be recognized by reason of the sale by the Limited
Partners' Partnership of personal property to a Non-Controlled Subsidiary, the
actual allocation of Operating Partnership liabilities to the Limited Partner
following the Mergers and the REIT Conversion and the amount of built-in gain
with respect to the Hotel(s) contributed to the Operating Partnership by the
Partnership in which he is a Limited Partner.
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<PAGE>
A Limited Partner who elects to receive a Note will be treated as having made
a taxable disposition of his Partnership Interest. The amount realized in
connection with such disposition will equal the sum of the "issue price" of the
Note (i.e., the principal amount of the Note) plus the portion of the
Partnership's liabilities allocable to the Limited Partner for federal income
tax purposes. To the extent the amount realized exceeds the Limited Partner's
adjusted basis in his Partnership Interest, the Limited Partner will recognize
gain. Such Limited Partner may be eligible to defer at least a portion of that
gain under the "installment sale" rules (see "Federal Income Tax Consequences--
Tax Treatment of Limited Partners Who Exercise Their Right to Make the Note
Election") but those rules would not permit the Limited Partner to defer all of
the gain (including any gain attributable to the Limited Partner's "negative
capital account" and any gain attributable to depreciation recapture) and may
require that the Limited Partner who defers gain pay to the IRS interest on a
portion of the resulting tax that has been deferred.
The discussion of federal income tax consequences in this Consent
Solicitation is not exhaustive of all possible tax consequences. For example,
it does not give a detailed discussion of any state, local or foreign tax
considerations. In addition, except to the extent discussed under the heading
"Federal Income Tax Consequences--Taxation of Non-U.S. Shareholders of Host
REIT," it does not purport to deal with tax consequences that might be relevant
to foreign corporations and persons who are not citizens or residents of the
United States.
The gain, if any, required to be recognized by a Limited Partner as a
consequence of the Mergers (including any gain recognized as a result of the
sale of personal property by the Limited Partner's Partnership or as a result
of making the Note Election) can be offset by unused passive activity losses
from his Partnership and other investments.
EACH LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISOR TO
DETERMINE THE IMPACT OF SUCH LIMITED PARTNER'S PERSONAL TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES OF THE MERGERS AND THE REIT CONVERSION TO SUCH
LIMITED PARTNER.
Qualification of Host REIT as a REIT. Host REIT expects to qualify as a REIT
for federal income tax purposes effective for its first taxable year commencing
following the REIT Conversion. If it so qualifies, Host REIT will be permitted
to (i) deduct dividends paid to its shareholders, allowing the income
represented by such dividends to avoid taxation at the entity level and to be
taxed only at the shareholder level and (ii) treat retained net capital gains
in a manner so that such gains are taxed at the Host REIT level but effectively
avoid taxation at the shareholder level. Host REIT, however, will be subject to
a separate corporate income tax on any gains recognized during the ten years
following the REIT Conversion that are attributable to "built-in" gain with
respect to the assets that Host owned at the time of the REIT Conversion (which
tax would be paid by the Operating Partnership). Host REIT has substantial
deferred tax liabilities that are likely to be recognized during such period
without any corresponding receipt of cash and the Operating Partnership will be
responsible for paying such taxes. Host REIT's ability to qualify as a REIT
will depend upon its continuing satisfaction following the REIT Conversion of
various requirements related to the nature of its assets, the sources of its
income and the distributions to its shareholders, including a requirement that
Host REIT distribute to its shareholders at least 95% of its taxable income
each year.
Sale of Personal Property. In order to protect Host REIT's ability to qualify
as a REIT, the Operating Partnership may require, immediately prior to the
Mergers, that certain of the Participating Partnerships (specifically, Atlanta
Marquis, Hanover, MHP and PHLP) sell a portion of the personal property
associated with the Hotels owned by such Partnerships to a Non-Controlled
Subsidiary. These sales will be taxable transactions and may (although are not
expected to) result in a special allocation of any ordinary recapture income by
each such Partnership (other than Hanover) to its Limited Partners. This
income, if any, will be allocated to each such Limited Partner in the same
proportion and to the same extent that such Limited Partner previously was
allocated
24
<PAGE>
any deductions directly or indirectly giving rise to the treatment of such
gains as recapture income. A Limited Partner who receives such an allocation of
recapture income will not be entitled to any special distribution from his
Partnership in connection with the sale of personal property.
SUMMARY FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial and other
information for the Operating Partnership and combined consolidated historical
financial information for the Company (as defined in Note 1 to the Notes to the
Combined Consolidated Financial Statements included herein). The following
summary financial information should be read in conjunction with the financial
statements and notes thereto and Management's Discussion and Analysis of
Results of Operations and Financial Condition included elsewhere in this
Consent Solicitation.
The unaudited pro forma financial statements as of June 19, 1998 and for the
fiscal year ended January 2, 1998 and the twenty-four weeks ended June 19, 1998
("First Two Quarters 1998") are presented as if the REIT Conversion occurred as
of June 19, 1998 for the pro forma balance sheets and at the beginning of each
period presented for the pro forma statements of operations. The pro forma
information incorporates certain assumptions that are described in the Notes to
the Unaudited Pro Forma Financial Statements included elsewhere in this Consent
Solicitation.
The pro forma information does not purport to represent what the Operating
Partnership's financial position or results of operations would actually have
been if these transactions had, in fact, occurred on such date or at the
beginning of the period indicated, or to project the Operating Partnership's
financial position or results of operations at any future date or for any
future period.
In addition, the historical information contained in the following table is
not comparable to the operations of the Operating Partnership on a going-
forward basis because the historical information relates to an operating entity
which owns and operates its hotels, while the Operating Partnership will own
the Hotels but will lease them to the Lessees and receive rental payments in
connection therewith.
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SUMMARY FINANCIAL INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------- HISTORICAL
PRO FORMA FISCAL YEAR 1997 FIRST TWO QUARTERS 1998
--------------------------- ---------------------------
100% 100% 100% 100%
PARTICIPATION PARTICIPATION HISTORICAL PARTICIPATION PARTICIPATION FIRST TWO
WITH NO WITH NOTES FISCAL WITH NO WITH NOTES QUARTERS
NOTES ISSUED ISSUED(1) YEAR 1997 NOTES ISSUED ISSUED(1) 1998
------------- ------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Hotel revenues......... $ -- $ -- $1,093 $ -- $ -- $652
Rental revenues (1).... 1,164 1,164 -- 625 625 --
Other revenues......... 15 15 17 9 9 56
------ ------ ------ ---- ----- ----
Total revenues....... 1,179 1,179 1,110 634 634 708
------ ------ ------ ---- ----- ----
OPERATING COSTS AND
EXPENSES:
Hotel.................. 631 629 649 292 291 343
Other.................. 11 11 29 5 5 10
------ ------ ------ ---- ----- ----
Total operating costs
and expenses........... 642 640 678 297 296 353
------ ------ ------ ---- ----- ----
Operating profit........ 537 539 432 337 338 355
Minority interest....... (9) (9) (32) (11) (11) (30)
Corporate expenses...... (44) (44) (45) (20) (20) (20)
REIT Conversion
expenses............... -- -- -- -- -- (6)
Interest expense........ (437) (454) (287) (203) (211) (151)
Dividends on Convertible
Preferred Securities... (37) (37) (37) (17) (17) (17)
Interest income......... 28 28 52 20 20 26
------ ------ ------ ---- ----- ----
Income before income
taxes.................. 38 23 83 106 99 157
Provision for income
taxes.................. (2) (1) (36) (5) (5) (64)
------ ------ ------ ---- ----- ----
Income before
extraordinary items ... $ 36 $ 22 $ 47 $101 $ 94 $ 93
====== ====== ====== ==== ===== ====
</TABLE>
AS OF JUNE 19, 1998
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------
100% PARTICIPATION 100% PARTICIPATION
WITH NO NOTES WITH NOTES
ISSUED ISSUED(2) HISTORICAL
------------------ ------------------ ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net.. $ 7,001 $ 6,948 $ 5,054
Total assets................. 8,397 8,345 6,194
Debt......................... 5,083 5,319 3,570
Total liabilities............ 5,892 6,128 4,628
Convertible Preferred
Securities.................. 550 550 550
Equity....................... 1,955 1,667 1,016
</TABLE>
- --------
(1) Lease amounts reflect estimates as the Leases have not been finalized,
although negotiations are substantially complete. The Company does not
believe the final lease amounts will be materially different from the
amounts presented.
(2) Assumes that all the Limited Partners of each Partnership elect to
exchange their OP Units for Notes.
26
<PAGE>
RISK FACTORS
In considering whether to approve of a Merger by any Partnership, Limited
Partners should consider carefully, among other factors, the material risks
described below.
RISKS AND EFFECTS OF THE MERGERS
CONFLICTS OF INTEREST. The Mergers, the REIT Conversion and the
recommendations of the General Partners involve conflicts of interest because
of the relationships among Host, the Operating Partnership, the General
Partners and SLC.
SUBSTANTIAL BENEFITS TO RELATED PARTIES. To the extent that the
anticipated benefits of the REIT Conversion are reflected in the value of
Host's common stock prior to the Effective Date, such benefits will not be
shared with the Limited Partners. In addition, following the REIT
Conversion, current Host shareholders (together with the Blackstone
Entities), and not the Limited Partners, will own the common stock of SLC
and will benefit from the terms of the leases to the extent net revenues
exceed rental payments and other expenses. The Mergers will facilitate the
consummation, and enable Host to reap the full benefits, of the REIT
Conversion. By converting to a REIT, Host expects to benefit from the
advantages enjoyed by REITs in raising capital and acquiring additional
assets, participating in a larger group of comparable companies and
increasing its potential base of shareholders. Also, Host will realize
significant savings through the substantial reduction of its future
corporate-level income taxes. Because of Host's significant ownership
position in certain Partnerships (including Atlanta Marquis, Desert
Springs, Hanover, MHP and MHP2), the failure of one or more of these
Partnerships to participate in a Merger likely would require that Host
contribute some or all of its ownership interest in the Non-Participating
Partnership to a taxable Non-Controlled Subsidiary, which would materially
reduce the benefit to Host the REIT Conversion as it applies to that
interest.
AFFILIATED GENERAL PARTNERS. Host has varying interests in each of the
Partnerships and subsidiaries of Host act as General Partner of each of the
Partnerships (except for PHLP, in which Host is the General Partner). Each
General Partner has an independent obligation to assess whether the terms
of the Merger are fair and equitable to the Limited Partners of its
Partnership, which involves considerations for Host and its subsidiaries
that are different from those for the Limited Partners. While each General
Partner has sought faithfully to discharge its obligations to its
Partnership, there is an inherent conflict of interest in having the
General Partners determine the terms on which the Operating Partnership,
which is controlled by Host, will acquire the Partnerships, for which
subsidiaries of Host are General Partners, since no arm's length
negotiations are possible.
LEASING ARRANGEMENTS. Conflicts of interest exist in connection with
establishing the terms of the leasing arrangements being entered into as
part of the REIT Conversion. The General Partners, all of which are
subsidiaries of Host (except in the case of PHLP, in which Host is the
General Partner), are recommending the Mergers, and Host is responsible for
establishing the terms of the Mergers and the REIT Conversion, including
the Leases. The common stock of SLC will be distributed to Host REIT's
shareholders and the Blackstone Entities after the terms of the Leases have
been determined. Accordingly, Host REIT's shareholders and the Blackstone
Entities, as the initial shareholders of SLC, will potentially benefit from
the terms of the Leases to the extent net revenues exceed rental payments
and other expenses and Limited Partners will not because they will not
receive shares of SLC common stock.
POTENTIAL AAA CONFLICTS. AAA has been retained by the General Partners
(consisting of Host and its subsidiaries) to determine the Appraised Values
of the Hotels and the Continuation Values of the Partnerships and to render
the Fairness Opinion. Host has previously retained AAA to perform
appraisals and render fairness and solvency opinions in connection with
other transactions, and there is the possibility that Host REIT and the
Operating Partnership will retain AAA to perform similar tasks in the
future.
27
<PAGE>
DIFFERENT TAX CONSEQUENCES UPON SALE OR REFINANCING OF CERTAIN
HOTELS. Certain holders of OP Units may experience different and more
adverse tax consequences compared to those experienced by other holders of
OP Units or by holders of Common Shares upon the sale of, or the reduction
of indebtedness on, any of the Hotels. Therefore, such holders, including
Host REIT and its subsidiaries, may have different objectives regarding the
appropriate pricing and timing of any sale or refinancing of an individual
Hotel. As expressly provided in the Partnership Agreement, Host REIT, as
general partner of the Operating Partnership, is not required to take into
account the tax consequences of the limited partners in deciding whether to
cause the Operating Partnership to undertake specific transactions (but the
Operating Partnership is obligated to pay any taxes Host REIT incurs as a
result of such transactions) and the limited partners have no right to
approve or disapprove such transactions.
PARTNERSHIP AGREEMENT. Conflicts of interest exist in connection with
establishing the terms of the Partnership Agreement, including provisions
which benefit Host REIT, all of which were determined by Host.
These conflicts of interest could result in decisions that do not fully
reflect the interests of all Limited Partners. For a discussion of the
Operating Partnership's policies and agreements designed to minimize any
adverse effects from future conflicts of interest, see "Distribution and Other
Policies--Conflicts of Interest Policies."
ABSENCE OF ARM'S LENGTH NEGOTIATIONS. No independent representative was
retained to negotiate on behalf of the Limited Partners. AAA, which performed
the Appraisals and rendered the Fairness Opinion, has not negotiated with the
General Partners or Host and has not participated in establishing the terms of
the Mergers. Consequently, the terms and conditions of the Mergers may have
been more favorable to the Limited Partners if such terms and conditions were
the result of arm's length negotiations. In this regard, the Fairness Opinion
specifically does not conclude that other methodologies for determining the
Exchange Values of the Partnerships and/or the price of the OP Units might not
have been more favorable to the Limited Partners.
EXCHANGE VALUE MAY NOT EQUAL FAIR MARKET VALUE OF THE PARTNERSHIPS'
HOTELS. Each Limited Partner of a Participating Partnership who retains OP
Units will receive consideration with a deemed value equal to the Exchange
Value of such Limited Partner's Partnership Interest. The determination of the
Exchange Value of each Partnership involves numerous estimates and
assumptions. There is no assurance that the Exchange Value of a Partnership
will equal the fair market value of the Hotels and other assets contributed by
such Partnership. See "Determination of Exchange Values and Allocation of OP
Units."
ALLOCATION OF OP UNITS TO HOST REIT IS DIFFERENT FROM ALLOCATION OF OP UNITS
TO LIMITED PARTNERS. Host REIT will receive in the aggregate a number of OP
Units (including OP Units allocated to the General Partners of the
Partnerships) equal to the number of shares of Host common stock outstanding
on the Effective Date (and, if Host has outstanding shares of preferred stock
at the time of the REIT Conversion, a corresponding number of preferred
partnership interests in the Operating Partnership), which should fairly
represent the market value of Host REIT but may not be equal to the fair
market or net asset value of the Hotels and other assets that Host will
contribute to the Operating Partnership. The Partnerships will receive OP
Units in the Mergers with a deemed value equal to the Exchange Value of such
Partnership. The different methods of allocating OP Units may result in
Limited Partners not receiving the fair market value of their Partnership
Interests and Host REIT receiving a higher percentage of the interests in the
Operating Partnership. See "Determination of Exchange Values and Allocation of
OP Units."
PRICE OF OP UNITS MIGHT BE LESS THAN THE FAIR MARKET VALUE OF THE
PARTNERSHIP INTERESTS. The price of an OP Unit, for purposes of the Mergers
and the REIT Conversion, will be equal to the average closing price on the
NYSE of a Host REIT Common Share for the first 20 trading days after the
Effective Date of the Mergers (but in no event greater than $ per share). It
is likely that, over time, the value of the publicly traded Common Shares of
Host REIT (and therefore the value of the OP Units) will diverge from the
deemed value of the OP Units used for purposes of the Mergers. This could
result in the Limited Partners receiving OP Units
28
<PAGE>
with an actual value that is less than either the price of the OP Units for
purposes of the Mergers or the fair market value of their Partnership
Interests.
INABILITY OF LIMITED PARTNERS TO REDEEM OP UNITS FOR ONE YEAR. Limited
Partners who elect to retain OP Units received in the Mergers will be unable
to redeem such OP Units for one year following the Mergers. Until then,
Limited Partners will bear the risk of illquidity.
VALUE OF THE NOTES WILL BE LESS THAN THE EXCHANGE VALUE. At the same time
that he votes on the Merger of his Partnership, each Limited Partner also may
elect to receive at the time of the Merger, in exchange for OP Units, an
unsecured, seven-year Note of the Operating Partnership with a principal
amount equal to the Note Election Amount of his Partnership Interest. The
determination of the Note Election Amount is based upon numerous assumptions
and estimates. The deemed value of the OP Units will exceed the principal
amount of the corresponding Notes in all Partnerships (because the Exchange
Values will be higher than the Note Election Amounts) and there is no
assurance that the Note a Limited Partner receives will have a value equal to
either (i) the fair market value of the Limited Partner's share of the Hotels
and other assets owned by his Partnership or (ii) the principal amount of the
Notes. There will be no public market for the Notes. If the Notes are sold,
they may sell at prices substantially below their issuance price. Noteholders
are likely to receive the full principal amount of a Note only if they hold
the Note to maturity, which is December 15, 2005, or if the Operating
Partnership repays the Notes prior to maturity. Because the Notes are
unsecured obligations of the Operating Partnership, they will be effectively
subordinated to all secured debt of the Operating Partnership and all
obligations of both the Participating Partnerships and the Operating
Partnership's other subsidiaries. See "Description of the Notes." As of June
19, 1998, on a pro forma basis assuming the Full Participation Scenario, the
Operating Partnership would have had aggregate consolidated debt of
approximately $5.1 billion to which the Notes were effectively subordinated or
which rank equally with such Notes.
REDUCED CASH DISTRIBUTIONS FOR CERTAIN LIMITED PARTNERS. The expected
initial annual cash distributions of the Operating Partnership to the Limited
Partners of MHP and MHP2 per Partnership Unit (from $4,015 to $4,417 and
$5,968 to $6,565, respectively) will be less than the estimated cash
distributions of MHP and MHP2 per Partnership Unit ($9,500 and $21,564,
respectively) for 1998.
CHANGES IN FAIRNESS OPINION. The Fairness Opinion will be updated by AAA
only if so requested by the Operating Partnership. If no such request is made,
changes may occur from the date of the Fairness Opinion to the Effective Date
of the Mergers that might affect the conclusions expressed in the Fairness
Opinion, some of which could be material.
FUNDAMENTAL CHANGE IN THE NATURE OF INVESTMENT. The Mergers and the REIT
Conversion involve a fundamental change in the nature of a Limited Partner's
investment from holding an interest in one or more Partnerships, some of which
were structured as tax shelter investments, and each of which are finite-life
entities that expire between the years 2063 and 2106 and which own only one or
a fixed portfolio of (or controlling interests in) Hotels and distribute the
profits from the operation of such Hotels to its partners, to holding an
interest in an operating real estate company that (i) has a perpetual term,
(ii) intends to continue its operations for an indefinite time period, (iii)
will initially own interests in up to approximately 120 Hotels, (iv) will
distribute to its partners the rents received from the Lessees (which will
operate the Hotels and bear the risks and receive the direct benefits of the
Hotels), (v) has the ability to acquire additional hotels (including hotels
with additional brands), (vi) will be able to reinvest proceeds from sales or
refinancings of existing Hotels in additional hotels and (vii) has a publicly
traded general partner.
In addition, the Operating Partnership does not anticipate that it will
distribute to its limited partners the proceeds from properties that are sold
or refinancings, but instead generally will reinvest such proceeds to repay
indebtedness, acquire additional existing properties, develop new properties
or fund capital expenditure or other working-capital needs. Thus, in contrast
to an investment in the Partnerships, Limited Partners who retain OP Units
will not be able to realize a return of capital through distributions of sale
and refinancing proceeds. Instead, Limited Partners will be able to realize a
return of capital primarily through the exercise of their Unit Redemption
29
<PAGE>
Right, thereby receiving cash or if the OP Units are redeemed for Common
Shares, by selling the Common Shares received as a result thereof. A Limited
Partner's share of the liquidation proceeds, if any, from the sale of a
Partnership's Hotel or Hotels could be higher than the amount realized upon
exercise of the Unit Redemption Right (or payments on any Note received by a
Limited Partner who elects to exchange his OP Units for such Note). An
investment in the Operating Partnership may not outperform an investment in
any individual Partnership. See "Comparison of Ownership of Partnership
Interests, OP Units and Common Shares."
EXPOSURE TO MARKET AND ECONOMIC CONDITIONS OF OTHER HOTELS. As a result of
the Mergers, Limited Partners in Participating Partnerships who elect to
retain OP Units will own interests in a much larger enterprise with a broader
range of assets than any of the Partnerships individually. A material adverse
change affecting the Operating Partnership's assets will affect all Limited
Partners regardless of whether a particular Limited Partner previously was an
investor in such affected assets. Each Partnership owns discrete assets, and
the Mergers and the REIT Conversion will significantly diversify the types and
geographic locations of the Hotels in which the Limited Partners will have
interests. As a result, the Hotels owned by the Operating Partnership may be
affected differently by economic and market conditions than those Hotel(s)
previously owned by an individual Partnership.
LIMITED PARTNERS HAVE NO CASH APPRAISAL RIGHTS. Limited Partners of
Participating Partnerships who vote against the Merger will not have a right
to receive cash based upon an appraisal of their Partnership Interests.
UNCERTAINTIES AS TO THE SIZE AND LEVERAGE OF THE OPERATING PARTNERSHIP. The
Limited Partners cannot know at the time they vote on a Merger the exact size
and amount of leverage of the Operating Partnership. Host is an existing
operating company that regularly issues and repays debt, acquires additional
hotels and disposes of existing hotels. Also, some or all of the Partnerships
may elect not to participate in a Merger. In addition, outside partners in
certain Private Partnerships may not consent to a lease of their partnership's
Hotel(s). In either such case, Host will contribute its interests in such
Partnerships and Private Partnerships to the Operating Partnership but the
Operating Partnership may contribute such interests to a Non-Controlled
Subsidiary, which will be subject to corporate-level income taxation. Host
also may repurchase outstanding securities or issue new debt or equity
securities prior to the consummation of the Mergers and the REIT Conversion.
OTHER UNCERTAINTIES AT THE TIME OF VOTING. There are several other
uncertainties at the time the Limited Partners must vote on the Mergers,
including (i) the exact Exchange Value for each Partnership (which will be
adjusted for changes in lender and capital expenditure reserves, deferred
maintenance and other items prior to the Effective Date), (ii) the price of
the OP Units for purposes of the Mergers, which will be determined by
reference to the post-Merger trading prices of Host REIT's Common Shares and
which, together with the Exchange Value, will determine the number of OP Units
the Limited Partners of each Participating Partnership will receive and (iii)
the exact principal amount of the Notes that may be received in exchange for
OP Units, which cannot be known until after the vote on the Mergers. For these
reasons, the Limited Partners cannot know at the time they vote on a Merger
these important aspects of the Merger.
LACK OF CONTROL OVER HOTEL OPERATIONS. Due to current federal income tax law
restrictions on a REIT's ability to derive revenues directly from the
operation of a hotel, the Operating Partnership will lease virtually all of
its consolidated Hotels to the Lessees, which will operate the Hotels by
continuing to retain the Managers pursuant to the Management Agreements. The
Operating Partnership will not operate the Hotels or participate in the
decisions affecting the daily operations of the Hotels. The Operating
Partnership will have only limited ability to require the Lessees or the
Managers to operate or manage the Hotels in any particular manner and no
ability to govern any particular aspect of their day-to-day operation or
management. Even if Host REIT's management believes the Lessees or the
Managers are operating or managing the Hotels inefficiently or in a manner
that does not result in the maximization of rental payments to the Operating
Partnership under the Leases, the Operating Partnership has only a limited
ability to require the Lessees or the Managers to change their method of
operation or management. Therefore, the Operating Partnership will be
dependent for its revenue upon the ability of the
30
<PAGE>
Lessees and the Managers to operate and manage the Hotels. The Operating
Partnership is limited to seeking redress only if the Lessees violate the
terms of the Leases and then only to the extent of the remedies set forth
therein. Remedies under the Leases include the Operating Partnership's ability
to terminate a Lease upon certain events of default such as the Lessee's
failure to pay rent or failure to maintain certain net worth requirements and
breaches of other specified obligations under the Leases. See "Business and
Properties--The Leases." Termination of a Lease, however, could impair Host
REIT's ability to qualify as a REIT for federal income tax purposes unless
another suitable lessee could be found. Furthermore, upon expiration of the
Leases, the Lessees will have a right of first offer to renew the Leases upon
expiration.
EXPIRATION OF THE LEASES AND POSSIBLE INABILITY TO FIND OTHER LESSEES. The
Leases will expire seven to ten years after the Effective Date, and there can
be no assurance that such Leases will be renewed (or if renewed, will be
renewed on terms as favorable to the Operating Partnership). If the Leases are
not renewed, the Operating Partnership will be required to find other lessees,
which lessees must meet certain requirements set forth in the Management
Agreements. There can be no assurance that satisfactory lessees could be found
or as to the terms and conditions on which the Operating Partnership would be
able to renew the Leases or enter into new leases with such lessees.
REQUISITE VOTE OF LIMITED PARTNERS OF PARTNERSHIPS BINDS ALL LIMITED
PARTNERS. For each Partnership, approval of a Merger by the requisite vote of
the Limited Partners, as described in "Voting Procedures--Required Vote and
Other Conditions," will cause the Partnership to participate in the Merger and
will bind all Limited Partners of such Partnership, including Limited Partners
who voted against or abstained from voting with respect to the Merger.
SUBSTANTIAL INDEBTEDNESS OF THE OPERATING PARTNERSHIP. The Operating
Partnership will have substantial indebtedness. As of June 19, 1998, on a pro
forma basis assuming the Full Participation Scenario, the Operating
Partnership had outstanding indebtedness totaling approximately $5.1 billion,
which represents a % debt-to-total market capitalization ratio on a pro forma
basis at such date (based upon a price per Common Share of Host REIT of $ ).
The Operating Partnership's business is capital intensive and it will have
significant capital requirements in the future. The Operating Partnership's
leverage level could affect its ability to (i) obtain financing in the future,
(ii) undertake refinancings on terms and subject to conditions deemed
acceptable by the Operating Partnership, (iii) make distributions to partners,
(iv) pursue its acquisition strategy or (v) compete effectively or operate
successfully under adverse economic conditions. In the event that the
Operating Partnership's cash flow and working capital are not sufficient to
fund the Operating Partnership's expenditures or to service its indebtedness,
the Operating Partnership would be required to raise additional funds through
capital contributions, the refinancing of all or part of its indebtedness, the
incurrence of additional permitted indebtedness or the sale of assets. There
can be no assurance that any of these sources of funds would be available, if
at all, in amounts sufficient for the Operating Partnership to meet its
obligations. Moreover, even if the Operating Partnership were able to meet its
obligations, its leveraged capital structure could significantly limit its
ability to finance its acquisition program and other capital expenditures, to
compete effectively or to operate successfully, especially under adverse
economic conditions.
NO LIMITATION ON DEBT. Host REIT will have a policy of incurring debt only
if, immediately following such incurrence, its debt-to-total market
capitalization ratio on a pro forma basis would be % or less. However, there
are no limitations in Host REIT's or the Operating Partnership's
organizational documents that limit the amount of indebtedness that either
entity may incur, although both the Notes and the Operating Partnership's
other debt instruments will contain certain restrictions on the amount of
indebtedness that the Operating Partnership may incur. Accordingly, the Board
of Trustees could alter or eliminate this policy from time to time to the
extent permitted by its debt agreements. If this policy were changed, the
Operating Partnership could become more highly leveraged, resulting in an
increase in debt service payments that could adversely affect the Operating
Partnership's cash flow, and consequently, the cash available for distribution
to holders of OP Units and Common Shares and could increase the risk of
default on the Operating Partnership's indebtedness.
31
<PAGE>
TIMING OF THE REIT CONVERSION. If the REIT Conversion does not occur in time
for Host REIT to elect REIT status effective January 1, 1999, the
effectiveness of Host REIT's election could be delayed to January 1, 2000,
which would result in Host REIT continuing to pay corporate income taxes in
1999 and could cause the Blackstone Acquisition not to be consummated.
INDIVIDUAL ASSETS MAY OUTPERFORM THE OPERATING PARTNERSHIP'S PORTFOLIO. The
Mergers and the REIT Conversion will combine into a single entity all of the
assets and liabilities associated with the Participating Partnerships, the
Private Partnerships and Host, as well as the Blackstone Hotels. Assets of
certain Participating Partnerships may, over time, outperform OP Units, which
represent undivided interests in all of the assets of the Operating
Partnership. Although the Exchange Values of the Participating Partnerships
will be determined in part by the estimated future cash flows of such
Partnerships, Limited Partners of a Participating Partnership that would
outperform the Operating Partnership if allowed to continue as a separate
entity will nonetheless receive the same rate of return per OP Unit as the
rest of the limited partners of the Operating Partnership. In addition, the
return that such Limited Partners receive on their investment in the Operating
Partnership could be lower than the return that their Partnership would have
provided if it had not participated in the Merger.
LEASES COULD IMPAIR THE SALE OR OTHER DISPOSITION OF THE OPERATING
PARTNERSHIP'S HOTELS. Each Lease provides for a termination payment if the
Lease is terminated by the Operating Partnership prior to the expiration of
the term of such Lease (including due to a change in the federal income tax
laws that allows the Operating Partnership to operate the Hotels without
jeopardizing Host REIT's status as a REIT), except following a default by a
Lessee and in certain other circumstances or unless the Operating Partnership
leases to the Lessee a comparable substitute hotel. The termination fee is
equal to the fair market value, discounted by 12%, of the Lessee's leasehold
interest in the remaining term of the Lease. The payment of such termination
fee under the Leases could have the effect of impairing the ability of the
Operating Partnership to sell its Hotels if market conditions otherwise
warrant such a sale and would reduce the net proceeds of any such sale. See
"Business and Properties--The Leases--Termination of Lease upon Disposition of
the Hotels."
MANAGEMENT AGREEMENTS COULD IMPAIR THE SALE OR OTHER DISPOSITION OF THE
OPERATING PARTNERSHIP'S HOTELS. Marriott International serves as the manager
for all but 16 of the Operating Partnership's Hotels and provides various
other services to Host and its subsidiaries. Although the Lessees will have
primary liability under the management agreements as long as the Leases are in
effect, the Operating Partnership will remain liable thereunder. The Hotels
generally may not be sold or otherwise transferred unless the transferee
assumes the management agreements relating thereto. The possible desire of the
Operating Partnership, from time to time, to finance, refinance or effect a
sale of any of the properties managed by Marriott International may, depending
upon the structure of such transactions, result in a need to modify the
management agreements with Marriott International with respect to such
property. Any such modification proposed by the Operating Partnership may not
be acceptable to Marriott International, and the lack of consent from Marriott
International could adversely affect the Operating Partnership's ability to
consummate such financing or sale. In addition, certain situations could arise
where actions taken by Marriott International in its capacity as manager of
competing lodging properties would not necessarily be in the best interests of
the Operating Partnership. Nevertheless, the Operating Partnership believes
that there is sufficient mutuality of interest between the Operating
Partnership and Marriott International to result in a mutually productive
relationship.
NO CONTROL OVER MAJOR DECISIONS. Currently, Limited Partners of the
Partnerships generally have the right to vote on certain major transactions,
such as (i) a sale of all or substantially all of a Partnership's assets, (ii)
a merger or consolidation of a Partnership with another entity, (iii)
incurrence of certain types and amounts of debt, (iv) amendments to the
partnership agreement or (v) removal of the General Partner, although all such
matters (except removal of the General Partner) also require the approval of
the General Partner. In contrast, limited partners of the Operating
Partnership generally will have no voting rights as to management (including a
change in control of management), debt financing (including reduction of
mortgage indebtedness, except in certain limited circumstances), sale or other
disposition of one or more Hotels (except with respect to a sale of all or
substantially all of the Hotels, although Host REIT's percentage interest in
the Operating Partnership and
32
<PAGE>
its ability to vote such interests give it the ability to determine the
outcome of that vote) or removal of Host REIT as general partner of the
Operating Partnership. See "Description of OP Units--Borrowing by the
Operating Partnership" and "--Sales of Assets." However, limited partners of
the Operating Partnership will have certain voting rights during the first
year following the Mergers. See "Description of OP Units--Certain Voting
Rights of Holders of OP Units During the First Year Following the Mergers."
After the REIT Conversion, substantially all actions taken by the Operating
Partnership will be based upon decisions made by the management and Board of
Trustees (as constituted from time to time) of Host REIT, in its absolute
discretion, as the sole general partner of the Operating Partnership.
FOREGOING POTENTIAL BENEFITS OF ALTERNATIVES TO THE REIT CONVERSION. The
alternatives to participation in the REIT Conversion through a Merger include
continuation of a Partnership, sale of the Partnership's assets and
liquidation, reorganization as a standalone REIT or merger of the Partnership
with an existing REIT. Continuation of a Partnership in accordance with its
existing business plan would not subject the Partnership to the risks
associated with a Merger or change the Limited Partners' voting rights or the
policy governing their cash distributions. Liquidation of a Partnership would
allow Limited Partners to receive the net proceeds from the sale of the
Partnership's assets without waiting until their OP Units become redeemable
and would permit valuation of the Partnership's assets through negotiations
with prospective purchasers (in many cases unrelated third parties), making it
unnecessary to rely upon other valuation methods to estimate fair market
value. Such a sale and liquidation, however, would result in substantial
taxable income for many Limited Partners. Reorganization of a Partnership as a
standalone REIT would allow certain Limited Partners to receive REIT shares
immediately and achieve liquidity (albeit in a substantially smaller company
with substantially fewer publicly held shares) and to continue their
investment only in their existing Hotel(s). Merger of a Partnership with an
existing REIT would give Limited Partners liquidity (or in the case of a
merger with an UPREIT, tax deferral advantages) but would benefit Limited
Partners more than the Mergers only if the consideration received had a value
in excess of the value of the OP Units to be received in the Mergers (although
Limited Partners with negative capital accounts would be required to recognize
gain to the extent thereof upon formation of the standalone REIT). See
"Background and Reasons for the Mergers and the REIT Conversion--Alternatives
to the Mergers."
NO PARTNER LIABILITY. The merger agreements pursuant to which subsidiaries
of the Operating Partnership will merge with the Partnerships will provide
that the Operating Partnership will have no recourse against any of the
partners in the Participating Partnerships in the event the Operating
Partnership suffers a loss as the result of an inaccuracy in any
representation or warranty made by the Partnership in such merger agreements.
DILUTION. While currently there are no specific proposals for the Operating
Partnership to issue OP Units beyond those to be issued in the REIT Conversion
and the Blackstone Acquisition, the Operating Partnership expects to pursue
acquisitions of additional hotels. These acquisitions may be financed through
the issuance of OP Units or other limited partnership interests directly to
property owners or to Host REIT in exchange for cash. Any such OP Units or
other limited partnership interests in the Operating Partnership may have
certain preferences. Additional issuances of equity securities of Host REIT or
OP Units in connection with acquisitions of additional hotels or offerings of
securities for cash may occur in the discretion of Host REIT's Board of
Trustees, and would result in proportional reductions of the percentage
ownership interests of the limited partners (or other holders of OP Units) of
the Operating Partnership. See "Description of OP Units."
RISKS OF OWNERSHIP OF OP UNITS AND COMMON SHARES
INABILITY TO REMOVE HOST REIT AS GENERAL PARTNER OF THE OPERATING
PARTNERSHIP. The Partnership Agreement provides that limited partners may not
remove Host REIT 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 with or
without cause by limited partners holding percentage interests in the
Operating Partnership ("Percentage Interests") that are more than 50% of the
aggregate Percentage Interests of the outstanding limited partnership
interests entitled to vote thereon, including any such interests held by the
general partner). The inability to remove Host REIT as general partner may not
be in the
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best interests of the limited partners of the Operating Partnership. See
"Description of OP Units--Removal or Withdrawal of Host REIT; Transfer of Host
REIT's Interests."
RESTRICTIONS ON TRANSFER OF OP UNITS. The Partnership Agreement contains
restrictions on the ability of limited partners to transfer their OP Units,
except in certain limited circumstances, without the prior written consent of
Host REIT. See "Description of OP Units--Restrictions on Transfers of
Interests by Limited Partners."
LIMITATIONS ON ACQUISITION OF OP UNITS AND COMMON SHARES AND CHANGE IN
CONTROL. Host REIT's Declaration of Trust (the "Declaration of Trust") and the
Partnership Agreement will contain a number of provisions that may limit the
ability of outside parties to acquire control of Host REIT, including the
following:
OWNERSHIP LIMIT. The 9.8% ownership limit described under "--Possible
Adverse Consequences of Limits on Ownership of Common Shares" below may
have the effect of precluding a change in control of Host REIT by a third
party without the consent of the Board of Trustees, even if such change in
control would be in the interest of the limited partners of the Operating
Partnership or shareholders of Host REIT (and even if such change in
control would not reasonably jeopardize the REIT status of Host REIT).
STAGGERED BOARD. The Board of Trustees of Host REIT will have three
classes of trustees. The terms of the first, second and third classes will
expire in 1999, 2000 and 2001, respectively. Trustees for each class will
be chosen for a three-year term upon the expiration of the then current
class' term, beginning in 1999. The staggered terms for trustees may affect
the shareholders' ability to effect a change in control of Host REIT even
if a change in control would be in the interest of the limited partners of
the Operating Partnership or shareholders of Host REIT.
PREFERRED SHARES OF BENEFICIAL INTEREST. The Declaration of Trust will
authorize the Board of Trustees of Host REIT to issue up to 1,000,000
preferred shares of beneficial interest and to establish the preferences
and rights of any preferred beneficial interests issued. The issuance of
preferred shares of beneficial interest having special preferences or
rights could have the effect of delaying or preventing a change in control
of Host REIT even if a change in control would be in the interest of the
shareholders of Host REIT or limited partners of the Operating Partnership.
CONSENT RIGHTS OF THE LIMITED PARTNERS. Under the Partnership Agreement,
Host REIT generally will be able to merge or consolidate with another
entity with the consent of partners holding Percentage Interests that are
more than 50% of the aggregate Percentage Interests of the outstanding
partnership interests entitled to vote thereon (including any such
partnership interests held by Host REIT) as long as the holders of OP Units
either will receive or will have the right to receive the same
consideration as the holders of Common Shares. Host REIT, as a holder of a
majority of the OP Units, would be able to control the outcome of such a
vote. Under the Declaration of Trust, the approval of the holders of at
least 66 2/3% of the outstanding Host REIT Common Shares is necessary to
effectuate such merger or consolidation.
MARYLAND BUSINESS COMBINATION LAW. Under the Maryland General Corporation
Law (the "MGCL"), as applicable to real estate investment trusts, certain
"business combinations" (including certain issuances of equity securities)
between a Maryland REIT and any person who owns 10% or more of the voting
power of the trust's then outstanding shares of beneficial interest (an
"Interested Shareholder") or an affiliate of the Interested Shareholder are
prohibited for five years after the most recent date in which the
Interested Shareholder becomes an Interested Shareholder. Thereafter, any
such business combination must be approved by a supermajority (80%) of
outstanding voting shares, and by two-thirds of voting shares other than
voting shares held by an Interested Shareholder unless, among other
conditions, the trust's common shareholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Shareholder.
MARRIOTT INTERNATIONAL PURCHASE RIGHT. In connection with Host's spinoff
of Marriott International in 1993, Marriott International obtained the
right to purchase up to 20% of each class of Host's outstanding voting
shares at the then fair market value upon the occurrence of certain change
of control events involving Host (the "Marriott International Purchase
Right"). The Marriott International Purchase Right will continue
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in effect after the Mergers (until June 2017), subject to certain
limitations intended to protect the REIT status of Host REIT. The Marriott
International Purchase Right may have the effect of discouraging a takeover
of Host REIT, because any person considering acquiring a substantial or
controlling block of Host REIT Common Shares will face the possibility that
its ability to obtain or exercise control would be impaired or made more
expensive by the exercise of the Marriott International Purchase Right.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF COMMON SHARES. To
maintain its qualification as a REIT for federal income tax purposes, not more
than 50% in value of the outstanding shares of beneficial interest of Host
REIT may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities). See "Federal Income Tax
Consequences--Federal Income Taxation of Host REIT Following the REIT
Conversion--Requirements for Qualification." In addition, a person who owns,
directly or by attribution, 10% or more of a tenant of Host REIT (or a tenant
of any partnership in which Host REIT is a partner) cannot own, directly or by
attribution, 10% or more of the shares of Host REIT without jeopardizing Host
REIT's qualification as a REIT. To facilitate maintenance of its qualification
as a REIT for federal income tax purposes, Host REIT will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
shareholder of more than 9.8% of the issued and outstanding Common Shares
(subject to an exception for Common Shares held prior to the REIT Conversion
so long as the holder thereof would not own more than 9.8% in value of the
outstanding shares of beneficial interest of Host REIT) and will prohibit
ownership, directly or by virtue of the attribution provisions of the Code, by
any single shareholder of more than 9.8% of the issued and outstanding shares
of any class or series of Host REIT's preferred shares (collectively, the
"Ownership Limit"). The Board of Trustees, in its sole and absolute
discretion, may waive or modify the Ownership Limit with respect to one or
more persons who would not be treated as "individuals" for purposes of the
Code if it is satisfied, based upon information required to be provided by the
party seeking the waiver and upon an opinion of counsel satisfactory to the
Board of Trustees, that ownership in excess of this limit will not cause a
person who is an individual to be treated as owning shares in excess of the
Ownership Limit, applying the applicable constructive ownership rules, and
will not otherwise jeopardize Host REIT's status as a REIT for federal income
tax purposes (for example, by causing any tenant of the Operating Partnership
or any of the Hotel Partnerships (including but not limited to SLC and the
Lessees) to be considered a "related party tenant" for purposes of the REIT
qualification rules). Common Shares acquired or held in violation of the
Ownership Limit will be transferred automatically to a trust for the benefit
of a designated charitable beneficiary, and the person who acquired such
Common Shares in violation of the Ownership Limit will not be entitled to any
distributions thereon, to vote such Common Shares or to receive any proceeds
from the subsequent sale thereof in excess of the lesser of the price paid
therefor or the amount realized from such sale. A transfer of Common Shares to
a person who, as a result of the transfer, violates the Ownership Limit may be
void under certain circumstances, and, in any event, would deny the transferee
any of the economic benefits of owning Common Shares in excess of the
Ownership Limit. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." The Ownership Limit may have the
effect of delaying, deferring or preventing a change in control and,
therefore, could adversely affect the shareholders' ability to realize a
premium over the then-prevailing market price for the Common Shares in
connection with such transaction.
POSSIBLE DIFFERING FIDUCIARY DUTIES OF GENERAL PARTNERS AND HOST REIT. The
General Partners, Host REIT, as general partner of the Operating Partnership,
and the Board of Trustees of Host REIT, respectively, owe fiduciary duties to
their constituent owners. Although some courts have interpreted the fiduciary
duties of the Board of Trustees in the same way as the duties of a general
partner in a limited partnership, it is unclear whether, or to what extent,
there are differences in such fiduciary duties. It is possible that the
fiduciary duties of the trustees of Host REIT to the shareholders may be less
than those of the General Partners to their respective Limited Partners or
Host REIT, as general partner of the Operating Partnership, to the limited
partners of the Operating Partnership. The Partnership Agreement contains a
specific provision to the effect that Host REIT, as general partner of the
Operating Partnership, is under no obligation to consider the separate
interests of the limited partners of the Operating Partnership in taking
partnership action and also contains broad exculpatory language. Since the
partnership agreements of the Partnerships do not contain the same provisions,
the fiduciary
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duties of Host REIT, as general partner of the Operating Partnership, to the
limited partners of the Operating Partnership may be less than those of the
General Partners to their respective Limited Partners. See "Comparison of
Ownership of Partnership Interests, OP Units and Commons Shares--Fiduciary
Duties."
EFFECT ON COMMON SHARE PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales of a
substantial number of Common Shares, or the perception that such sales could
occur, could adversely affect prevailing market prices for Common Shares.
Beginning July 1, 1999, half of the approximately 43.7 million OP Units to be
issued in the Blackstone Acquisition will become redeemable pursuant to their
Unit Redemption Right, an additional 25% will be redeemable on October 1,
1999, and the balance will be redeemable on January 1, 2000, which means it is
possible for the Blackstone Entities to convert all of their OP Units into
Common Shares prior to, or concurrently with, the first time the Limited
Partners would be able to exercise their Unit Redemption Right and possibly
causing the price of the Common Shares to decrease prior to the Limited
Partners being able to sell their Common Shares. In addition, beginning at
least one year after the Effective Date (or after a lesser period in certain
circumstances), other holders of OP Units, including Limited Partners who
receive OP Units in the Mergers, may be able to sell Common Shares received
upon exercise of their Unit Redemption Right in the public market pursuant to
registration or exemptions from registration. In addition, a substantial
number of Common Shares would, pursuant to employee benefit plans, be issued
or reserved for issuance from time to time, including Common Shares reserved
for issuance pursuant to options issued concurrently with the consummation of
the REIT Conversion, and these Common Shares would be available for sale in
the public markets from time to time pursuant to exemptions from registration
or upon registration. No prediction can be made about the effect that future
sales of Common Shares would have on the market price of the Common Shares.
CURRENT HOST COMMON STOCK PRICE MAY NOT NECESSARILY BE INDICATIVE OF THE
PRICE OF HOST REIT COMMON SHARES FOLLOWING THE REIT CONVERSION. Hosts's
current stock price is not necessarily indicative of how the market will value
Host REIT Common Shares following the REIT Conversion, because of the effect
of the distribution of the SLC common stock and cash or other securities, the
acquisition of additional assets in connection with the REIT Conversion,
including the Blackstone Acquisition and the change in Host's organization
from a taxable corporation to a REIT. The current stock price of Host reflects
the current market valuation of Host's current business and assets (including
the SLC common stock and the cash or securities to be distributed in
connection with the REIT Conversion), a significant portion of which (except
for the SLC common stock and cash or securities to be distributed) will be
contributed to the Operating Partnership and will comprise the core of the
Operating Partnership's business and assets following the REIT Conversion.
EFFECT ON COMMON SHARE PRICE OF MARKET CONDITIONS. As with other publicly
traded equity securities, the value of the Common Shares will depend upon
various market conditions, which may change from time to time. Among the
market conditions that may affect the value of the Common Shares are the
following: (i) the extent of institutional investor interest in Host REIT,
(ii) the general market perception of REITs in general and hotel REITs in
particular and the attractiveness of their equity securities in comparison to
other equity securities (including securities issued by other real estate-
based companies), (iii) Host REIT's financial performance, (iv) changes in the
tax laws affecting REITs (particularly REITs that primarily own hotels) and
(v) general stock and bond market conditions. Although the Limited Partners of
a Participating Partnership will receive OP Units with an aggregate deemed
value equal to the Exchange Value of their Partnership Interests in the
Merger, there can be no assurance that the Common Shares would not trade at
prices below this deemed value after the REIT Conversion, thereby reducing the
value of such OP Units below the Exchange Value.
EFFECT ON COMMON SHARE PRICE OF EARNINGS AND CASH DISTRIBUTIONS. It is
generally believed that the market value of the equity securities of a REIT is
primarily based upon the market's perception of the REIT's growth potential
for its core portfolio, the value of its real estate portfolio and its
prospects for accretive acquisitions and development. The combination of these
factors creates a market perception of a REIT's current and potential future
cash distributions, whether from operations, sales, acquisitions, development
or refinancings, and is secondarily based upon the value of the underlying
assets. For that reason, Common Shares may trade at prices that are higher or
lower than the net asset value per Common Share or per OP Unit. To the extent
Host
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REIT retains operating cash flow for investment purposes, working capital
reserves or other purposes rather than distributing such cash flow to
shareholders, these retained funds, while increasing the value of Host REIT's
underlying assets, may not correspondingly increase the market price of the
Common Shares. The failure of Host REIT to meet the market's expectation with
regard to future earnings and cash distributions would likely adversely affect
the market price of the Common Shares.
EFFECT ON COMMON SHARE PRICE OF MARKET INTEREST RATES. One of the factors
that will influence the price of the Common Shares will be the dividend yield
on the Common Shares (as a percentage of the price of the Common Shares)
relative to market interest rates. Thus, an increase in market interest rates
may lead prospective purchasers of Common Shares to expect a higher dividend
yield, which would adversely affect the market price of the Common Shares.
EFFECT ON COMMON SHARE PRICE OF UNRELATED EVENTS. As with other publicly
traded equity securities, the value of the Common Shares will depend upon
various market conditions, including conditions unrelated to real estate
investments generally. Thus, events which depress equity market prices may not
have any effect on real estate market values, with the result that the Common
Shares may trade at prices below Host REIT's net asset value.
DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL. As with other REITs, but unlike
corporations generally, Host REIT's ability to reduce its debt and finance its
growth largely must be funded by external sources of capital because Host REIT
generally will have to distribute to its shareholders 95% of its taxable
income in order to qualify as a REIT (including taxable income where Host REIT
does not receive corresponding cash). Host REIT's access to external capital
will depend upon a number of factors, including the market's perception of
Host REIT's growth potential, its current and potential future earnings, cash
distributions and the market price of the Common Shares.
RISKS OF OWNERSHIP OF THE NOTES
THE NOTES ARE UNSECURED. The Notes, which are prepayable at any time, are
unsecured obligations of the Operating Partnership. Thus, the Notes will be
effectively subordinated to any secured debt of the Operating Partnership and
to all obligations of the Hotel Partnerships and all other subsidiaries of the
Operating Partnership. As of June 19, 1998, on a pro forma basis assuming the
Full Participation Scenario, the Operating Partnership and its subsidiaries
would have had aggregate consolidated debt to which the Notes would be
effectively subordinated or which rank equally with such Notes of
approximately $5.1 billion.
NO PUBLIC MARKET FOR THE NOTES. There will be no public market for the
Notes. If the Notes are sold, they may sell at prices substantially below
their issuance price. Noteholders are likely to receive the full principal
amount of a Note only if they hold the Note to maturity, which is December 15,
2005, or if the Operating Partnership repays the Notes prior to maturity.
LIMITED PROTECTION FOR NOTEHOLDERS IN THE EVENT OF A RESTRUCTURING OR
SIMILAR TRANSACTION. Other than (i) certain restrictions on the incurrence of
indebtedness, (ii) a financial covenant requiring the Operating Partnership to
maintain certain coverage ratios and (iii) the customary requirements that the
surviving entity in any business combination assume the obligations under the
Notes and the Indenture and be in full compliance with all of the provisions
of the Indenture, the Indenture does not contain any special provisions
protecting Noteholders in the event of a restructuring, reorganization or
similar transaction involving the Operating Partnership, which could increase
the risk that the Notes may not be paid in full at maturity. See "Description
of the Notes."
RISKS OF OPERATION
COMPETITION IN THE LODGING INDUSTRY. The profitability of the Hotels is
subject to general economic conditions, the management abilities of the
Managers (including primarily Marriott International), competition,
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the desirability of particular locations and other factors relating to the
operation of the Hotels. The full-service segment of the lodging industry in
which the Hotels primarily operate is highly competitive, and the Hotels
generally operate in geographical markets that contain numerous competitors.
The Hotels' success will be dependent, in large part, upon their ability to
compete in such areas as access, location, quality of accommodations, room
rate structure, the quality and scope of food and beverage facilities and
other services and amenities. Although the competitive position of each of the
Company's hotel properties differs from market to market, the Company believes
that its properties generally compare favorably to their competitive set in
the markets in which they operate on the basis of these factors. Furthermore,
the Company's strategy is to affiliate its properties with managers operating
under the highest quality brand names in the industry which the Company
believes will enhance their competitive position. Nonetheless, there can be no
assurance that these managers will maintain the quality of their brand names.
Furthermore, competing properties may be built or existing products enhanced
such that they offer characteristics more favorable than those offered by the
Company's properties. See "Business and Properties--Competition." The lodging
industry, including the Hotels (and thus the Operating Partnership), may be
adversely affected in the future by (i) national and regional economic
conditions, (ii) changes in travel patterns, (iii) taxes and government
regulations which influence or determine wages, prices, interest rates,
construction procedures and costs, (iv) the availability of credit and (v)
other factors beyond the control of the Operating Partnership.
GENERAL REAL ESTATE INVESTMENT RISKS. Partners of the Operating Partnership
will continue to bear risks associated with real estate investments. The
yields available from equity investments in real estate and the Operating
Partnership's ability to service debt depend, in large part, upon the amount
of rental revenues generated, expenses incurred and capital expenditures
required in the operation of its business. The Operating Partnership's income
and ability to make distributions to its partners will be dependent upon the
rent payable by the Lessees exceeding the amounts required for debt service,
property taxes and other expenses payable by the Operating Partnership
(including required FF&E reserves and capital expenditures). The rental
payments payable by the Lessees will be affected in part by the sales
generated by the Managers from operation of the Hotels and expenses incurred
by the Managers in operating the Hotels, which expenses are borne by the
Lessees. The Lessees' ability to pay rent accrued under the Leases will depend
in significant part upon the ability of the Managers to generate gross sales
in excess of its requirements to meet operating expenses. The Operating
Partnership's rental income from the Hotels may, therefore, directly or
indirectly, be adversely affected by a number of factors, including the
general economic climate, local real estate conditions, such as an oversupply
of, or a reduction in demand for, hotel space, the attractiveness of the
Hotels to consumers, the quality, philosophy and performance of management,
the ability of the Lessees to maximize rental payments to Host REIT, the
ability of the Manager to effectively operate the Hotels, competition from
comparable hotels, changes in room rates and increases in operating costs due
to inflation and other factors, which increases may not necessarily be passed
through fully to guests. In addition, the Operating Partnership's rental
income from the Hotels and real estate values also are affected by such
factors as the cost of compliance with government regulation, including zoning
and tax laws, the potential for liability under applicable laws, interest rate
levels and the availability of financing. Certain significant expenditures
associated with each equity investment in a Hotel (such as mortgage payments,
if any, real estate taxes and maintenance costs) also may not decrease even
though circumstances cause a reduction in the Operating Partnership's rental
income from the Hotel. If any of the above occurs, the Operating Partnership's
ability to make expected distributions to its partners, including Host REIT,
could be adversely affected.
RENTAL REVENUES FROM HOTELS SUBJECT TO PRIOR RIGHTS OF LENDERS. In
accordance with the mortgage loan agreements with respect to outstanding
indebtedness of the Hotel Partnerships, the rental revenues received by the
Operating Partnership under the Leases first will be used to satisfy the debt
service on such outstanding indebtedness and any cash flow remaining
thereafter will be available to satisfy all other obligations of the Hotel
Partnership (including paying property taxes and insurance, funding the
required FF&E reserves for the Hotels and capital improvements and paying debt
service with respect to unsecured debt) and to make distributions to the
partners (including Host REIT).
POSSIBLE UNDERPERFORMANCE OF NEW ACQUISITIONS. In the future, the Operating
Partnership expects to pursue acquisitions of additional full-service hotels
and other types of real estate. Acquisitions entail the risk that
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such investments will fail to perform in accordance with expectations. The
Operating Partnership anticipates that, in certain circumstances, it may use
OP Units as consideration to acquire hotels from tax-sensitive sellers and, in
connection with such acquisitions, it may agree to certain restrictions on the
Operating Partnership's ability to sell, or reduce the amount of mortgage
indebtedness on, such acquired hotels, which may increase the Operating
Partnership's leverage and which may impair the Operating Partnership's
ability to take actions that would otherwise be in the best interests of its
limited partners.
SEASONALITY. The hotel industry is seasonal in nature. The seasonality of
the industry may, from time to time, affect the ability of the Lessees to make
timely rent payments under the Leases. An inability of the Lessees to make
timely rent payments to the Operating Partnership could adversely affect the
ability of the Operating Partnership to make distributions to partners
(including Host REIT).
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid
and, therefore, will tend to limit the ability of the Operating Partnership to
sell and purchase hotels promptly in response to changes in economic or other
conditions. This could make it difficult for the Operating Partnership to sell
any of its Hotels, even if a sale were in the interest of limited partners.
LIMITATIONS ON SALE OR REFINANCING OF CERTAIN HOTELS. For reasons relating
to federal income tax considerations, the agreements by which the Operating
Partnership will acquire certain Hotels (or obtain consent to lease certain
Hotels to the Lessees) will also restrict the ability of the Operating
Partnership to dispose of or refinance the debt secured by such Hotels for a
period of three and a half to eleven and a half years from the Effective Date,
depending on the Hotel. Similarly, upon acquiring the Blackstone Hotels, the
Operating Partnership will agree not to dispose of the Blackstone Hotels for
ten years (although the Operating Partnership may dispose of up to 50% of the
value of the assets contributed to the Operating Partnership by the Blackstone
Entities after five years). Thus, even if it were in the best interests of the
Operating Partnership and its limited partners to sell or refinance the debt
secured by any of these Hotels, it may be difficult or impossible for the
Operating Partnership to do so during their respective lock-out periods.
HOTELS SUBJECT TO GROUND LEASES MAY AFFECT THE OPERATING PARTNERSHIP'S
REVENUES. Of the approximately 120 Hotels in which the Operating Partnership
will initially hold an interest, 41 are subject to ground leases. Such ground
leases generally require increases in ground rent payments every five years.
To the extent that the rents payable under the Leases do not increase at the
same rate as the increases under the ground leases, it could affect the
Operating Partnership's cash available for distribution and its ability to
make distributions to partners (including Host REIT). In addition, any sale of
a Hotel encumbered by a ground lease would be made subject to such ground
lease and the value realized by the Operating Partnership in such sale might
not be as high if such Hotel were not sold subject to such ground lease or
were sold subject thereto.
DEPENDENCE OF THE OPERATING PARTNERSHIP UPON SLC. SLC and its subsidiaries
will be the Lessees of substantially all of the Hotels and their rent payments
will be the primary source of the Operating Partnership's revenues. SLC's
financial condition and ability to meet its obligations under the Leases will
determine the Operating Partnership's ability to make distributions to its
partners. As of June 19, 1998, on a pro forma basis, after giving effect to
the REIT Conversion, SLC would have had approximately $322 million of
indebtedness (not including guarantees of obligations of SLC's subsidiaries
under the Leases and the Management Agreements) and SLC can incur additional
indebtedness in the future. There can be no assurance that SLC will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Leases. In addition, the credit rating of the Operating
Partnership and Host REIT will be affected by the general creditworthiness of
SLC.
FEDERAL INCOME TAX RISKS
TAX CONSEQUENCES OF THE MERGERS. The Operating Partnership has received an
opinion of Hogan & Hartson L.L.P., counsel to Host, Host REIT and the
Operating Partnership, based upon certain assumptions and representations of
the General Partners, the Operating Partnership, Host and Host REIT, to the
effect that, except
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for any gain attributable to the sale of personal property by a Partnership to
a Non-Controlled Subsidiary, the Mergers will not result in the recognition of
taxable income or gain by a Limited Partner at the time of the Mergers (i) who
does not exercise his Unit Redemption Right on a date sooner than the date two
years after the date of the consummation of the Mergers; (ii) who does not
receive a cash distribution (or deemed cash distribution resulting from relief
from liabilities, including as a result of the prepayment of indebtedness
associated with the Limited Partner's Partnership) in excess of such Limited
Partner's aggregate adjusted tax basis in his Partnership Interest at the time
of the Mergers; (iii) who does not elect to receive a Note in exchange for OP
Units in connection with the Mergers; (iv) who is not required to recognize
gain by reason of the election by another Limited Partner in his Partnership
to receive a Note in exchange for his OP Units in connection with the Mergers
(which in counsel's opinion, described below, should not be the result of such
election); and (v) whose "at risk" amount does not fall below zero as a result
of the Mergers or the REIT Conversion. The General Partners and the Operating
Partnership do not believe, with regard to a Limited Partner who acquired his
Partnership Interest in the original offering of such Partnership Interests
and has held that Interest at all times since the offering, that the Mergers
will result in such Limited Partner (a) receiving a distribution (or deemed
distribution) of cash in excess of such Limited Partner's adjusted tax basis
in his Partnership Interest or (b) having his "at risk" amount fall below
zero. The adjusted tax basis of a Limited Partner who did not acquire his
Partnership Interest in the original offering of such Partnership Interests,
however, could vary materially from the adjusted tax basis of a Limited
Partner who did. Therefore, depending on the adjusted tax basis of such a
Limited Partner in his Partnership Interest, the Mergers could result in the
receipt by such Limited Partner of a cash distribution (or deemed cash
distribution) in excess of such Limited Partner's adjusted tax basis in his
Partnership Interest, and, accordingly, could result in the recognition of
taxable income or gain by such Limited Partner.
Hogan & Hartson L.L.P. is of the opinion that, although the matter is not
free from doubt, a Limited Partner who does not elect to receive a Note in
connection with the Mergers should not be required to recognize gain by reason
of another Limited Partner's election to receive a Note in exchange for OP
Units. With respect to a Limited Partner's exercise of his Unit Redemption
Right, Hogan & Hartson L.L.P. is of the opinion that it is more likely than
not that a Limited Partner's exercise of his Unit Redemption Right more than
one year after the date of consummation of the Mergers but less than two years
after such date will not cause the Merger itself to be a taxable transaction
for the Limited Partner (or for the other Limited Partners of such
Partnership). Opinions of counsel, however, do not bind the IRS or the courts,
and no assurance can be provided that such opinions will not be challenged by
the IRS or will be sustained by a court if so challenged.
The particular tax consequences of the Mergers and the REIT Conversion for a
Limited Partner will depend upon a number of factors related to the tax
situation of that individual Limited Partner and the Partnership of which he
is a Limited Partner, including such factors as the Limited Partner's
aggregate adjusted tax basis in his Partnership Interest, the extent to which
the Limited Partner has unused passive activity losses arising in connection
with his investment in the Partnership or other investments that could offset
income arising from the Mergers and the REIT Conversion, the amount of income
(if any) required to be recognized by reason of the sale by the Limited
Partner's Partnership of personal property to a Non-Controlled Subsidiary in
connection with the REIT Conversion, the allocation of Operating Partnership
liabilities to the Limited Partner following the Mergers and the REIT
Conversion and the amount of built-in gain with respect to the Hotels owned by
the Partnership of which he is a Limited Partner. See "Federal Income Tax
Consequences--Summary of Tax Opinions." The Operating Partnership has
consulted with its advisors in connection with structuring the Mergers and the
REIT Conversion, but, with one exception, has not sought a ruling from the IRS
as to the tax consequences of the Mergers and the REIT Conversion. See
"Federal Income Tax Consequences--Tax Consequences of the Mergers--IRS Ruling
Request Regarding Allocation of Partnership Liabilities." EACH LIMITED PARTNER
IS URGED TO CONSULT WITH HIS OWN TAX ADVISOR BEFORE DETERMINING WHETHER TO
APPROVE OF AND PARTICIPATE IN THE MERGERS IN ORDER TO DETERMINE THE
ANTICIPATED TAX CONSEQUENCES OF THE MERGERS FOR SUCH LIMITED PARTNER.
There is a significant possibility that the Operating Partnership will be
considered to be a "publicly traded partnership." The opinion of Hogan &
Hartson L.L.P. regarding the tax status of the Operating Partnership will
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be based on the Operating Partnership's expectation that it will have
sufficient "qualifying income," so that even if it were considered to be a
publicly traded partnership, it would qualify as a partnership for federal
income tax purposes. See "Federal Income Tax Consequences--Tax Status of the
Operating Partnership." In this regard, the Partnership Agreement will
prohibit any person (other than Host REIT and The Blackstone Group) from
holding in excess of 4.9% of the value of the interests in the Operating
Partnership. If the Operating Partnership were a publicly traded partnership
that qualifies as a partnership for federal income tax purposes because of the
"qualifying income" exception, however, a Limited Partner could be subject to
certain special rules applicable to publicly traded partnerships. In
particular, a Limited Partner would be unable to use passive activity losses
from other passive activities (including his investment in his Partnership) to
offset his allocable share of Operating Partnership gain and income, and any
Operating Partnership losses allocable to a Limited Partner could be used only
as an offset against such Limited Partner's allocable share of future
Operating Partnership income and gain and not against income and gain from
other passive activities.
EFFECTS OF SUBSEQUENT EVENTS UPON RECOGNITION OF GAIN. In addition to any
gain that might be recognized by the Limited Partners at the time of the
Mergers, there are a variety of subsequent events and transactions (including
(i) the sale or other taxable disposition of one or more of the Hotels owned
by the Partnerships, (ii) the refinancing or repayment of certain liabilities
secured by one or more of the Hotels owned by the Partnerships, (iii) the
issuance of additional OP Units, including in connection with the issuance of
Common Shares or other equity interests by Host REIT and the acquisition of
additional properties in exchange for OP Units or other equity interests in
the Operating Partnership, (iv) an increase to the basis of the Hotels owned
by the Partnerships resulting from capital expenditures and (v) the
elimination over time of the disparity between the current tax basis of the
Hotels owned by the Partnerships and the "book basis" of such Hotels (based
upon their fair market value at the time of the Mergers) that could cause a
Limited Partner who holds OP Units to recognize part or all of the taxable
gain that otherwise has been deferred pursuant to the Mergers.
Certain Hotels (including the Blackstone Hotels) will be covered by
agreements that will restrict the ability of the Operating Partnership to
dispose of such Hotels or refinance the debt secured by them. In addition, if
Atlanta Marquis participates in the Mergers, the Operating Partnership will
succeed to an existing agreement that will restrict its ability to dispose of
the Hotel owned by Atlanta Marquis or to refinance the debt secured by such
Hotel without compensating certain outside partners for resulting adverse tax
consequences. See
"--Limitations on Sale or Refinancing of Certain Hotels" above. The
Partnership Agreement does not impose any restrictions on the Operating
Partnership's ability to dispose of the Hotels owned by the Partnerships,
however, or to refinance or repay debt secured by the Hotels owned by the
Partnerships (or to direct that a Partnership engage in such a transaction),
but the Operating Partnership is obligated to pay any taxes Host REIT incurs
as a result of such transactions. In addition, Host REIT, as general partner
of the Operating Partnership, is not required to take into account the tax
consequences to the limited partners in deciding whether to cause the
Operating Partnership to undertake specific transactions (but the Operating
Partnership is obligated to pay any taxes that Host REIT incurs as a result of
such transactions), and the limited partners generally have no right to
approve or disapprove such transactions. See "Description of OP Units--Sales
of Assets" and
"--Borrowing by the Operating Partnership."
SALE OF PERSONAL PROPERTY MAY RESULT IN GAIN TO CERTAIN PARTNERSHIPS. In
order to facilitate the participation of Atlanta Marquis, Hanover, MHP and
PHLP in the Mergers without adversely affecting Host REIT's qualification as a
REIT, the Operating Partnership will require, as part of the Mergers, that
such Partnerships sell a portion of the personal property associated with the
Hotels owned by such Partnerships to a Non-Controlled Subsidiary. These sales
will be taxable transactions and, with the exception of the sale by Hanover,
may (although are not expected to) result in an allocation of a relatively
modest amount of ordinary recapture income by each Partnership to its Limited
Partners. This income, if any, will be allocated to each Limited Partner in
the same proportion and to the same extent that such Limited Partner was
allocated any deductions directly or indirectly giving rise to the treatment
of such gains as recapture income. A Limited Partner who receives such an
allocation of recapture income will not be entitled to any special
distribution from his Partnership in connection with the sale of personal
property.
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ELECTION TO RECEIVE NOTES. A Limited Partner who elects to receive a Note in
connection with the Mergers in exchange for his OP Units will be treated as
having made a taxable disposition of his Partnership Interest. The amount
realized in connection with such disposition will equal the sum of the "issue
price" of the Note (i.e., the principal amount of the Note) plus the portion
of the Partnership's liabilities allocable to the Limited Partner for federal
income tax purposes. To the extent the amount realized exceeds the Limited
Partner's adjusted tax basis in his Partnership Interest, the Limited Partner
will recognize gain. A Limited Partner may be eligible to defer at least a
portion of that gain under the "installment sale" rules (see "Federal Income
Tax Consequences--Tax Treatment of Limited Partners Who Exercise Their Right
to Make the Note Election") but those rules will not permit a Limited Partner
to defer all of the gain recognized (for example, gain attributable to his
"negative capital account" and income attributable to "depreciation
recapture") and may require that a Limited Partner who defers gain pay to the
IRS interest on a portion of the resulting tax that has been deferred. A
Limited Partner with a "negative capital account" with respect to his
Partnership Interest who elects to receive a Note will recognize "phantom
income" in that amount at the time of the Mergers in any event.
EXERCISE OF UNIT REDEMPTION RIGHT. The receipt of either cash or Common
Shares, as determined by Host REIT, by a Limited Partner in connection with
the exercise of such Limited Partner's Unit Redemption Right will be a taxable
transaction and likely will result in the recognition by the Limited Partner
of substantial gain for federal income tax purposes. The amount realized in
connection with a Limited Partner's exercise of his Unit Redemption Right will
equal the sum of either the amount of cash or the value of the Common Shares
received plus the portion of the Operating Partnership's liabilities allocable
to the OP Units redeemed for federal income tax purposes. To the extent the
amount realized exceeds the Limited Partner's adjusted basis in the redeemed
OP Units, the Limited Partner will recognize gain. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Dissolution of the Operating Partnership" and "--Tax Treatment of
Exercise of Unit Redemption Right." State and local income and transfer taxes
may apply to such a redemption as well.
Failure of Host REIT to Qualify as a REIT.
GENERAL. Host REIT intends to operate so as to qualify as a REIT under the
Code effective for Host REIT's first taxable year commencing following the
REIT Conversion. A REIT generally is not taxed at the corporate level on
income it currently distributes to its shareholders as long as it distributes
currently at least 95% of its taxable income (excluding net capital gain). No
assurance can be provided, however, that Host REIT will so qualify or be able
to remain so qualified or that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to Host REIT's qualification as a REIT or the
federal income tax consequences of such qualification. In this regard, Host
REIT expects to receive an opinion of Hogan & Hartson L.L.P. in connection
with the REIT Conversion to the effect that Host REIT, effective for its first
taxable year commencing following the REIT Conversion, will be organized in
conformity with the requirements for qualification as a REIT under the Code,
and that Host REIT's proposed method of operation will enable it to satisfy
the requirements for qualification and taxation as a REIT. This opinion will
be conditioned upon certain factual representations made by Host REIT and the
Operating Partnership as to matters relating to the organization and operation
of Host REIT, the Operating Partnership, the Hotel Partnerships, the
Subsidiary Partnerships, the Non-Controlled Subsidiaries, the Incentive
Compensation Trust and SLC and the Lessees. In addition, this opinion will be
based upon the factual representations of Host REIT concerning its business
and properties as set forth in this Consent Solicitation and will assume that
the actions described in this Consent Solicitation are completed in a timely
fashion. Moreover, an opinion of counsel does not bind the IRS or the courts,
and no assurance can be provided that such opinion will not be challenged by
the IRS or will be sustained by a court if so challenged.
REQUIRED DISTRIBUTIONS AND PAYMENTS. In order to qualify as a REIT, Host
REIT will be required each year to distribute to its shareholders at least 95%
of its net taxable income (excluding any net capital gain). Due to certain
transactions entered into in prior years, Host REIT is expected to recognize
substantial amounts of "phantom" taxable income in future years that is not
matched by cash flow or EBITDA to the Operating Partnership or Host REIT. To
qualify as a REIT, Host REIT also will have to distribute to its shareholders
not
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later than the end of its first taxable year as a REIT an amount equal to the
earnings and profits accumulated by Host and its subsidiaries and not
distributed by or at the time of the REIT Conversion (including any increases
thereto resulting from subsequent IRS audits of years prior to Host REIT's
first taxable year as a REIT). In addition, Host REIT will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
made by it with respect to the calendar year are less than the sum of (i) 85%
of its ordinary income, (ii) 95% of its capital gain net income for that year,
and (iii) any undistributed taxable income from prior periods. Host intends
that Host REIT will make distributions to its shareholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax and
will rely for this purpose on distributions from the Operating Partnership.
However, differences in timing between taxable income and cash available for
distribution due to, among other things, the seasonality of the hospitality
industry could require the Operating Partnership to borrow funds on a short-
term basis to enable Host REIT to meet the 95% distribution requirement, avoid
the nondeductible excise tax, and therefore maintain its REIT status. The
Operating Partnership also is required to pay (or reimburse Host REIT for) all
taxes and other liabilities and expenses that Host REIT incurs, including
taxes and liabilities attributable to periods and events prior to the REIT
Conversion and any taxes that Host REIT must pay in the event it were to fail
to qualify as a REIT. In addition, the Operating Partnership's inability to
retain earnings (resulting from Host REIT's 95% and other distribution
requirements) will generally require the Operating Partnership to refinance
debt that matures with additional debt or equity. There can be no assurance
that any of these sources of funds, if available at all, would be available to
meet the Operating Partnership's obligations.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. If Host REIT fails to qualify
as a REIT, it will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. In
addition, unless entitled to relief under certain statutory provisions, Host
REIT will be disqualified from treatment as a REIT for the four taxable years
following the year during which REIT qualification is lost. The additional tax
would significantly reduce the cash available for distribution by Host REIT to
its shareholders. Failure of Host REIT to qualify as a REIT could reduce
materially the value of the Common Shares and OP Units and would cause all
distributions to shareholders to be taxable as ordinary income to the extent
of Host REIT's current and accumulated earnings and profits (although, subject
to certain limitations under the Code, corporate distributees may be eligible
for the dividends received deduction with respect to these distributions). See
"Federal Income Tax Consequences--Federal Income Taxation of Host REIT
Following the Mergers--Failure of Host REIT to Qualify as a REIT." Failure of
Host REIT to qualify as a REIT also would result in a default under the New
Senior Notes and the New Credit Facility.
"C CORPORATION" TAXABLE YEAR. In order to qualify as a REIT, Host REIT
cannot have at the end of any taxable year any undistributed "earnings and
profits" (E&P) that are attributable to a "C" corporation taxable year. A REIT
has until the close of its first taxable year in which it has non-REIT E&P to
distribute such accumulated E&P. Host REIT will be required to distribute this
E&P prior to the end of 1999 (the first taxable year for which the REIT
election of Host REIT is expected to be effective). Failure to do so would
result in disqualification of Host REIT as a REIT at least for taxable year
1999. Host REIT believes that, prior to December 31, 1999, E&P distributions
made in connection with the REIT Conversion, together with any distributions
of non-REIT E&P made after the REIT Conversion but prior to December 31, 1999,
will be sufficient to distribute all of the non-REIT E&P, but there are
substantial uncertainties relating to the estimate of Host REIT's non-REIT E&P
and the value of noncash consideration to be distributed as part of the E&P
distribution and, thus, there can be no assurance that this requirement will
be met. See "Federal Income Tax Consequences--Federal Income Taxation of Host
REIT Following the Mergers--Requirements for Qualification."
TREATMENT OF LEASES. To qualify as a REIT, a REIT must satisfy two gross
income tests. Rent paid pursuant to the Leases will constitute substantially
all of the gross income of Host REIT. In order for the rent paid pursuant to
the Leases to constitute qualifying income for purposes of the gross income
tests (a) the Leases must be respected as true leases for federal income tax
purposes and not be treated as service contracts, joint ventures or some other
type of arrangement and (b) the Lessees must not be regarded as "related party
tenants" (as defined in the Code). Host REIT expects that Hogan & Hartson
L.L.P. will provide to Host REIT on the Effective Date an opinion to the
effect that, based upon certain representations of Host REIT regarding the
Leases
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and the expectations of Host REIT and the Lessees with respect thereto, the
Leases will be respected as leases for federal income tax purposes. An opinion
of counsel, however, does not bind the IRS or the courts and this
determination ultimately will depend upon the accuracy of the factual
representations of Host REIT regarding the Leases. In this regard, if the
Leases were not respected as true leases for federal income tax purposes or if
the Lessees were regarded as "related party tenants," Host REIT would not be
able to satisfy either of the two gross income tests and, as a result, would
lose its REIT status. Accordingly, Host REIT would be subject to corporate
level income taxation, which would significantly reduce the cash available for
distribution to its shareholders. See "Federal Income Tax Consequences--
Federal Income Taxation of Host REIT Following the Mergers--Income Tests
Applicable to REITs."
OTHER TAX LIABILITIES. Even if Host REIT qualifies as a REIT, it will be
subject, through the Operating Partnership and the Hotel Partnerships, to
certain federal, state and local taxes on its income and property. See
"Federal Income Tax Consequences--Federal Income Taxation of Host REIT
Following the Mergers--General." In addition, Host REIT will be subject to tax
at the regular corporate rate (currently 35%) upon its share of any gain
recognized as a result of any sale by the Operating Partnership or the Hotel
Partnerships (within the 10-year period beginning on the Effective Date of the
Mergers) of assets, including the Hotels, in which interests were acquired by
the Operating Partnership from Host and its subsidiaries as part of the
Mergers and the REIT Conversion to the extent that such gain existed at the
time of the REIT Conversion. Host has substantial deferred tax liabilities
that likely will be recognized by Host REIT in the next ten years, under these
rules, without any corresponding receipt of cash by Host REIT from the
Operating Partnership. The Operating Partnership is obligated under the
Partnership Agreement and the terms of the REIT Conversion to pay all such
taxes incurred by Host REIT, as well as any liabilities that the IRS may
assert against Host REIT for corporate income taxes for taxable years prior to
the time Host REIT qualifies as a REIT. The Non-Controlled Subsidiaries will
be taxable "C" corporations and will pay federal and state income tax on their
net income at the full applicable corporate rates. Holders of OP Units will be
subject to state and local taxation in the jurisdictions in which the
Operating Partnership directly or indirectly holds real property and such
holders will be required to file periodic tax returns in at least some of
those jurisdictions. The Operating Partnership will initially own Hotels
located in approximately 28 different states and the District of Columbia.
FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP. The
Operating Partnership and Host REIT have received an opinion of Hogan &
Hartson L.L.P. to the effect that the Operating Partnership will be treated as
a partnership for federal income tax purposes. An opinion of counsel, however,
does not bind the IRS or the courts, and no assurance can be provided that
such opinion will not be challenged by the IRS or will be sustained by a court
if so challenged. If the IRS were to treat successfully the Operating
Partnership as an entity that is taxable as a corporation, Host REIT would
cease to qualify as a REIT because the value of Host REIT's ownership interest
in the Operating Partnership would exceed 5% of Host REIT's assets and because
Host REIT would be considered to hold more than 10% of the voting securities
of another corporation. See "Federal Income Tax Consequences--Federal Income
Taxation of Host REIT Following the Mergers--Asset Tests Applicable to REITs."
Moreover, the imposition of a corporate tax on the Operating Partnership would
reduce significantly the amount of cash available for distribution to its
limited partners. See "Federal Income Tax Consequences--Tax Status of the
Operating Partnership" and "--Tax Aspects of Host REIT's Ownership of OP
Units."
LIMITED PARTNERS NEED TO CONSULT WITH THEIR OWN TAX ADVISORS. Because the
specific tax attributes of a Limited Partner and the facts regarding such
Limited Partner's interest in his Partnership could have a material impact on
the tax consequences to such Limited Partner of the Mergers, the subsequent
ownership and disposition of OP Units or Notes and/or the subsequent ownership
and disposition of Common Shares, it is essential that each Limited Partner
consult with his own tax advisors regarding the application of federal,
foreign and state and local tax laws to such Limited Partner's personal tax
situation.
MISCELLANEOUS RISKS
DEPENDENCE UPON KEY PERSONNEL. The Operating Partnership is dependent upon
the efforts of the executive officers of Host REIT. While the Operating
Partnership believes that it could find replacements for
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these key personnel, the loss of their services could have a significant
adverse effect on the operations of the Operating Partnership. The Operating
Partnership does not intend to obtain key-man life insurance with respect to
any of the executive officers of Host REIT.
POTENTIAL LITIGATION RELATED TO THE REIT CONVERSION. Over the last several
years, business reorganizations involving the combination of several
partnerships into a single entity occasionally have given rise to investor
lawsuits. These lawsuits have involved claims against the general partners of
the participating partnerships, the partnerships themselves and related
persons involved in the structuring of, or benefiting from, the conversion or
reorganization, as well as claims against the surviving entity and its
trustees and officers. For example, limited partners of five of the six
limited partnerships controlled by Host that own limited service and extended-
stay hotels have filed a lawsuit against Host and the general partners (which
are subsidiaries of Host) of such limited partnerships alleging, among other
things, breaches of their fiduciary duties in connection with a potential
consolidation transaction. Certain other lawsuits are pending against Host and
its affiliates by limited partners in certain Partnerships (specifically,
Atlanta Marquis, MHP, MHP2 and PHLP). If any lawsuits are filed in connection
with any Merger or other part of the REIT Conversion, such lawsuits could
delay the closing of such Merger or the REIT Conversion or result in
substantial damage claims against the Operating Partnership, Host REIT or the
General Partners of the Partnerships. The Partnerships are each obligated to
indemnify their General Partner for claims against them arising from their
role as general partner other than to the extent they are guilty of
negligence, fraud, misconduct or breach of fiduciary duty. Because the
Operating Partnership will be acquiring the Participating Hotel Partnerships
through the Mergers, Host REIT and the Operating Partnership indirectly will
be subject to the indemnification obligations of the Hotel Partnerships to
their general partners and any obligations of the Hotel Partnerships to pay
damages to the extent not covered by any available insurance. See "Business
and Properties--Legal Proceedings." In the event any pending lawsuits or any
new lawsuits filed against any of the Partnerships or the General Partners in
connection with the REIT Conversion or the Mergers are not resolved by final
court action or settled before the Effective Date, the Exchange Values of such
Partnerships will be adjusted to account for a litigation reserve and other
contingent liabilities.
LACK OF CONTROL OVER NON-CONTROLLED SUBSIDIARIES. The Non-Controlled
Subsidiaries will hold various assets, consisting primarily of interests in
hotels which are not leased and certain international hotels, the control of
which by the Operating Partnership would jeopardize Host REIT's status as a
REIT. Although the Operating Partnership will own 95% of the total economic
interests of the Non-Controlled Subsidiaries, the Incentive Compensation Trust
will own all of the voting common stock of the Non-Controlled Subsidiaries
(which will represent the remaining 5% of the total economic interest
thereof). As the owner of the voting stock of the Non-Controlled Subsidiaries,
the Incentive Compensation Trust will select the directors of the Non-
Controlled Subsidiaries, who will be responsible for overseeing the operations
of those entities. As a result, the Operating Partnership will have no control
over the operation or management of the hotels or other assets owned by the
Non-Controlled Subsidiaries even though it will depend upon the Non-Controlled
Subsidiaries for a significant portion of its revenues (and the activities of
the Non-Controlled Subsidiaries could cause the Operating Partnership to be in
default under its major unsecured debt facilities).
RISK INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
Instead of purchasing hotel properties directly, the Operating Partnership
may invest as a co-venturer. Joint venturers often have shared control over
the operation of the joint venture assets. Therefore, such investments may,
under certain circumstances, involve risks such as the possibility that the
co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the business interests
or goals of the Operating Partnership, or be in a position to take action
contrary to the instructions or the requests of the Operating Partnership or
contrary to the Operating Partnership's policies or objectives. Consequently,
actions by a co-venturer might result in subjecting hotel properties owned by
the joint venture to additional risk. Although the Operating Partnership
generally will seek to maintain sufficient control of any joint venture to
permit the Operating Partnership's objectives to be achieved, it may be unable
to take action without the approval of its joint venture partners or its joint
venture partners could take actions binding on the joint
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venture without the Operating Partnership's consent. Additionally, should a
joint venture partner become bankrupt, the Operating Partnership could become
liable for such partner's share of joint venture liabilities.
CHANGES IN LAWS. Increases in real estate or business improvement district
taxes will not result in increased rental payments to the Operating
Partnership under the Leases, with the result that they may adversely affect
the Operating Partnership's cash flow from operations and its ability to
maintain the expected level of distributions to partners, including Host REIT.
Similarly, changes in laws increasing the potential liability for
environmental conditions existing at Hotels or increasing the restrictions on
discharges or other conditions, as well as changes in laws affecting
construction and safety requirements, may result in significant unanticipated
capital expenditures, which, to the extent such expenditures must be borne by
the Operating Partnership as the lessor of the Hotels, would adversely affect
the Operating Partnership's cash flow from operations and its ability to make
distributions to limited partners.
UNINSURED LOSS. The Operating Partnership will carry comprehensive liability,
fire, flood, extended coverage and rental loss (for rental losses extending up
to 12 months) insurance with respect to its Hotels with policy specifications
and insured limits customarily carried for similar hotels. Certain types of
losses (such as from earthquakes and environmental hazards), however, may be
either uninsurable or not economically insurable. Should an uninsured loss
occur, the Operating Partnership could lose both its capital invested in, and
anticipated profits from, one or more of its Hotels.
AMERICANS WITH DISABILITIES ACT. The Hotels must comply with Title III of
the Americans with Disabilities Act (the "ADA") to the extent that such Hotels
are "public accommodations" or "commercial facilities" as defined by the ADA.
The ADA may require removal of structural barriers to access by persons with
disabilities in certain public areas of the Operating Partnership's Hotels
where such removal is readily achievable. The Operating Partnership believes
that the Hotels will not be required to make substantial non-budgeted capital
expenditures to address the requirements of the ADA. However, noncompliance
with the ADA could result in substantial capital expenditures to remove
structural barriers, as well as the imposition of fines or an award of damages
to private litigants which might adversely affect the Operating Partnership's
ability to make expected distributions to limited partners, including Host
REIT. Under the Leases, the Operating Partnership would be required to fund
all such expenditures.
OTHER REGULATORY ISSUES. The Operating Partnership's Hotels will be subject
to various forms of regulation in addition to the ADA, including building
codes, regulations pertaining to fire safety and other regulations which may
from time to time be enacted. The Operating Partnership may be required to
incur significant costs to comply with any future changes in such regulations.
POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and local
laws, ordinances and regulations, owners or operators of real estate may be
required to investigate and clean up certain hazardous substances released at
a property, and may be held liable to a governmental entity or to third
parties for property damage or personal injuries and for investigation and
clean-up costs incurred by the parties in connection with any contamination.
In addition, some environmental laws create a lien on a contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. No assurances can be
given that (i) a prior owner, operator or occupant, such as a tenant, did not
create a material environmental condition not known to the Operating
Partnership, (ii) a material environmental condition with respect to any Hotel
does not exist or (iii) future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in the imposition of environmental liability.
In addition, no assurances can be given that all potential environmental
liabilities have been identified or properly quantified. Moreover, no
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Hotels will not be affected by the condition of
land or operations in the vicinity of the Hotels (such as the presence of
underground storage tanks) or by third parties unrelated to the Operating
Partnership.
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CONFLICTS OF INTEREST
The Mergers and REIT Conversion were initiated by Host and are being
proposed by Host, the Operating Partnership and the General Partners, which
are Host or its subsidiaries. The terms and conditions of the Mergers and REIT
Conversion and the structure of the Operating Partnership also were formulated
by Host, the General Partners and the Operating Partnership. See "Background
and Reasons for the Mergers and the REIT Conversion--Background of the Mergers
and the REIT Conversion."
As discussed below, the establishment of the terms of the Mergers and REIT
Conversion, the recommendation by the General Partners with respect to the
Mergers and the operation of the Operating Partnership involve conflicts of
interest. In resolving any conflicts of interest, each of the General Partners
must act in accordance with its fiduciary duties to the Limited Partners of
its Partnership. The trustees of Host REIT, which will be the sole general
partner of the Operating Partnership, also must act in accordance with their
fiduciary duties to the shareholders of Host REIT and, to a certain extent,
the limited partners of the Operating Partnership as limited by the
Partnership Agreement. See "Comparison of Ownership of Partnership Interests,
OP Units and Common Shares--Fiduciary Duties" for a general description of
these duties.
SUBSTANTIAL BENEFITS TO RELATED PARTIES
To the extent that the anticipated benefits of the REIT Conversion are
reflected in the value of Host's common stock prior to the Effective Date, the
Limited Partners will not enjoy the effect of such benefits on the value of
their investment. In addition, following the REIT Conversion, current Host
shareholders (together with the Blackstone Entities), and not the Limited
Partners, will own the common stock of SLC and will benefit from the terms of
the leases to the extent net revenues exceed rental payments and other
expenses. The Mergers will facilitate the consummation, and enable Host to
reap the full benefits, of the REIT Conversion. By converting to a REIT, Host
expects to benefit from the advantages enjoyed by REITs in raising capital and
acquiring additional assets, participating in a larger group of comparable
companies and increasing its potential base of shareholders. Also, Host will
realize significant savings through the substantial reduction of its future
corporate-level income taxes. Because of Host's significant ownership position
in certain Partnerships (including Atlanta Marquis, Desert Springs, Hanover,
MHP and MHP2), the failure of one or more of these Partnerships to participate
in a Merger likely would require that Host contribute some or all of its
ownership interest in the Non-Participating Partnership to a taxable Non-
Controlled Subsidiary, which would materially reduce the benefit to Host of
the REIT Conversion as it applies to that interest.
AFFILIATED GENERAL PARTNERS
Host has varying interests in each of the Partnerships, and subsidiaries of
Host act as General Partner of each of the Partnerships (except for PHLP, in
which Host is the General Partner). Each General Partner has an independent
obligation to assess whether the terms of the Merger are fair and equitable to
the Limited Partners of its Partnership, which involves considerations for
Host and its subsidiaries that are different from those for the Limited
Partners. While each General Partner has sought faithfully to discharge its
obligations to its Partnership, there is an inherent conflict of interest in
having the General Partners determine the terms on which the Operating
Partnership, which is controlled by Host, will acquire the Partnerships, for
which subsidiaries of Host are General Partners, since no arm's length
negotiations are possible.
LEASING ARRANGEMENTS
Conflicts of interest exist in connection with establishing the terms of the
leasing arrangements being entered into as part of the REIT Conversion. The
General Partners, all of which are subsidiaries of Host (except in the case of
PHLP, in which Host is the General Partner), are recommending the Mergers, and
Host is responsible for establishing the terms of the Mergers and the REIT
Conversion, including the Leases. The common stock of SLC will be distributed
to Host REIT's shareholders and the Blackstone Entities after the terms of the
Leases have been determined. Accordingly, Host REIT's shareholders and the
Blackstone Entities, as the
47
<PAGE>
initial shareholders of SLC, will potentially benefit from the terms of the
Leases to the extent net revenues exceed rental payments and other expenses
and Limited Partners will not because they will not receive shares of SLC
common stock.
DIFFERENT TAX CONSEQUENCES UPON SALE OR REFINANCING OF CERTAIN HOTELS
Certain holders of OP Units may experience different and more adverse tax
consequences compared to those experienced by other holders of OP Units or by
holders of Common Shares upon the sale of, or the reduction of indebtedness
encumbering, any of the Hotels. Therefore, such holders, including Host REIT
and its subsidiaries, may have different objectives regarding the appropriate
pricing and timing of any sale or refinancing of an individual Hotel. As
expressly provided in the Partnership Agreement, Host REIT, as general partner
of the Operating Partnership, is not required to take into account the tax
consequences of the limited partners of the Operating Partnership in deciding
whether to cause the Operating Partnership to undertake specific transactions
(but the Operating Partnership is obligated to pay any taxes Host REIT incurs
as a result of such transactions), and the limited partners have no right to
approve or disapprove such transactions.
PARTNERSHIP AGREEMENT
Conflicts of interest exist in connection with establishing the terms of the
Partnership Agreement, all of which were determined by Host.
ABSENCE OF ARM'S LENGTH NEGOTIATIONS; NO INDEPENDENT REPRESENTATIVE
No independent representative was retained to negotiate on behalf of the
Limited Partners. Although the General Partners have obtained the Appraisals
and the Fairness Opinion from AAA, AAA has not negotiated with the General
Partners or Host and has not participated in establishing the terms of the
Mergers. Consequently, the terms and conditions of the Mergers may have been
more favorable to the Limited Partners if such terms and conditions were the
result of arm's length negotiations. See "Fairness Analysis and Opinion." In
this regard, the Fairness Opinion specifically does not conclude that other
methodologies for determining the Exchange Values of the Partnerships and/or
the price of the OP Units might not have been more favorable to the Limited
Partners.
POTENTIAL AAA CONFLICTS
AAA has been retained by the General Partners (consisting of Host and its
subsidiaries) to determine the Appraised Values of the Hotels and to render
the Fairness Opinion. Host has previously retained AAA to perform appraisals
and give fairness and solvency opinions in connection with other transactions,
and there is the possibility that Host REIT and the Operating Partnership will
retain AAA to perform similar tasks in the future.
POLICIES WITH RESPECT TO CONFLICTS OF INTEREST
The Operating Partnership has adopted certain policies and will enter into
agreements with Host REIT and its affiliates designed to minimize the adverse
effects from these potential conflicts of interest. See "Distribution and
Other Policies--Conflicts of Interest Policies" and "Business and Properties--
Noncompetition Agreements." There can be no assurance, however, that the
policies and agreements always will be successful in eliminating the influence
of such conflicts, and if they are not successful, decisions could be made at
the Host REIT level that might fail to reflect fully the interests of the
limited partners of the Operating Partnership.
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<PAGE>
BACKGROUND AND REASONS FOR THE MERGERS AND THE REIT CONVERSION
BACKGROUND OF THE PARTNERSHIPS
Formation of the Partnerships. From 1982 through 1990, Host sponsored the
eight Partnerships, which were formed to acquire, own and operate full-service
hotels operating under the Marriott brand name. Each Partnership is a Delaware
limited partnership, except Chicago Suites, which is a Rhode Island limited
partnership. The Partnerships raised capital from approximately 5,900
investors in eight offerings. The Partnerships, except Chicago Suites, Hanover
and MDAH, are "public" partnerships within the meaning of the applicable
Commission guidelines, and separate wholly owned subsidiaries of Host are the
sole general partners of each Partnership (except for PHLP, for which Host
itself acts as general partner). The Hotels owned by the Partnerships are
managed by Marriott International and its subsidiaries.
The table below sets forth the capital raised in the original offerings,
distributions made and number of Hotels owned by each of the Partnerships as
of June 19, 1998:
HISTORICAL INFORMATION CONCERNING THE PARTNERSHIPS
<TABLE>
<CAPTION>
AGGREGATE DISTRIBUTIONS TO
DISTRIBUTIONS TO LIMITED PARTNERS PER
TOTAL LIMITED PARTNERS PARTNERSHIP UNIT NO. OF
LIMITED PARTNER THROUGH THROUGH HOTELS
PARTNERSHIP CAPITAL RAISED JUNE 19, 1998(/1/) JUNE 19, 1998(/1/)(/2/) OWNED
- ----------- --------------- ------------------ ----------------------- ------
(IN THOUSANDS) (IN THOUSANDS) (IN DOLLARS)
<S> <C> <C> <C> <C>
Atlanta Marquis......... $ 53,000 $23,188 $43,751(/3/) 1(/4/)
Chicago Suites.......... 11,642 2,819 8,415 1
Desert Springs.......... 88,020 84,332 93,702 1
Hanover................. 8,269 622 7,405 1
MDAH.................... 40,615 9,738 22,522 6
MHP..................... 100,000 59,824 59,824 2(/5/)
MHP2.................... 73,115 120,452 161,681 4(/6/)
PHLP.................... 18,000 0 0 8
</TABLE>
- --------
(1) Includes distributions to the General Partners or their affiliates as
holders of Partnership Units (but not distributions to them in their
capacities as general partner).
(2) A Partnership Unit in all of the Partnerships except Chicago Suites
($35,000) and PHLP ($10,000) represents an original investment of
$100,000.
(3) Includes approximately $8,600 per Partnership Unit of distributions
related to the 1997 reallocation of tax losses.
(4) Atlanta Marquis has an 80% residual interest in the Atlanta Marriott
Marquis and for 1998 is expected to receive substantially all of the cash
flow from the hotel.
(5) Includes Marriott's Harbor Beach Resort, in which MHP owns a 50.5%
interest.
(6) Includes the Santa Clara Marriott, in which MHP2 owns a 50% interest and
Host owns the remaining 50% interest.
The following paragraphs describe, on a partnership-by-partnership basis,
the original investment objectives of each Partnership and the extent to which
such objectives have been met.
Atlanta Marquis. The offering of interests in Atlanta Marriott Marquis
Limited Partnership (the predecessor of Atlanta Marquis), which was completed
in 1985, was intended to provide investors with an opportunity to benefit from
investment tax credits, tax losses, expected increasing cash flow from both
the lease and operation of the Atlanta Marquis Hotel as well as potential
capital appreciation. Based upon a financial forecast that reflected the
General Partner's judgment, based upon facts and circumstances at the time,
with respect to the most likely set of conditions and the most likely course
of action (and subject to the various assumptions, risks, qualifications,
limitations and uncertainties described therein and in the related private
placement memorandum), it was estimated that tax savings through 1989 would be
$76,226 per Partnership Unit for an investor in the 50% tax bracket (including
a $7,845 tax credit in 1985), cash flow to the Class A Limited Partners was
expected to begin in 1986 and increase through 1994 to an annual level of
12.2% of a Class A
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<PAGE>
Limited Partner's original investment, and it was assumed for the purpose of
the forecast that investors would receive a return of all their investment
from a sale of the underlying land to the partnership owning the hotel and a
distribution from assumed excess refinancing proceeds in 1994. Thereafter,
Class A Limited Partners would continue to benefit from ownership of the
Hotel. The financial forecast did not assume a sale of Atlanta Marquis' Hotel.
Through June 19, 1998, Atlanta Marquis Class A Limited Partners have received
distributions from cash flow of $30,127, tax credits of up to $7,500,
allocations of tax losses of approximately $208,700 (which have been offset in
part by subsequent allocations of taxable income of approximately $4,600) and
a return of capital of $5,000 per Partnership Unit, plus $8,624 of payments
per Partnership Unit received with respect to the reallocation of certain tax
losses resulting from the 1990 debt refinancing (assuming each Atlanta Marquis
Limited Partner classified these amounts as purchase price adjustments as the
General Partner advised). Due to changes in the tax law occurring after the
date of the original offering (including, in particular, the changes enacted
as part of the Tax Reform Act of 1986) that, among other things, reduced the
marginal tax rates applicable to individuals and limited the use of certain
tax losses by individuals, the tax losses allocated to the Atlanta Marquis
Limited Partners did not likely result in tax savings of the magnitude
originally forecast.
Chicago Suites. The offering, which was completed in 1989, was intended to
(i) preserve and protect Chicago Suites Limited Partners' capital, (ii)
generate cash distributions to the Chicago Suites Limited Partners that would
be sheltered in whole or in part from current federal income taxation and
(iii) realize expected increases in both annual cash distributions from
operations and potential long-term appreciation in the value of Chicago
Suites' Hotel. Based upon a financial forecast and facts and circumstances at
the time (and subject to the various assumptions, risks, qualifications,
limitations and other uncertainties described therein and in the related
private placement memorandum), it was estimated that cash flow to the Chicago
Suites Limited Partners would commence in 1989 and increase through 1994 to an
annual level of 11% of a Limited Partner's original investment and that in
1994 investors would receive a return of all capital invested through an
assumed refinancing. Thereafter, through 2003, it was estimated that Chicago
Suites Limited Partners would receive cash distributions at an annual level of
approximately 4% of their original investment. The financial forecast did not
assume a sale of Chicago Suites' Hotel. Through June 19, 1998, Chicago Suites
Limited Partners have received distributions from cash flow of $8,415 and no
return of capital per Partnership Unit.
Desert Springs. The offering, which was completed in 1987, was intended to
provide investors with an opportunity to benefit from substantial cash flow in
the early years of the Partnership from the rent to be received under an
airline equipment lease and from the Desert Springs' Hotel operating lease
with expected increasing cash flow and potential capital appreciation in later
years from the operation of Desert Springs' Hotel. Based upon a financial
forecast and facts and circumstances at the time (and subject to the various
assumptions, risks, qualifications, limitations and other uncertainties
described therein and in the related private placement memorandum), it was
estimated that (i) cash distributions on a tax-sheltered basis to the Desert
Springs Limited Partners would commence in 1987 at approximately 12.3% of a
Limited Partner's original investment and increase to approximately 14.4% of a
Limited Partner's original investment in 1991 and (ii) Desert Springs Limited
Partners would receive $50,000 per Partnership Unit on a tax-sheltered basis
from assumed excess refinancing proceeds in 1991. Thereafter, Desert Springs
Limited Partners would continue to benefit from ownership of Desert Springs'
Hotel and the airline equipment. The financial forecast did not assume a sale
of Desert Springs' Hotel. Desert Springs Limited Partners received a cash
distribution in connection with the sale of the airline equipment in 1996 of
$19,851 per Partnership Unit. Through June 19, 1998, Desert Springs Limited
Partners have received distributions from cash flow of $48,851 and a return of
capital of $25,000 per Partnership Unit.
Hanover. The offering, which was completed in 1986, was intended to provide
investors with an opportunity to benefit from expected increasing cash flow
from the operation of Hanover's Hotel as well as potential capital
appreciation and tax benefits. Based upon a financial forecast (which assumed,
among other things, rent payable under the operating lease would be sufficient
to provide an annual 10% priority return to the Partnership) and facts and
circumstances at the time (and subject to the various assumptions, risks,
qualifications, limitations and other uncertainties described therein and in
the related private placement memorandum), it was
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estimated that (i) cash distributions on a tax-free basis to the Hanover
Limited Partners would commence in 1987 at approximately 12.7% of a Limited
Partner's original investment and increase to approximately 15.5% of a Limited
Partner's original investment in 1991 and (ii) Hanover Limited Partners would
receive $100,000 per Partnership Unit on a tax-free basis from assumed
refinancing proceeds ($50,000 per Partnership Unit in 1991 and $50,000 per
Partnership Unit in 1996). Thereafter, Hanover Limited Partners would continue
to benefit from ownership of Hanover's Hotel. The financial forecast did not
assume a sale of Hanover's Hotel. Through June 19, 1998, Hanover Limited
Partners have received distributions from cash flow of $7,405 and no return of
capital per Partnership Unit. In April 1998, Host completed a tender for
Partnership Units of Hanover in which it acquired 40 Partnership Units for an
aggregate consideration of $1.6 million or $40,000 per Partnership Unit.
MDAH. The offering, which was completed in 1990, was intended to (i) provide
semi-annual cash distributions which were anticipated to be free from
significant current federal income taxation through 1999 (assuming tax losses
from MDAH were carried forward to offset MDAH income in later years), (ii)
allow Limited Partners to participate in the potential long-term appreciation
in the value of MDAH's Hotels and (iii) preserve investor capital. Based upon
a financial forecast and facts and circumstances at the time (and subject to
the various assumptions, risks, qualifications, limitations and other
uncertainties described therein and in the related private placement
memorandum), it was estimated that MDAH Limited Partners could expect cash
distributions to be made at an annualized rate of 9.2% of a Limited Partner's
original investment for 1990, 11.8% for 1991 and 12.3% for 1992. The average
annual cash return was expected to be 15.9% of a Limited Partner's original
investment for each of the ten fiscal years ending December 31, 1999. The
financial forecast did not assume a sale of MDAH's Hotels. Through June 19,
1998, MDAH Limited Partners have received distributions from cash flow of
$23,522 and no return of capital per Partnership Unit.
MHP. The offering, which was completed in 1985, was intended to provide
investors with an opportunity to benefit from expected increasing cash flow
from the operation of MHP's Hotels as well as potential capital appreciation,
investment tax credits and tax losses. Based upon a financial forecast and
facts and circumstances at the time (and subject to the various assumptions,
risks, qualifications, limitations and other uncertainties described therein
and in the related private placement memorandum), it was estimated that (i)
cash flow to the MHP Limited Partners would commence in 1987 and increase
through 1995 to an annual level of 16.9% of a Limited Partner's original
investment and (ii) the MHP Limited Partners would receive $100,000 per
Partnership Unit on a tax-free basis from assumed refinancing proceeds
($50,000 per Partnership Unit in 1991 and $50,000 per Partnership Unit in
1995). In addition, tax savings through 1990 were forecast to be $79,581 per
Partnership Unit for an MHP Limited Partner in the 50% tax bracket (including
a $6,197 tax credit in 1986). Tax savings were forecast to continue through
1995 and would total $88,588 per Partnership Unit. Thereafter, MHP Limited
Partners would continue to benefit from ownership of MHP's Hotels. The
financial forecast did not assume a sale of MHP's Hotels. On November 17,
1993, one of MHP's hotels, the Warner Center Hotel, was foreclosed upon.
Through June 19, 1998, MHP Limited Partners have received distributions from
cash flow of $52,824, tax credits of $6,010 and allocations of tax losses of
approximately $149,600 (which have been offset in part by subsequent
allocations of taxable income of approximately $38,200 and capital gains of
approximately $26,200) and a return of capital of $7,000 per Partnership Unit.
Due to changes in the tax law occurring after the date of the original
offering (including, in particular, the changes enacted as part of the Tax
Reform Act of 1986) that, among other things, reduced the marginal tax rates
applicable to individuals and limited the use of certain tax losses by
individuals, the tax losses allocated to the MHP Limited Partners did not
likely result in tax savings of the magnitude originally forecast. In January
1998, Host completed a tender offer for Partnership Units of MHP in which it
acquired 463.75 Partnership Units for an aggregate consideration of $37.1
million or $80,000 per Partnership Unit.
MHP2. The offering, which was completed in 1989, was intended to provide
investors with an opportunity to benefit from (i) potential semi-annual cash
distributions from operations of MHP2's Hotels, which distributions were
anticipated to be free from significant current federal income taxation
through 1997 (assuming losses from MHP2 were carried forward to offset MHP2
income in later years), (ii) potential long-term appreciation in the value of
MHP2's Hotels and (iii) the preservation of investor capital. Based upon a
financial
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<PAGE>
forecast and facts and circumstances at the time (and subject to the
assumptions, various risks, qualifications, limitations and other
uncertainties described therein and in the related private placement
memorandum), it was estimated that cash distributions to the MHP2 Limited
Partners would commence in 1989 at an annualized rate of approximately 9.6% of
a Limited Partner's original investment, which annualized rate was expected to
increase to approximately 24% of a Limited Partner's adjusted invested capital
for 1998. It was also forecast that the Limited Partners would receive a
distribution (which was expected to be free from current federal income
taxation) from assumed refinancing proceeds of approximately $60,400 per
Partnership Unit in 1993. Thereafter, the MHP2 Limited Partners would continue
to benefit from ownership of MHP2's Hotels. The financial forecast did not
assume a sale of MHP2's Hotels. Through June 19, 1998, MHP2 Limited Partners
have received distributions from cash flow of $161,681 and no return of
capital per Partnership Unit. In June 1996, Host completed a tender offer for
Partnership Units of MHP2 in which it acquired 377 Partnership Units for an
aggregate consideration of $56.6 million or $150,000 per Partnership Unit.
PHLP. The offering, which was completed in 1982, was intended to provide
investors with the opportunity for tax benefits, potential cash flow
distributions and capital appreciation. Based upon a financial forecast and
facts and circumstances at the time (and subject to the various assumptions,
risks, qualifications, limitations and other uncertainties described therein
and in the related private placement memorandum), it was estimated that cash
available for distribution was not expected to be significant for some years,
reaching 6.2% of a PHLP Limited Partner's original investment in 1993 and
rising to 20.7% of a PHLP Limited Partner's original investment by 1996. The
financial forecast did not assume a sale of PHLP's Hotels. On January 31,
1986, PHLP sold the Denver West hotel to Host. In 1993 and 1994, the Raleigh
Crabtree, Tampa Westshore and Point Clear hotels were foreclosed upon. In
1994, PHLP repurchased the Raleigh Crabtree and Tampa Westshore hotels using
proceeds from two loans advanced by a subsidiary of Host. On August 22, 1995,
PHLP sold the Dallas/Fort Worth hotel to a wholly owned subsidiary of Host and
used the proceeds to pay down debt. Through June 19, 1998, PHLP Limited
Partners have received no distributions from cash flow, tax credits up to
$1,588 and allocations of tax losses of approximately $128,000 (which have
been offset in part by subsequent allocations of taxable income of
approximately $21,300 and capital gains of approximately $49,600) and no
return of capital per Partnership Unit. Due to changes in the tax law
occurring after the date of the original offering (including, in particular,
the changes enacted as part of the Tax Reform Act of 1986) that, among other
things, reduced the marginal tax rates applicable to individuals and limited
the use of certain tax losses by individuals, the tax losses allocated to the
PHLP Limited Partners did not likely result in tax savings of the magnitude
originally forecast.
Anticipated Holding Periods. None of the offering documents of the
Partnerships indicated any specific anticipated holding period. The purposes
of the offerings, as stated above, included receiving tax benefits,
distributions from operations and refinancing proceeds from continued
ownership of the Hotel(s) and, at some unspecified time, proceeds from the
disposition of the Hotel(s).
Investment Liquidity. Since the Partnership Units of the Partnerships are
not listed on any national or regional stock exchange, nor quoted on any
automated quotations system, there has been limited liquidity available to
Limited Partners. No formal market for such Partnership Units exists and
because of provisions in the Code which tax "publicly traded partnerships" as
corporations, the partnership agreement for each Partnership prohibits such a
market from developing. Sales activity in the Partnership Units has been
limited and sporadic.
The information in the following table shows the highest, lowest and
weighted average prices for sales of the Partnership Units in the Partnerships
as reported to the General Partners for the twelve months ended April 15,
1998, the date immediately prior to the public announcement of the REIT
Conversion. These prices are not indicative of total return to investors in
the respective Partnerships because prior cash distributions and tax benefits
received by each Limited Partner are not reflected in the price. There can be
no assurance that transactions in Partnership Units of any Partnership have
not occurred at prices either above the highest price or below the lowest
price set forth below.
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<PAGE>
PARTNERSHIP UNIT PRICES
(ALL PRICE INFORMATION ON A PER PARTNERSHIP UNIT BASIS)
<TABLE>
<CAPTION>
ESTIMATED
TRANSACTION NUMBER OF EXCHANGE
PERIOD PARTNERSHIP WEIGHTED VALUE PER
ORIGINAL 12 MONTHS UNITS HIGHEST LOWEST AVERAGE PARTNERSHIP
PARTNERSHIP COST ENDED TRADED PRICE PRICE PRICE UNIT(1)
- ----------- -------- ----------- ----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $100,000 4/15/98 31.0 $ 37,000 $ 20,000 $ 32,430 $ 45,425
Chicago Suites.......... 35,000 4/15/98 49.5 14,300 10,000 10,182 33,471
Desert Springs.......... 100,000 4/15/98 31.0 42,200(2) 10,000 23,526 40,880
Hanover(3).............. 100,000 4/15/98 41.0 40,000 20,500 39,524 123,202
MDAH.................... 100,000 4/15/98 46.0 45,600 20,000 38,475 109,216
MHP..................... 100,000 4/15/98 6.0 91,500 40,000 68,150 141,425
MHP2.................... 100,000 4/15/98 4.0 155,000 150,000 153,750 237,334
PHLP.................... 10,000 4/15/98 .6666 871 871 871 5,040
</TABLE>
- --------
(1) Based upon the estimated Exchange Values of Partnership Interests in each
Partnership. The estimated Exchange Value is equal to the greatest of
estimated Adjusted Appraised Value, estimated Continuation Value and
estimated Liquidation Value. The actual Exchange Values will be determined
as of the Final Valuation Date. The amounts in this column represent the
estimated Exchange Value that would be allocable to Limited Partners per
Partnership Unit.
(2) The $42,200 highest per Partnership Unit price paid for a Partnership Unit
of Desert Springs was determined based on the price paid for one-half of a
Partnership Unit prior to a distribution of $25,000 per Partnership Unit
of capital proceeds from a refinancing.
(3) Includes 40 Hanover Partnership Units purchased by Host pursuant to a
tender offer at a price of $40,000 per Partnership Unit on April 12, 1997.
Excluding the tender offer purchases, there was a single Partnership Unit
sold at a price of $20,500.
BACKGROUND OF THE MERGERS AND THE REIT CONVERSION
Host and the other General Partners are proposing the Mergers in connection
with a plan adopted by Host to restructure its business operations so that it
will qualify as a REIT under the Code. Host REIT expects to qualify as a REIT
beginning with its first taxable year commencing after the closing of the REIT
Conversion, which currently is expected to be the year commencing January 1,
1999. Host's reasons for engaging in the REIT Conversion include the
following:
. Host believes the REIT structure will provide superior operating results
through changing economic conditions and all phases of the hotel economic
cycle.
. Host believes the REIT Conversion will improve its financial flexibility
and allow it to continue to strengthen its balance sheet by reducing its
overall debt to equity ratio over time.
. As a REIT, Host believes it will be able to compete more effectively with
other public lodging real estate companies that already are organized as
REITs and to improve investor understanding of its operations, thus
making performance comparisons with its peers more meaningful.
. By becoming a dividend paying company, Host believes its shareholder base
will expand to include investors attracted by yield as well as asset
quality.
. Host believes the adoption of the UPREIT structure will facilitate the
tax-deferred acquisition of other hotels (such as in the case of the
Blackstone Acquisition and the Mergers).
Host explored the possibility of engaging in a business combination with a
so-called "paired share" REIT in December 1996 and January 1997, but decided
not to pursue such a transaction. During the fourth quarter of 1997, Host
began to explore the possibility of reorganizing as a REIT on a stand-alone
basis. In April 1998, Host decided that it would be advantageous, both for its
shareholders and for the outside investors in the Partnerships, as discussed
in the following paragraphs, if Host were to convert to a REIT and offer to
the Partnerships the opportunity to participate in the REIT Conversion.
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<PAGE>
REASONS FOR THE MERGERS
The Mergers are being proposed at this time for three principal reasons:
. First, the General Partners believe that the expected benefits of the
Mergers to the Limited Partners, as set forth below, outweigh the risks
of the Mergers to the Limited Partners, as set forth in "Risk Factors."
. Second, the General Partners believe that participation in the REIT
Conversion through the Mergers is better for the Limited Partners than
the alternatives of continuing each Partnership as a standalone entity or
liquidating the Partnership because (i) the Exchange Value is equal to
the highest estimated value that would be derived by Limited Partners
from the three alternatives, (ii) for all but three Partnerships, the
Adjusted Appraised Value is substantially higher than either the
Continuation Value or the Liquidation Value, (iii) Limited Partners will
obtain significantly enhanced liquidity by receiving OP Units which will
be redeemable for publicly traded Common Shares or cash commencing one
year after the Effective Date and (iv) Limited Partners will receive
regular quarterly distributions which, for all Partnerships except for
MHP and MHP2, will be significantly greater than estimated cash
distributions from their current Partnerships for 1998 and for PHLP will
represent the first cash distributions received from their investments.
See "Determination of Exchange Values and Allocation of OP Units."
. Third, Host is proposing the Mergers at this time to each Partnership
because consummation of the Merger as to each Partnership will enable
Host to obtain the full benefits of the REIT Conversion with respect to
its interests in such Partnership, while also giving the other partners
of the Partnership the opportunity to enjoy the benefits of the REIT
Conversion. See "Risk Factors--Risks and Effects of the Mergers--
Conflicts of Interest--Substantial Benefits to Related Parties."
The expected benefits from the Mergers to the Limited Partners include the
following:
Enhanced Liquidity of Investment. Limited Partners' Partnership Units
currently represent relatively illiquid investments. Although there is a
limited resale market for Partnership Units, the trading volume is thin and
the recent trading prices of outstanding Partnership Units in each of the
Partnerships are less than the estimated Exchange Value of Partnership Units
in each Partnership, except for Desert Springs. See "Partnership Unit Prices"
above. The REIT Conversion will offer Limited Partners significantly enhanced
liquidity with respect to their investments in the Partnerships because,
commencing one year following the Mergers, Limited Partners who retain OP
Units will be able to exercise their Unit Redemption Right at any time,
subject to certain limited exceptions. Limited Partners thereby would be able
to receive, at Host REIT's election, either freely tradable Common Shares of
Host REIT or the cash equivalent thereof. Host has approximately 204 million
shares of common stock outstanding and is expected to have a total common
equity market capitalization of approximately $ billion after giving effect
to the estimated $ million earnings and profits distribution (based on Host's
$ closing price per share on the NYSE on , 1998). The exercise of the Unit
Redemption Right, however, generally would result in recognition of taxable
income or gain at that time.
Regular Quarterly Cash Distributions. Over each of the last five full
calendar years, only MHP2 Limited Partners have received cash distributions in
each year. Generally, over the last five full calendar years, Limited Partners
in the other Partnerships, except for Hanover and PHLP, have received some
cash distributions. In contrast, because Host REIT is required to distribute
at least 95% of its REIT taxable income, the General Partners expect that the
Operating Partnership will make regular quarterly cash distributions to
holders of OP Units (including Host REIT). Host expects that these
distributions will be higher than the estimated cash distributions for 1998 of
all Partnerships except MHP and MHP2, and, in any event, the ability to
receive distributions quarterly and in regular amounts would be enhanced.
Management expects to fund such distributions through operating cash flow and,
if necessary, additional borrowings. Distributions will be made in the
discretion of Host REIT's Board of Trustees. See "Distribution and Other
Policies--Distribution Policy." As a substantial holder of OP Units, Host REIT
would also receive regular quarterly distributions, with such distributions to
be in an amount at least sufficient to permit Host REIT to make distributions
with respect to the Common Shares as required by the Code provisions relating
to REITs. There can be no assurance that Host REIT will be able to make such
distributions in the future. Upon exercise of the Unit Redemption Right,
Limited Partners who receive
54
<PAGE>
Common Shares would be entitled to receive cash distributions with respect to
such Common Shares in an amount per Common Share equal to the amount
distributed per OP Unit.
The following table sets forth the cash distributions from operations per
Partnership Unit for all of the Partnerships for 1997, actual and expected
distributions from operations for 1998 and the range of expected distributions
for 1999 estimated to be paid by the Operating Partnership to the Limited
Partners of each Partnership if the Mergers and the REIT Conversion occur
(computed assuming the Effective Date is December 31, 1998).
<TABLE>
<CAPTION>
ESTIMATED 1999
DISTRIBUTIONS
ACTUAL AND FOLLOWING THE
EXPECTED MERGERS AND
1997 1998 THE REIT
PARTNERSHIP DISTRIBUTIONS DISTRIBUTIONS(1) CONVERSION(2)
----------- ------------- ---------------- -----------------
<S> <C> <C> <C>
Atlanta Marquis................ $ 0 $ 895(3) $ 2,271 to $2,498
Chicago Suites................. 0 0 1,674 to 1,841
Desert Springs................. 0(4) 2,500 2,044 to 2,248
Hanover........................ 0 0 6,160 to 6,776
MDAH........................... 0 0 5,461 to 6,007
MHP............................ 7,700 9,500 7,071 to 7,778
MHP2........................... 29,879 21,564 11,867 to 13,054
PHLP........................... 0 0 252 to 277
</TABLE>
- --------
(1) Represents actual cash distributions made through August 20, 1998 and
expected cash to be distributed during the period from August 21, 1998
through December 31, 1998. These amounts do not include amounts, if any,
to be distributed from third and fourth quarter 1998 operations which will
be distributed before June 1, 1999.
(2) Based upon preliminary estimated annual distributions of approximately
$1.00 to $1.10 per OP Unit. Investors are cautioned that this preliminary
estimate may change and the changes may be material. See "Distributions
and Other Policies--Distribution Policy."
(3) Actual and Expected 1998 Distributions do not include a return of capital
of $5,000 per Partnership Unit.
(4) 1997 Distributions do not include a return of capital of approximately
$25,000 per Partnership Unit.
Substantial Tax Deferral. The General Partners expect that Limited Partners
of the Participating Partnerships who do not elect to receive a Note in
exchange for OP Units generally should be able to obtain the benefits of the
Mergers while continuing to defer recognition for federal income tax purposes
of at least a substantial portion, if not all, of the gain with respect to
their Partnership Interests that otherwise would be recognized in the event of
a liquidation of the Partnership or a sale or other disposition of its assets
in a taxable transaction (although Limited Partners in Atlanta Marquis, MHP
and PHLP may (although are not expected to) recognize a relatively modest
amount of ordinary income as the result of required sales of personal property
by such Partnership to a Non-Controlled Subsidiary). Thereafter, such Limited
Partners generally should be able to defer at least a substantial portion of
such built-in gain until they elect to exercise their Unit Redemption Right or
one or more of the Hotels currently owned by their Partnership are sold or
otherwise disposed of in a taxable transaction by the Operating Partnership
or, in certain cases, the debt now secured by such Hotels is repaid, prepaid
or substantially reduced. The federal income tax consequences of the Mergers
are highly complex and, with respect to each Limited Partner, are dependent
upon many variables, including the particular circumstances of such Limited
Partner. See "Federal Income Tax Consequences--Tax Consequences of the
Mergers." Each Limited Partner is urged to consult with his own tax advisors
as to the consequences of the Mergers in light of his particular
circumstances.
Risk Diversification. Upon consummation of the REIT Conversion, each Limited
Partner's investment will be converted from an investment in an individual
Partnership owning from one to eight hotels into an investment in an
enterprise that initially will own or control approximately 120 Hotels and
will have a total market capitalization of approximately $ billion.
Participation in a Merger, as well as future hotel acquisitions by the
Operating Partnership, will reduce the dependence upon the performance of, and
the exposure to the risks associated with, any particular Hotel or group of
Hotels currently owned by an individual Partnership and spread
55
<PAGE>
such risk over a broader and more varied portfolio, including more diverse
geographic locations and multiple brands. See "Business and Properties--
Business Objectives."
Reduction in Leverage and Interest Costs. It is expected that the Operating
Partnership will have a significantly lower leverage to value ratio than any
of the Partnerships currently, each of which has a leverage ratio that exceeds
55% and typically averages between 75% and 80% (calculated as a percentage of
Appraised Value), resulting in interest and debt service savings and greater
financial stability.
Growth Potential. The General Partners believe that the conversion of each
Limited Partner's investment into an investment in the Operating Partnership
will allow Limited Partners to participate in growth opportunities that would
not otherwise be available to them by exchanging interests in their existing,
non-traded limited partnerships for interests in a publicly traded real estate
company focused primarily on a more diverse and growing full-service hotel
portfolio. The General Partners believe that substantial opportunities exist
to acquire or develop full-service hotel properties at attractive prices and
that the Partnerships are not in a position to take advantage of such
opportunities because of (i) their lack of access to additional sources of
capital on favorable terms, (ii) restrictions on additional acquisitions and
development imposed by the partnership agreements of the Partnerships and
(iii) the fact that the Partnerships have already committed their capital and
generally are not authorized to raise additional funds for (or reinvest net
sale or refinancing proceeds in) new investments, absent amendment of the
partnership agreements of the Partnerships or approval by a majority of the
outstanding Partnership Interests.
The Operating Partnership's structure as part of an UPREIT should provide it
with substantial flexibility to structure acquisitions of additional hotels
utilizing debt, cash, OP Units or Common Shares (or any combination thereof).
In particular, the ability of the Operating Partnership to issue OP Units in
the future for the purpose of acquiring additional properties may permit the
Operating Partnership to structure acquisitions of hotel properties on a tax-
deferred basis to the sellers (i.e., sellers of properties generally will be
able to exchange their ownership interests in those properties for OP Units
without incurring an immediate income tax liability).
Greater Access to Capital. With publicly traded equity securities, a larger
base of assets and a greater equity value than any of the Partnerships
individually, Host REIT expects to have greater access to the capital
necessary to fund the Operating Partnership's operations and to consummate
acquisitions on more attractive terms than would be available to any of the
Partnerships individually. Host REIT and the Operating Partnership should have
more sources of capital available to it than the Partnerships through access
to the public equity and debt capital markets, as well as from more
traditional sources of real estate financing. This greater access to capital
should provide greater financial stability to the Operating Partnership and
reduce the level of risk associated with refinancing existing loans upon
maturity, as compared to the Partnerships individually.
Public Market Valuation of Assets. In most instances, the Partnership Units
of each Partnership currently trade at a discount to the net asset value of
the Partnership's assets. In contrast, the General Partners believe that by
exchanging interests in their existing, non-traded, finite-life limited
partnerships with a fixed portfolio for interests in an infinite-life real
estate company focused primarily on a more diverse and growing full-service
hotel portfolio and providing valuation based upon publicly traded Common
Shares of Host REIT, the Limited Partners will have the opportunity to
participate in the recent trend toward ownership of real estate through a
publicly traded entity, which, in many instances, has resulted in market
valuations of public real estate companies in excess of the estimated net
asset values of those companies. Therefore, the REIT Conversion offers Limited
Partners the opportunity to obtain OP Units (and, upon the exercise of the
Unit Redemption Right at any time commencing one year following the Mergers,
Common Shares) whose public market valuation may exceed the fair market value
of the underlying assets of the Operating Partnership on a per OP Unit/Common
Share basis. There can be no assurance, however, that the Common Shares of
Host REIT will trade at a premium to the private market values of the
Operating Partnership's assets or that the relative pricing differential will
not change or be eliminated in the future. Also, the benefit of Host's
conversion to a REIT will not be shared by the Limited Partners if and to the
extent that such benefit is reflected in the market valuation of Host's common
stock prior to the REIT Conversion.
56
<PAGE>
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS
Under the partnership agreements of the Partnerships, the General Partners
do not receive any fees or compensation for services rendered to the
Partnerships as general partner but the General Partners and their affiliates
are reimbursed for certain costs and expenses incurred on behalf of the
Partnerships. In addition, each General Partner is entitled to distributions
related to its respective interests in a Partnership. Host REIT, as general
partner of the Operating Partnership, will be required to conduct all of its
business through the Operating Partnership. Following the REIT Conversion,
Host REIT will be entitled to receive cash distributions with respect to the
OP Units that it owns and the Operating Partnership will pay (or reimburse
Host REIT for) all expenses that Host REIT incurs, including taxes (subject to
certain limited exceptions).
The following table sets forth the reimbursements and distributions paid by
all of the Partnerships to the General Partners and their affiliates on a
combined basis for the last three fiscal years and the First Two Quarters 1998
("Historical") and the reimbursements and distributions that would have been
paid to the General Partners for the last fiscal year and the First Two
Quarters 1998 if the REIT Conversion had been in effect, assuming the Full
Participation Scenario ("Pro Forma") and assuming a distribution per OP Unit
of $1.05 per year during such period, which is the midpoint of the expected
distribution range for 1999.
HISTORICAL AND PRO FORMA
REIMBURSEMENTS AND DISTRIBUTIONS TO GENERAL PARTNERS AND THEIR AFFILIATES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR FISCAL YEAR
1998 1997 1996 1995
-------------------- -------------------- ---------- ----------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(/1/)..... $1,799 $ -- $ 1,657 $ -- $ 1,168 $ 568
Distributions(/2/)...... 6,716 7,191 15,881 14,383 8,202 338
------ ------ -------- ------- -------- -------
Total................. $8,515 $7,191 $ 17,538 $14,383 $ 9,370 $ 906
====== ====== ======== ======= ======== =======
</TABLE>
- --------
(1) All expenses will be paid directly by the Operating Partnership,
accordingly, there are no expected reimbursements on a pro forma basis.
(2) The amount of distributions payable to the General Partners and their
affiliates on a pro forma basis reflect distributions at a rate of $1.05
per annum per OP Unit (which is the midpoint of the expected range of
distributions per OP Unit for 1999) with respect to the estimated number
of OP Units that the General Partners and their affiliates will receive
with respect to their general and limited partner interests in the
Partnerships, assuming all Partnerships participate in the Mergers. Such
number does not reflect the aggregate number of OP Units Host will receive
in connection with the REIT Conversion.
ALTERNATIVES TO THE MERGERS
In determining whether to propose the Mergers, the General Partners compared
the benefits to the Limited Partners of continuing each Partnership with the
benefits the Limited Partners could achieve by the participation of their
Partnership in the REIT Conversion through a Merger. The General Partners
considered the other principal alternative--liquidation of a Partnership--but
do not believe that liquidation is appropriate at this time because the
expected benefits of the proposed Mergers are greater.
The following paragraphs discuss the advantages and disadvantages of
continuing the Partnerships as standalone partnerships and, to assist Limited
Partners in evaluating the Mergers, liquidating the Partnerships, reorganizing
each Partnership as a standalone REIT and merging one or more Partnerships
with another REIT.
CONTINUATION OF EACH PARTNERSHIP
Benefits of Continuation. Continuing each Partnership without change, in
accordance with its existing business plan and pursuant to its current
partnership agreement, would have the following effects, some of which effects
Limited Partners may perceive as benefits:
. No Partnership would be subject to the risks associated with the Mergers
and REIT Conversion, and instead each Partnership would remain a
separate entity, with its own assets and liabilities and would
57
<PAGE>
pursue its original investment objectives consistent with the
guidelines, restrictions and safeguards contained in its partnership
agreement;
. No Partnership's performance would be affected by the performance of the
other Hotel Partnerships or Host REIT, including the investment
objectives, interests and intentions of the limited partners of the
other Hotel Partnerships or the shareholders of Host REIT;
. There would be no change in the nature of the Limited Partners' voting
rights; and
. There would be no change in the cash distribution policy of the
Partnership.
Disadvantages of Continuation. Maintaining the Partnerships as separate
entities would have the following disadvantages, among others:
. Continued illiquidity of a Limited Partner's investment due to the
absence of an established market for interests in the Partnerships that
provides full value for such interests and the restrictions in the
federal income tax law and the partnership agreements that prevent the
development of such markets;
. The inability from time to time of the Partnerships to make regular
distributions;
. The inability of the Partnerships to take advantage of public market
valuation of their assets, growth opportunities and other potential
benefits of the Mergers;
. Each Partnership will continue to have a leverage to value ratio
exceeding 55% and typically averages between 75% and 80% (calculated as
a percentage of Appraised Value);
. Limited Partners will continue to be subject to the risks inherent in
the lack of broad diversity that any individual Partnership's assets
represent; and
. Any realization by the Limited Partners of the full value attributable
to their Partnership Units likely would require a liquidation of the
Partnership and the sale of its Hotel or Hotels which has the
disadvantages set forth below (see "--Liquidation of Each Partnership").
Liquidation of Each Partnership
Benefits of Liquidation. In lieu of participating in the Mergers and the
REIT Conversion, each Partnership could sell its assets (subject to the
existing Management Agreements), pay off its existing liabilities not assumed
by the buyer and distribute the net sales proceeds to its partners in
accordance with the distribution provisions of its partnership agreement. The
primary advantage of this alternative would be to provide immediate liquidity
to Limited Partners based upon the current market value of the Partnership's
real estate assets. See "--Summary of Comparative Valuation Alternatives" for
estimates of the net liquidation proceeds that might be available to the
Limited Partners upon the liquidation of each Partnership.
Disadvantages of Liquidation. The General Partners do not believe that this
alternative would be as beneficial to Limited Partners as the Mergers, for the
following reasons, among others: (i) certain existing Partnership debt cannot
be defeased or prepaid at the present time (such as certain indebtedness of
Atlanta Marquis and MHP2 and Desert Springs' Senior Notes) and when the
existing debt can be defeased or prepaid, the costs of defeasance or
prepayment (with the exception of Chicago Suites, MDAH and PHLP) would
significantly decrease the sales proceeds available to Limited Partners of a
Partnership and (ii) a sale and liquidation would be a taxable event for
Limited Partners, who would lose the ability to individually plan the timing
of the recognition of their taxable gain. In addition, because of the tax
consequences that the General Partners (and thus Host) would incur upon a
Partnership's taxable sale of its Hotel or Hotels, this is not an alternative
that the General Partners would favor, making it less likely that such an
alternative could be implemented.
Reorganization of Each Partnership as a Separate REIT
Benefits of Reorganization as a Separate REIT. In lieu of participating in
the Mergers and the REIT Conversion, each Partnership could be reorganized as
a separate REIT (a "Separate REIT"), with the Limited
58
<PAGE>
Partners receiving shares of the Separate REIT and with those shares being
listed for trading on a stock exchange. The primary advantages of this
alternative would be that those Limited Partners who do not have a "negative
capital account" for tax purposes could receive REIT shares directly without
adverse tax consequences and would have liquidity for their interests in their
Partnership without the need to consolidate the Hotels owned by their
Partnership with the Hotels owned by Host, the other Partnerships, the Private
Partnerships and the Blackstone Entities. The Separate REIT could then decide
whether to pursue expansions through raising additional capital and acquiring
other hotels or perhaps other real estate assets. The Limited Partners, as
shareholders of the Separate REIT, could elect the directors of the Separate
REIT and therefore would have greater influence over the control of their
investment and its future direction than they have with respect to their
existing Partnership or will have following the Mergers. The Limited Partners
also would avoid the conflicts of interest inherent in the Mergers and the
REIT Conversion.
Disadvantages of Reorganization as a Separate REIT. The General Partners do
not believe that this alternative would be as beneficial to Limited Partners
as the Mergers for the following reasons, among others:(i) each Separate REIT,
on a standalone basis, would (a) be a relatively small public company, with a
substantially smaller capitalization and public float than Host REIT, (b) have
relatively high leverage, particularly for a public REIT, (c) likely need to
be externally advised rather than internally managed and (d) have only one or
several assets (depending on the Partnership), all of which would likely
adversely affect the trading value of the shares of the Separate REIT; (ii)
the organization of a Separate REIT would be a taxable transaction for Limited
Partners with "negative capital accounts" for tax purposes to the extent of
those negative capital accounts; (iii) if the Separate REIT were to raise
additional capital contemporaneously, this would cause the organization of the
Separate REIT to be a fully taxable transaction for all Limited Partners; and
(iv) the organization of a Separate REIT for certain Partnerships (including
Atlanta Marquis, Desert Springs, Hanover, MHP, MHP2 and PHLP) could have a
material adverse impact on the tax and/or economic positions of Host and the
General Partners in those Partnerships, and, therefore, the General Partners
of those Partnerships would not favor this alternative. The General Partners
believed that these disadvantages generally outweighed the advantages of
reorganizing one or more of the Partnerships as Separate REITs, as compared
with participation in the Mergers and the REIT Conversion, and certain of the
disadvantages would make this alternative practically impossible for certain
of the Partnerships to attain.
Merger of One or More of the Partnerships with Another REIT or UPREIT
Advantages of a Merger of One or More Partnerships with Another REIT or
UPREIT. In lieu of participating in the Mergers and the REIT Conversion, one
or more of the Partnerships might pursue a merger with another REIT,
particularly another REIT organized in the UPREIT format (including possibly a
merger with one of the "paired share" REITs that specializes in lodging
properties and is organized in the UPREIT format. The General Partners believe
that the only advantage of such an alternative would be if the consideration
to be received by the Limited Partners in such a merger were to have a value
in excess of the value of the OP Units that the Limited Partners will receive
in the Mergers. The General Partners believe, however, that the terms of the
Mergers are fair to the Limited Partners as discussed herein (see "Fairness
Analysis and Opinion") although there can be no assurance that the Limited
Partners might not receive greater value if one or more of the Partnerships
were to pursue a merger with another REIT or UPREIT.
Disadvantages of a Merger of One or More Partnerships with Another REIT or
UPREIT. The General Partners do not believe that this alternative would be as
beneficial to Limited Partners as the Mergers for the following reasons, among
others: (i) such a merger, unless consummated with a REIT organized in the
UPREIT format, would be a fully taxable transaction for the Limited Partners,
with the result that the Limited Partners would lose the ability to
individually plan the timing of the recognition of their taxable gain; (ii)
the General Partners believe that the Marriott lodging brands are among the
most respected and widely recognized brand names in the lodging industry and
that the Limited Partners would derive greater benefit from owning an interest
in an UPREIT that specializes in owning Marriott-brand hotels, together with
the diversity provided by the Hyatt, Ritz-Carlton, Four Seasons and Swissotel
brand hotels that the Operating Partnership will own; and (iii) the
59
<PAGE>
acquisition of certain of the Partnerships (including Atlanta Marquis, Desert
Springs, Hanover, MHP, MHP2 and PHLP) by another REIT specializing in the
ownership and operation of lodging properties could have a material adverse
impact on the tax and/or economic positions of Host and the General Partners
in those Partnerships, and, therefore, the General Partners of those
Partnerships would not favor this alternative. The General Partners believed
that these disadvantages generally outweighed any speculative advantage that
might be obtained from pursuing a merger transaction with another REIT or
UPREIT (particularly given the General Partners' assessments of the benefits
to the Limited Partners of participation in the Mergers and the REIT
Conversion, and that certain of the disadvantages would make this alternative
practically impossible for certain of the Partnerships to attain.
Summary of Comparative Valuation Alternatives
To determine the Exchange Values and to assist Limited Partners in comparing
alternatives to the Mergers, the General Partners, in conjunction with AAA,
have computed for each Partnership the estimated Adjusted Appraised Value, the
estimated Continuation Value and the estimated Liquidation Value of the
Partnership Interests of the Limited Partners in each Partnership. Estimated
Exchange Value is equal to the greatest of estimated Adjusted Appraised Value,
estimated Continuation Value and estimated Liquidation Value. In addition, the
table below sets for the minimum and pro forma number of OP Units to be
received by the Limited Partners in the Partnerships. For a detailed
explanation of the calculation of each value, see "Determination of Exchange
Values and Allocation of OP Units."
The estimated values set forth below may increase or decrease as a result of
various adjustments that will be finally calculated as of the Final Valuation
Date, but such estimated Exchange Values will not change as a result of less
than all of the Partnerships participating in the Mergers. The number of OP
Units to be issued to the Limited Partners will not be determined until after
the Effective Date.
SUMMARY OF COMPARATIVE VALUATION ALTERNATIVES AND NUMBER OF OP UNITS
(ALL AMOUNTS ON A PER PARTNERSHIP UNIT BASIS)(1)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ADJUSTED ESTIMATED ESTIMATED ESTIMATED MINIMUM PRO FORMA
APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NUMBER OF
PARTNERSHIP VALUE VALUE VALUE VALUE(2) OP UNITS(3) OP UNITS(4)
----------- --------- ------------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $ 41,991 $ 45,425 $ 406 $ 45,425 2,271
Chicago Suites.......... 33,471 24,184 31,467 33,471 1,674
Desert Springs.......... 40,880 33,536 27,617 40,880 2,044
Hanover................. 123,202 98,090 88,474 123,202 6,160
MDAH.................... 109,216 89,340 98,343 109,216 5,461
MHP..................... 140,032 141,425 124,261 141,425 7,071
MHP2.................... 237,334 212,032 205,140 237,334 11,867
PHLP.................... 0 5,040 0 5,040 252
</TABLE>
- --------
(1) A Partnership Unit in all of the Partnerships except Chicago Suites
($35,000) and PHLP ($10,000) represents an original investment of
$100,000.
(2) Estimated Exchange Value is equal to the greatest of estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value.
(3) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers.
(4) Assumes the price of an OP Unit is $20.00, which is the price used for
purposes of the pro forma financial statements.
60
<PAGE>
RECOMMENDATION OF THE GENERAL PARTNERS
FOR THE REASONS STATED HEREIN, THE GENERAL PARTNERS BELIEVE THAT THE MERGERS
PROVIDE SUBSTANTIAL BENEFITS AND ARE FAIR TO THE LIMITED PARTNERS OF EACH
PARTNERSHIP AND RECOMMEND THAT ALL LIMITED PARTNERS VOTE FOR THE MERGERS. SEE
"FAIRNESS ANALYSIS AND OPINION--FAIRNESS ANALYSIS."
61
<PAGE>
DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF OP UNITS
OVERVIEW
Following consummation of the REIT Conversion, OP Units will be owned by the
following groups:
. Host REIT, which will receive in the aggregate a number of OP Units
equal to the number of outstanding shares of common stock of Host in
exchange for the contribution of its full-service hotel assets and other
assets (excluding its senior living assets and the cash to be
distributed to its shareholders), subject to all liabilities of Host
(including past and future tax liabilities), other than liabilities of
SLC. The total number of OP Units received by Host REIT will include the
OP Units attributable to the interests of the General Partners and their
affiliates in the Partnerships, valued as described below. On a pro
forma basis, as of June 19, 1998, Host REIT would have received
approximately 204 million OP Units, based upon the number of outstanding
shares of Host common stock at that time. If Host issues any shares of
preferred stock prior to the REIT Conversion, Host REIT also will
receive a number of preferred partnership interests in the Operating
Partnership equal to the number of outstanding shares of preferred
stock.
. The Blackstone Entities, which will receive, in addition to other
consideration (see "Business and Properties--Blackstone Acquisition"),
approximately 43.7 million OP Units in exchange for the contribution of
the Blackstone Hotels and certain other related assets, subject to
certain liabilities.
. Limited Partners of the Participating Partnerships, who will receive in
the Mergers a number of OP Units based upon the Exchange Values of their
respective Partnership Interests, determined as summarized below.
. Partners unaffiliated with Host in certain Private Partnerships, who
have agreed to exchange their interests in their Private Partnerships
for OP Units based upon the value of their interests in their Private
Partnerships, as determined by negotiation with Host.
METHODOLOGY FOR DETERMINING EXCHANGE VALUES
Summary. The Exchange Value of each Partnership will be equal to the
greatest of its Adjusted Appraised Value, Continuation Value and Liquidation
Value, each of which has been determined as follows:
. Adjusted Appraised Value. The General Partners have retained AAA to
determine the market value of each of the Hotels as of March 1, 1998
(the "Appraised Value"). The "Adjusted Appraised Value" of a Partnership
equals the Appraised Value of its Hotels, adjusted as of the Final
Valuation Date (as defined below) for lender reserves, capital
expenditure reserves, existing indebtedness (including a "mark to
market" adjustment to reflect the market value of such indebtedness),
certain deferred maintenance costs, deferred management fees and
transfer and recordation taxes and fees.
. Continuation Value. The "Continuation Value" of a Partnership represents
AAA's estimate, as adopted by the General Partners, of the discounted
present value, as of January 1, 1998, of the limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender reserves), assuming that the Partnership continues as an
operating business for twelve years and its assets are sold on December
31, 2009 for their then estimated market value.
. Liquidation Value. The "Liquidation Value" of a Partnership represents
the General Partners' estimate of the net proceeds to limited partners
resulting from the assumed sale as of December 31, 1998 of the Hotel(s)
of the Partnership, each at its Adjusted Appraised Value (after
eliminating any "mark to market" adjustment and adding back the
deduction for transfer and recordation taxes and fees, if any, made in
deriving the Adjusted Appraised Value), less (i) estimated liquidation
costs, expenses and contingencies equal to 2.5% of Appraised Value and
(ii) prepayment penalties or defeasance costs, as applicable.
Final determination of the Exchange Value of each Partnership will be made
as of the end of the four week accounting period ending at least 20 days prior
to the Effective Date (the "Final Valuation Date") and will be
62
<PAGE>
equal to the greatest of Adjusted Appraised Value, Continuation Value and
Liquidation Value as of such date. Adjusted Appraised Value, Continuation
Value and Liquidation Value will be adjusted as of the Final Valuation Date
(i) to reflect the amount of lender and capital expenditure reserves and the
amount of deferred management fees as of such date, (ii) to increase the
Adjusted Appraised Value by any amounts actually expended by a Partnership
after the Initial Valuation Date to perform deferred maintenance that were
previously subtracted in determining the estimated Adjusted Appraised Value of
such Partnership and (iii) to reflect any changes in the Partnership's other
reserves, such as for litigation expenses and indemnification costs and any
revised estimates of transfer and recordation taxes and fees.
Appraised Value. The Partnerships' Hotels were appraised as of March 1, 1998
by AAA, an independent, nationally recognized hotel valuation and financial
advisory firm experienced in the appraisals of lodging properties such as the
Partnerships' Hotels. Each appraisal (an "Appraisal") was reviewed by an MAI
(Member Appraisal Institute) appraiser and certified by such MAI appraiser as
having been prepared in accordance with the requirements of the Standards of
Professional Practice of the Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation.
The purpose of each Appraisal is to provide an estimate of the "Market
Value" of the related Hotel. "Market Value" means the most probable price
which a property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each acting
prudently and knowledgeably and assuming the price is not affected by undue
stimuli. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby: (i) the buyer and seller are equally motivated; (ii) both parties are
well informed or well advised, and each is acting in what he considers his own
best interest; (iii) a reasonable time frame is allowed for exposure in the
open market; (iv) payment is made in terms of cash in U.S. dollars or in terms
of financial arrangements comparable thereto and (v) the price represents the
normal consideration for the property sold unaffected by special or creative
financing or sales concessions granted by anyone associated with the sale. AAA
made site visits at all of the Hotels except for three Hotels owned by MDAH
and one Hotel owned by PHLP for purposes of the Appraisals.
In preparing the Appraisals, AAA relied primarily on the income
capitalization method of valuation, and then compared the value estimated by
this method with recent sales of comparable properties, as a check on the
reasonableness of the value determined through the income capitalization
method. AAA employed the following procedures for determining the Appraised
Value of each Hotel:
. Historical 1997 and Projected Year's Earnings. AAA reviewed the
historical 1997 net operating income (i.e., income before interest,
taxes, depreciation and amortization) ("NOI") prior to incentive
management fees and certain capital expenditures for the applicable
Hotel. AAA also prepared a projection of the net operating income prior
to incentive management fees and certain capital expenditures for the
applicable Hotel for the twelve month period ending February 28, 1999
(the "Projected Year"), using historical financial information for the
Hotel, budget information, a survey with the manager of the Hotel
addressing the physical condition of the Hotel, local market conditions
(including business mix, demand generators, future trends and
predictability of business), changes in the competitive environment,
comparison with direct competitors of the Hotel and risk factors
relating to the particular Hotel. The resulting gross margin (ratio of
total revenues to net operating income prior to incentive management
fees) was checked against AAA's database of the gross margins for
similar hotels for reasonableness.
. Impact of Incentive Management Fees. AAA estimated a normalized annual
amount of incentive management fees payable under the applicable
management agreement and subtracted this amount from the net operating
income prior to incentive management fees and certain capital
expenditures for 1997 and the Projected Year.
. Impact of Owner Funded Capital Expenditures. AAA estimated normalized
annual amounts of owner funded capital expenditures (over and above the
FF&E reserve) based in part on projected owner funded capital
expenditures estimated in the Engineering Study, including in the case
of three Hotels
63
<PAGE>
(Atlanta Marquis, Desert Springs and Hanover) certain identified 1998
capital expenditures for which reserves have been set aside. The
normalized amounts were then subtracted from the NOI prior to owner
funded capital expenditures for 1997 and the Projected Year.
. Capitalization of Adjusted NOI. AAA then capitalized the amount
resulting from the foregoing adjustments ("Adjusted NOI") for 1997 and
the Projected Year by dividing such amounts by capitalization rates that
AAA determined to be appropriate. A capitalization rate represents the
relationship between net operating income and sales prices of income
producing property. AAA selected the capitalization rates based upon its
review of current published surveys reflecting the opinions of investors
and participants such as REITs, hotel acquisition/management companies
and pension funds, lenders, brokers and consultants as to current
capitalization rates, and its own database of capitalization rates
reflected in recent transactions, adjusted for factors specific to the
individual Hotel, such as location, physical condition, reserve
policies, local market volatility and competition, guest mix, renovation
influences and other income characteristics. AAA used separate
capitalization rates that it deemed appropriate to capitalize 1997
historical Adjusted NOI and estimated Projected Year's Adjusted NOI. AAA
then estimated the value of each Hotel based upon each of the values
estimated by capitalizing 1997 and Projected Year's Adjusted NOI and its
professional judgment.
The following table sets forth the resulting Appraised Values of the Hotels
of each Partnership, as estimated by AAA.
APPRAISED VALUE OF EACH PARTNERSHIP'S HOTELS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APPRAISED VALUE
PARTNERSHIP ---------------
<S> <C>
Atlanta Marquis................................................ $ 255,000
Chicago Suites................................................. 34,300
Desert Springs................................................. 223,800
Hanover........................................................ 49,400
MDAH........................................................... 165,900
MHP............................................................ 354,261(1)
MHP2........................................................... 463,300(2)
PHLP........................................................... 265,800
----------
Total.......................................................... $1,811,761
==========
</TABLE>
- --------
(1) Excludes the 49.5% interest in the Harbor Beach Resort not owned by MHP.
(2)Excludes the 50% interest in the Santa Clara Marriott not owned by MHP2.
The following table sets forth the effective capitalization rates for 1997
and Projected Year's Adjusted NOI resulting from AAA's estimated Appraised
Values of the Hotels.
RESULTING EFFECTIVE CAPITALIZATION RATES IN APPRAISALS
<TABLE>
<CAPTION>
PROJECTED YEAR
(ENDING
PARTNERSHIP 1997 FEBRUARY 28, 1999)
----------- --------- ------------------
<S> <C> <C>
Atlanta Marquis................................ 9.4% 9.4%
Chicago Suites................................. 9.4% 10.3%
Desert Springs................................. 8.9% 9.3%
Hanover........................................ 9.4% 10.1%
MDAH........................................... 9.1 - 9.9% 10.1 - 10.6%
MHP............................................ 8.8 - 9.4% 9.8 - 10.2%
MHP2........................................... 9.1 - 9.6% 9.7 - 11.6%
PHLP........................................... 9.2 - 9.8% 9.7 - 10.6%
</TABLE>
64
<PAGE>
. Comparison with Comparable Sales. AAA checked the Appraised Value of
each Hotel derived by the foregoing procedures against its database of
comparable sale transactions for reasonableness.
In the case of a Hotel that is only partly owned by a Partnership, the
Appraised Value of such Hotel was reduced proportionately to the amount
attributable to such Partnership's ownership interest therein (but no
adjustment was made to reflect the effect that the outside interest might have
on decisions with respect to sales, refinancings or other major operational
matters). With respect to the Partnerships' Hotels, eleven properties were
encumbered by ground leases as of the date of the Appraisal: one owned by each
of Chicago Suites, MDAH and MHP, three owned by MHP2 and five owned by PHLP.
Accordingly, the Appraised Values of these Partnerships' Hotels have been
decreased to reflect the encumbrance of the ground leases and the interest of
the ground lessor in the operating cash flows of such Hotels. The Appraised
Value of MHP's Orlando World Center Hotel also includes AAA's estimate of the
present value of a planned expansion of the Hotel. The Appraised Values assume
all contractual provisions for FF&E reserves are adequate and have not been
reduced to reflect deferred maintenance or environmental remediation costs
with respect to the Partnerships' Hotels (but estimated deferred maintenance
costs have been deducted in estimating the Adjusted Appraised Value of each
Hotel). The Appraised Values did not take into account the costs that might be
incurred in selling a Hotel (but estimated costs for transfer and recordation
taxes and fees have been deducted in estimating the Adjusted Appraised Value
of each Hotel).
The Appraisals are not guarantees of present or future values and no
assurance can be given as to the actual value of the Partnerships' Hotels. The
Appraisals should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of the Partnerships.
The Appraised Values, and the assumptions underlying the projections on
which the Appraised Values are based, are contingent upon a series of future
events, the outcomes of which are not necessarily within the Operating
Partnership's control and cannot be determined at this time. There can be no
assurance that another appraiser would not have arrived at a different result.
Some of the assumptions inevitably will not materialize and unanticipated
events and circumstances will occur subsequent to the date of the Appraisals.
Furthermore, the actual results achieved from the Hotels will vary from the
results projected in the Appraisals and the variations may be material.
Adjusted Appraised Value. The Adjusted Appraised Value of each Partnership
was determined by totaling the Appraised Values of all of the Hotels of the
Partnership and then making various adjustments to the aggregate Appraised
Value, as described below.
. Lender Reserves. For Atlanta Marquis, Desert Springs, MDAH, MHP and
MHP2, debt service reserves are required to be held by third-party
lenders. The amount of these lender reserves as of the Initial Valuation
Date was added to the Appraised Values of these Hotels. A final
determination of the lender reserves of each of these Partnerships will
be made on the Final Valuation Date and any changes in such reserves
will be reflected in the Adjusted Appraised Value.
. 1998 Capital Expenditure Reserves. For Atlanta Marquis, Desert Springs
and Hanover, an amount equal to the capital expenditure reserves which
were set aside as of March 1, 1998 for various identified capital
improvements in 1998 (which amounts resulted in reductions in the
Appraised Value as described above) was added back to the Appraised
Value.
. Mortgage and Other Debt. The estimated principal balance and accrued
interest as of the Effective Date (assumed to be December 31, 1998) of
all mortgage and other debt of each Partnership has been subtracted from
the Appraised Value.
. Mark to Market Adjustments. The third-party loans of the Partnerships
have various interest rates and terms to maturity. In order to reflect
the market value of the third-party loans of each Partnership, the
estimated Adjusted Appraised Value for each Partnership has been
adjusted (increased or decreased) to "mark to market" the interest rate
for such loans. This adjustment has been estimated by comparing the
interest cost using the applicable interest rates on existing third-
party loans over their remaining
65
<PAGE>
term to the interest cost using the interest rate that the Operating
Partnership believes it would be able to obtain for unsecured debt in
the market as of the Final Valuation Date (which would have been % per
annum based on a 225 basis point (2.25 percent) spread over the yield on
seven-year U.S. Treasury securities as of , 1998). The mark to
market adjustment for each loan was calculated by determining the
difference between the present values, as of December 31, 1998, of the
interest payments over the remaining term of the loan from January 1,
1999 to maturity using the actual interest rate as the discount rate as
compared to using the assumed market rate as the discount rate. In the
case of the mezzanine loan on Desert Springs, the adjustment reflects
the prepayment penalty that would be payable because it is less than the
mark to market adjustment.
. Deferred Management Fees. The amount of deferred management fees
(management fees earned by the manager pursuant to the management
agreement and not paid currently) estimated to be payable under the
Management Agreement(s) of each Partnership as of December 31, 1998 have
been subtracted from the Appraised Value. The amount of such deferred
management fees will be recalculated as of the Final Valuation Date.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to the
applicable Hotel or Hotels of each Partnership have been subtracted from
the Appraised Value. The adjustments for this item will be reduced at
the Final Valuation Date to reflect amounts expended after the Initial
Valuation Date to perform such deferred maintenance. No adjustments have
been made for previously budgeted capital expenditures or deferred
maintenance costs estimated in the Engineering Study that are reflected
in the cash flow projections used for purposes of estimating Appraised
Values.
. Transfer and Recordation Taxes and Fees. The estimated transfer and
recordation taxes and fees required to be paid by each Partnership in
connection with the Mergers have been subtracted from the Appraised
Value. The actual transfer and recordation taxes and fees will be paid
by the Operating Partnership as part of the Merger Expenses.
The following table sets forth the adjustments to the aggregate Appraised
Values made to derive the estimated Adjusted Appraised Value for each
Partnership as of the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUES
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNTS)
<TABLE>
<CAPTION>
ATLANTA CHICAGO DESERT
MARQUIS SUITES SPRINGS HANOVER MDAH MHP MHP2 PHLP
-------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Appraised Value......... $255,000 $34,300 $223,800 $ 49,400 $165,900 $354,261(1) $463,300(2) $265,800
Lender reserves......... 3,600 0 6,173 0 3,000 1,800 6,800 0
Capital expenditure re-
serves................. 16,750 0 1,500 1,690 0 0 0 0
Mortgage debt........... (162,047) (22,284) (101,632) (29,394) (97,371) (192,137)(1) (259,945)(2) (161,136)
Other debt.............. (20,134) (464) (92,438) (10,398) (25,355) (722) 0 (128,102)
Mark to market adjust-
ment................... 4,693 94 411 (435) 399 2,878 (2,154) 0
Deferred management
fees................... 0 0 0 0 0 0 (3,184) (34,151)
Deferred maintenance
costs.................. (607) (46) (650) (72) (825) (245) (1,673) (5,212)
Transfer taxes.......... 0 (274) 0 0 0 0 0 (814)
-------- ------- -------- -------- -------- -------- -------- --------
Estimated Adjusted
Appraised Value........ $ 97,255 $11,326 $ 37,164 $ 10,791 $ 45,748 $165,835 $203,144 $ 0
======== ======= ======== ======== ======== ======== ======== ========
Limited partners'
share.................. $ 22,255 $11,213 $ 36,792 $ 10,349 $ 45,215 $140,032 $176,814 $ 0
Per Partnership Unit.... $ 41,991 $33,471 $ 40,880 $123,202 $109,216 $140,032 $237,334 $ 0
</TABLE>
- --------
(1) Excludes 49.5% of the $122,300,000 Appraised Value of the Harbor Beach
Resort and the $82,266,000 in mortgage debt encumbering the Hotel.
(2) Excludes 50% of the $126,200,000 Appraised Value of the Santa Clara
Marriott Hotel but includes 100% of the $42,500,000 in mortgage debt
encumbering the Hotel for which MHP2 is responsible.
66
<PAGE>
Continuation Value. AAA estimated the Continuation Value of each Partnership
using the following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for the Partnership for the 12-year period from
January 1, 1998 through December 31, 2009 based upon the estimated 1998
NOI before incentive management fees used in the Appraisals and for each
subsequent year applying an assumed annual stabilized growth rate
(ranging from 3.40% to 4.50%, depending upon the Partnership, as shown
in the table below) developed by AAA for this analysis. For each year in
the projection period, AAA estimated the amount of cash available for
distribution to limited partners after payment of all management fees,
debt service, owner funded capital expenditures based on the Engineering
Study and other partnership expenses and after application of the
applicable partnership agreement provisions. AAA assumed that each
Partnership's FF&E reserves were adequate and understood that Host
determined that there were no reserve shortfalls or surpluses.
. Refinancing Assumptions. For debt that matures during the 12-year
period, AAA assumed that the debt would be refinanced with interest
rates ranging from 7.25% to 8.60% per annum and a 20 to 25-year
amortization schedule, with estimated refinancing costs of 2% of the
refinanced amount being paid from operating cash flow (or added to the
principal balance of the loan, if cash flow was estimated to be
insufficient).
. Determination of Residual Value. To estimate the residual value of the
limited partners' interest in the Partnership at the end of the 12-year
period, AAA assumed that the Hotel(s) would be sold as of December 31,
2009 at their then market value. AAA estimated the market value of each
Hotel as of such date by applying an exit capitalization rate that it
deemed appropriate, using the factors described above in connection with
the "--Appraised Value," which are set forth in the table below, to the
estimated Adjusted NOI for 2009 (estimated as described above). AAA then
subtracted estimated sales costs of 2.0% of the estimated market value,
added lender reserves, and subtracted the estimated outstanding
principal balance of debt as of December 31, 2009 and deferred
management fees to arrive at net sales proceeds available for
distribution to partners. AAA then determined what portion of such
estimated net sales proceeds would be distributable to the Partnership's
limited partners under the various partnership and debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to the limited
partners from operations and estimated net sales proceeds (plus lender
reserves) to their present value as of January 1, 1998, using a discount
rate of 20% per annum. AAA believes that this discount rate reflects the
return on investment that investors expect from leveraged investments of
this nature.
The growth rates and exit capitalization rates used to determine the
estimated Continuation Value for each Partnership are as set forth below:
GROWTH RATES, EXIT CAPITALIZATION RATES
AND ESTIMATED CONTINUATION VALUE FOR EACH PARTNERSHIP
<TABLE>
<CAPTION>
ESTIMATED
EXIT CAPITALIZATION CONTINUATION VALUE
PARTNERSHIP GROWTH RATE RATE (2009) (PER PARTNERSHIP UNIT)
- ----------- ----------- ------------------- ----------------------
<S> <C> <C> <C>
Atlanta Marquis.......... 4.40% 9.8% $ 45,425
Chicago Suites........... 3.70% 9.9% 24,184
Desert Springs........... 4.50% 9.7% 33,536
Hanover.................. 3.70% 9.9% 98,090
MDAH..................... 3.40% 10.1% 89,340
MHP...................... 3.65%(1) 9.9% 141,425
MHP2..................... 3.40% 10.4% 212,032
PHLP..................... 3.60% 10.1% 5,040
</TABLE>
- --------
(1) Reflects the average of the stabilized growth rates of Harbor Beach Resort
(3.80% each year) and Orlando World Center (3.50% beginning in 2003 to
reflect the effect of the planned expansion of the Hotel).
67
<PAGE>
Liquidation Value. The Liquidation Value of each Partnership was estimated
by the General Partners and represents the estimated value of the Partnership
if all of its assets were sold as of December 31, 1998. Such value was based
upon the Adjusted Appraised Value of each Partnership, with the following
adjustments: (i) the "mark to market" adjustment used to estimate the Adjusted
Appraised Value was eliminated and instead prepayment or defeasance costs that
would be payable under existing debt agreements (regardless of whether the
debt in fact can be prepaid on December 31, 1998) were deducted from the
Appraised Value; (ii) the deduction for transfer and recordation taxes and
fees used to estimate the Adjusted Appraised Value was eliminated and instead
an amount equal to 2.5% of the Appraised Value of each Partnership's Hotel(s)
was subtracted from the Appraised Value for estimated liquidation costs,
expenses and contingencies; and (iii) the amount of participating interest
payable on the Desert Springs subordinated loan held by Host was deducted from
the Appraised Value to reflect the net proceeds available to partners of that
Partnership. The General Partner then determined the portion of the estimated
Liquidation Value that would be distributable to limited partners under the
terms of the applicable partnership agreements and other contractual
arrangements.
The following table sets forth the adjustments made to Adjusted Appraised
Value to estimate the Liquidation Value for each Partnership as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUES
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNTS)
<TABLE>
<CAPTION>
ATLANTA CHICAGO DESERT
MARQUIS SUITES SPRINGS HANOVER MDAH MHP MHP2 PHLP
-------- ------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Appraised Value......... $255,000 $34,300 $223,800 $49,400 $165,900 $354,261(1) $463,300(2) $265,800
Lender reserves......... 3,600 0 6,173 0 3,000 1,800 6,800 0
Capital expenditure re-
serve.................. 16,750 0 1,500 1,690 0 0 0 0
Mortgage debt........... (162,047) (22,284) (101,632) (29,394) (97,371) (192,137)(1) (259,945)(2) (161,136)
Other debt.............. (20,134) (464) (89,669) (10,398) (25,355) (722) 0 (128,102)
Prepayment/defeasance
costs.................. (10,972) 0 (8,821) (2,168) 0 (10,794) (20,551) 0
Deferred management
fees................... 0 0 0 0 0 0 (3,184) (34,151)
Deferred maintenance
costs.................. (607) (46) (650) (72) (825) (245) (1,673) (5,212)
Sales costs............. (6,375) (858) (5,595) (1,235) (4,148) (8,857) (11,583) (6,645)
-------- ------- -------- ------- -------- -------- -------- --------
Estimated Liquidation
Value.................. $ 75,215 $10,648 $ 25,106 $ 7,823 $ 41,201 $143,306 $173,164 $ 0
======== ======= ======== ======= ======== ======== ======== ========
Limited partners'
share.................. $ 215 $10,541 $ 24,855 $ 7,432 $ 40,714 $124,261 $152,829 $ 0
Per Partnership Unit.... $ 406 $31,467 $ 27,617 $88,474 $ 98,343 $124,261 $205,140 $ 0
</TABLE>
- --------
(1) Excludes 49.5% of the $122,300,000 Appraised Value of the Harbor Beach
Resort and the $82,266,000 in mortgage debt encumbering the Hotel.
(2) Excludes 50% of the $126,200,000 Appraised Value of the Santa Clara
Marriott Hotel but includes 100% of the $42,500,000 in mortgage debt
encumbering the Hotel for which MHP2 is responsible.
Estimated Exchange Values. The following table sets forth the estimated
Exchange Value of each Partnership (based upon the greatest of its estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value), the estimated minimum and pro forma number of OP Units to
be received and the estimated Note Election Amount for each Partnership, all
on a per Partnership Unit basis as of the Initial Valuation Date. The
estimated Exchange Value for each Partnership will be received by each Limited
Partner retaining OP Units in the Merger. The estimated Note Election Amount
for each Partnership (which will be received by Limited Partners electing to
receive Notes in exchange for OP Units) is equal to the Liquidation Value (or,
if greater, 60% of the Exchange Value) for that Partnership. The estimated
values set forth below may increase or decrease as a result of various
adjustments, which will be finally calculated as of the Final Valuation Date
but will not change as a result of less than all of the Partnerships
participating in the Mergers. The actual number of OP Units to be received by
the Limited Partners will be based on the average closing price on the NYSE of
a Host REIT Common Share for the 20 trading days after the Effective Date.
68
<PAGE>
ESTIMATED EXCHANGE VALUES,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
PER PARTNERSHIP UNIT(/1/)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
ESTIMATED ESTIMATED ESTIMATED ESTIMATED MINIMUM PRO FORMA ESTIMATED
ADJUSTED APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NUMBER OF NOTE ELECTION
PARTNERSHIP VALUE VALUE VALUE VALUE(2) OP UNITS(3) OP UNITS(4) AMOUNT(5)
----------- ------------------ ------------ ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $41,991 $45,425 $ 406 $45,425 2,271 $27,255
Chicago Suites.......... 33,471 24,184 31,467 33,471 1,674 31,467
Desert Springs.......... 40,880 33,536 27,617 40,880 2,044 27,617
Hanover................. 123,202 98,090 88,474 123,202 6,160 88,474
MDAH.................... 109,216 89,340 98,343 109,216 5,461 98,343
MHP..................... 140,032 141,425 124,261 141,425 7,071 124,261
MHP2.................... 237,334 212,032 205,140 237,334 11,867 205,140
PHLP.................... 0 5,040 0 5,040 252 3,024
</TABLE>
- --------
(1) A Partnership Unit in all of the Partnerships except for Chicago Suites
($35,000) and PHLP ($10,000) represents an original investment of
$100,000.
(2) The estimated Exchange Value is equal to the greatest of estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value.
(3) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers.
(4) Assumes the price of an OP Unit is $20.00, which is the price used for
purposes of the pro forma financial statements.
(5) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 60% of the Exchange Value (the "Note Election
Amount").
PRICE OF OP UNITS TO PAY EXCHANGE VALUES TO LIMITED PARTNERS
Each Limited Partner of a Participating Partnership will receive OP Units
with a deemed value equal to the Exchange Value of such Limited Partner's
Partnership Interests. The price of an OP Unit for this purpose will be equal
to the average closing price on the NYSE of a Host REIT Common Share for the
20 trading days after the Effective Date of the Mergers (but in no event
greater than $ per share). The closing price per share of Host common stock
on the NYSE was $ , on , 1998.
Limited Partners at the Effective Date of the Mergers who retain OP Units
will receive cash distributions from their respective Partnerships for all of
1998 and, if the Mergers do not occur in 1998, any portion of 1999 prior to
the Mergers for which period they do not receive a cash distribution from the
Operating Partnership. Cash distributions will be made by each Partnership in
accordance with its partnership agreement on or before June 1, 1999 in respect
of 1998 operations and, if the Mergers do not occur prior to January 1, 1999,
within 90 days after the Effective Date of the Mergers in respect of any 1999
operations. Limited Partners at the Effective Date of the Mergers who receive
Notes in exchange for OP Units will participate in the same distributions from
the Partnerships as Limited Partners who retain OP Units but will not receive
any distributions from the Operating Partnership with respect to periods after
the Effective Date of the Mergers.
No fractional OP Units will be issued. Fractional amounts less than or equal
to 0.50 of an OP Unit will be rounded down to the next whole number and
fractional amounts greater than 0.50 will be rounded up to the next whole
number of OP Units.
VALUATION OF GENERAL PARTNERS' INTERESTS IN THE PARTNERSHIPS AND ALLOCATION OF
OP UNITS TO THE GENERAL PARTNERS
The value of each General Partner's interest will be equal to the aggregate
Exchange Value of the Partnership minus the aggregate Exchange Value of the
Limited Partners' Partnership Interests (giving effect to the applicable
distribution preferences in each partnership agreement). The number of OP
Units that will be received by each General Partner will be equal to the value
of its interest in the Partnership divided by the same price per OP Unit used
to determine the number of OP Units to be received by the Limited Partners.
The total number of OP Units that will be owned directly or indirectly by Host
REIT (including OP Units owned by the General Partners) will be equal to the
number of outstanding shares of common stock of Host at the Effective Date.
69
<PAGE>
The following table sets forth the estimated value of the interest of each
General Partners and its affiliates in a Partnership based upon the estimated
aggregate Exchange Value of the Limited Partners' Partnership Interests as of
the Initial Valuation Date and the minimum and pro forma number of OP Units
estimated to be received by the General Partners and their affiliates in
respect thereof.
ESTIMATED VALUES OF GENERAL PARTNERS' AND THEIR AFFILIATES' INTERESTS AND
NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ATLANTA CHICAGO DESERT
MARQUIS SUITES SPRINGS HANOVER MDAH MHP MHP2 PHLP
------- ------- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Exchange Val-
ue..................... $88,662 $11,326 $37,164 $10,791 $45,748 $153,385 $203,144 $12,096
Limited Partners' share
of aggregate Exchange
Value.................. 24,075 11,213 36,792 10,349 45,215 141,425 176,814 9,072
------- ------- ------- ------- ------- -------- -------- -------
Value of General Part-
ner's interest(1)...... 64,587 113 372 442 533 11,960 26,330 3,024
Value of Host's limited
partner interest....... 68 0 0 4,928 218 68,344 93,035 5
------- ------- ------- ------- ------- -------- -------- -------
Total Host interest..... $64,655 $ 113 $ 372 $ 5,370 $ 751 $ 80,304 $119,365 $ 3,029
======= ======= ======= ======= ======= ======== ======== =======
Number of OP Units:
Minimum(2).............
Pro Forma(3)........... 3,233 6 19 269 38 4,015 5,968 151
</TABLE>
- --------
(1) For Atlanta Marquis, amount includes the Class B Limited Partnership
interest owned by an affiliate of the General Partner.
(2)Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers.
(3)Assumes the price of an OP Unit is $20.00, which is the price used for
purposes of the pro forma financial statements.
70
<PAGE>
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partners believe that the Mergers provide substantial benefits
and are fair to the Limited Partners of each Partnership and recommend that
all Limited Partners consent to the Mergers. The General Partners base this
recommendation primarily on (i) their view that the expected benefits of the
Mergers for the Limited Partners outweigh the risks and potential detriments
of the Mergers to the Limited Partners (see "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers" and "Risk Factors"),
(ii) their view that the value of the OP Units allocable to the Limited
Partners on the basis of the Exchange Value established for each Partnership
represents fair consideration for the Partnership Interests held by the
Limited Partners in each Partnership and is fair to the Limited Partners from
a financial point of view, and (iii) the Appraisals and Fairness Opinion of
AAA. See "--Fairness Opinion."
No Merger is conditioned upon the consummation of any other Merger. The
General Partners have considered this fact in evaluating the fairness of the
Mergers. The General Partners believe that the fairness of the Mergers will
not be materially affected by the presence or absence of any individual
Partnership or by any particular combination of Partnerships and that the
Mergers will be fair to the Limited Partners, individually and as a whole, if
they are consummated with any combination of Participating Partnerships. The
General Partners base this belief primarily on the fact that the consideration
to be paid to the Limited Partners in each individual Partnership has been
established based upon such Partnership's Exchange Value, without regard to
any possible combination of Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partners have taken into account the following considerations placing
the greatest weight on the first two consideration:
. The General Partners have concluded that the Exchange Value for each
Partnership, which is equal to the greatest of its Adjusted Appraised
Value, Continuation Value and Liquidation Value, represents fair
consideration for the Partnership Interests of the Limited Partners in
the Mergers in relation to such Partnership. The General Partners also
have concluded that the Exchange Value established for the Limited
Partners in each Partnership fairly reflects the value of the assets
held by such Partnership. In addition, the Fairness Opinion supports
these conclusions.
. Individual Limited Partners will be able to defer recognition of gain
until such time as they choose to realize such gain based on their own
personal considerations.
. The General Partners have concluded that the potential benefits of the
Mergers to the Limited Partners, as described under "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the
Mergers," outweigh the potential risks and detriments of the Mergers for
the Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partners, supports the
fairness of the Mergers, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
Limited Partners should consider carefully. The availability of the
Fairness Opinion is particularly significant in light of the absence of
arm's length negotiations in establishing the terms of the Mergers.
. Host will contribute its wholly owned full-service hotel assets,
substantially all of its interests in the Hotel Partnerships and its
other assets (excluding its senior living assets and the cash or
securities to be distributed to its shareholders) to the Operating
Partnership in exchange for (i) a number of OP Units in the aggregate
equal to the number of outstanding shares of common stock of Host, (ii)
preferred partnership interests in the Operating Partnership
corresponding to any shares of Host preferred stock outstanding at the
time of the REIT Conversion and (iii) the assumption by the Operating
Partnership of all liabilities of Host (including past and future tax
liabilities), other than liabilities of SLC. Following these
contributions, the Operating Partnership and its subsidiaries will
directly own all of Host's wholly-owned hotels and all of Host's
interests in the Hotel Partnerships and Host's assets. Host will receive
OP Units in respect of its general and limited partner interests in the
Partnerships on substantially the same
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basis as the Partnership Units held by Limited Partners. Host REIT will
not receive any compensation for its services as general partner to the
Operating Partnership following the REIT Conversion and will benefit
from the operations of the Operating Partnership only to the extent of
the distributions received based upon its percentage interest in the
Operating Partnership to the same extent as the other limited partners.
Because Host REIT will share in the value of the Operating Partnership
solely through distributions and not through any separate compensation
structure, the General Partners believe that this is a factor supporting
the fairness of the Mergers to the Limited Partners.
. The General Partners believe that the value of the consideration to be
received by the Limited Partners of each Partnership in the Mergers is
fair in relation to the value which would be derived by such Limited
Partners under any of the alternatives described under "Background and
Reasons for the Mergers and the REIT Conversion--Alternatives to the
Mergers," especially since the Exchange Value of each Partnership is
equal to the greatest of the Adjusted Appraised Value, the Continuation
Value and the Liquidation Value and historic prices paid for Partnership
Units (except for Desert Springs). The General Partners do not believe
that the sale of any Hotel(s) and liquidation of the associated
Partnership will obtain for Limited Partners of such Partnership as much
value as the value to be received by such Limited Partners following the
Mergers. In addition, while the Continuation Values of three of the
Partnerships (Atlanta Marquis, MHP and PHLP) are higher than the
Adjusted Appraised Values of such Partnerships, the General Partners
believe that the Mergers provide substantial benefits to such Limited
Partners, including those benefits described under "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the
Mergers," especially with respect to enhanced liquidity and regular
quarterly cash distributions. The General Partners believe that the
following benefits are of the greatest value and importance to the
Limited Partners of all of the Partnerships:
. Enhanced Liquidity. The Mergers and the REIT Conversion will offer
Limited Partners significantly enhanced liquidity with respect to
their investments in the Partnerships because, commencing one year
following the Effective Date, Limited Partners will be able to
exercise their Unit Redemption Right at any time, subject to certain
limited exceptions. Host has approximately 204 million shares of
common stock outstanding and is expected to have a total common
equity market capitalization of approximately $ billion after giving
effect to the estimated $ million earnings and profits distribution
(based on Host's $ closing price per share on the NYSE on ,
1998). The exercise of the Unit Redemption Right, however, generally
would result in recognition of taxable income or gain at that time.
. Risk Diversification. Upon consummation of the REIT Conversion, each
Limited Partner's investment will be converted from an investment in
an individual Partnership owning from one to eight hotels into an
investment in an enterprise that initially will own or control
approximately 120 Hotels and will have a total market capitalization
of approximately $ billion, thereby reducing the dependence upon the
performance of, and the exposure to the risks associated with, any
particular Hotel or group of Hotels currently owned by an individual
Partnership and spreading such risk over a broader and more varied
portfolio, including more diverse geographic locations and multiple
brands.
. Reduction in Leverage and Interest Costs. It is expected that the
Operating Partnership will have a significantly lower leverage to
value ratio than any of the Partnerships currently, each of which has
a leverage ratio that exceeds 55% and typically averages between 75%
and 80% (calculated as a percentage of Appraised Value), resulting in
interest and debt service savings and greater financial stability.
. Regular Quarterly Cash Distributions. The General Partners expect
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units. Host expects that these
distributions will be higher than the estimated cash distributions
for 1998 of all Partnerships except MHP and MHP2, and, in any event,
the ability to receive distributions quarterly and in regular amounts
would be enhanced.
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. Substantial Tax Deferral. The General Partners expect that Limited
Partners of the Participating Partnerships who do not elect to
receive Notes in exchange for OP Units generally should be able to
obtain the benefits of the Mergers while continuing to defer
recognition for federal income tax purposes of at least a substantial
portion, if not all, of the gain with respect to their Partnership
Interests that otherwise would be recognized in the event of a
liquidation of the Partnership or a sale or other disposition of its
assets in a taxable transaction (although Limited Partners in Atlanta
Marquis, MHP and PHLP may (although are not expected to) recognize a
relatively modest amount of ordinary income as the result of required
sales of personal property by each such Partnership to a Non-
Controlled Subsidiary in order to facilitate Host REIT's
qualification as a REIT).
. The General Partners believe that the economic terms of the leases of the
Hotels are fair and reasonable from the standpoint of the Operating
Partnership.
The General Partners believe that the factors described above, which support
the fairness of the Mergers to the Limited Partners of the Partnerships, when
weighed against the factors that may be disadvantageous, taken as a whole,
indicate that the Mergers are fair to the Limited Partners of all of the
Partnerships.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partners to
perform the Appraisals and to render the Fairness Opinion that (i) the
Exchange Value and the methodologies and underlying assumptions used to
determine the Exchange Value, the Adjusted Appraised Value, the Continuation
Value and the Liquidation Value of each Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of the Hotels) are fair and reasonable, from a financial
point of view, to the Limited Partners of each Partnership and (ii) the
methodologies used to determine the value of an OP Unit and the allocation of
the equity interest in the Operating Partnership to be received by the limited
partners of each Partnership are fair and reasonable to the Limited Partners
of each Partnership. The Fairness Opinion is addressed to each Partnership and
it may be relied upon by each of the Limited Partners of the Partnerships. The
full text of the Fairness Opinion, which contains a description of the
assumptions and qualifications applicable to the review and analysis by AAA,
is set forth in Appendix B to this Consent Solicitation and should be read in
its entirety. The material assumptions and qualifications to the Fairness
Opinion are summarized below, although this summary does not purport to be a
complete description of the various inquiries and analyses undertaken by AAA
in rendering the Fairness Opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description. For a more complete description of the assumptions and
qualifications that limit the scope of the Fairness Opinion, see "--
Qualifications to Fairness Opinion" and "--Assumptions" below.
Although the General Partners advised AAA that certain assumptions were
appropriate in their view, the General Partners imposed no conditions or
limitations on the scope of the investigation by AAA or the methods and
procedures to be followed by AAA in rendering the Fairness Opinion. The fees
and expenses of AAA will be treated as a Merger Expense and will be paid by
the Operating Partnership. In addition, the General Partners have agreed to
indemnify AAA against certain liabilities. See "--Compensation and Material
Relationships."
Qualifications to Fairness Opinion. In the Fairness Opinion, AAA
specifically states that it did not: (a) specifically consider other
methodologies for allocation of the OP Units, (b) address or conclude that
other methodologies for allocation of the OP Units to the Partnerships might
not have been more favorable to the Limited Partners in certain of the
Partnerships, (c) negotiate with the General Partners or Host, (d) participate
in establishing the terms of the Mergers, (e) provide an opinion as to the
terms and conditions of the Mergers other than those explicitly stated in the
Fairness Opinion, (f) make any independent review of the capital expenditure
estimates set forth in the Engineering Study, (g) with respect to the specific
reference to the allocation of the equity interest in the OP to be received by
the limited partners of each Partnership, AAA has assumed that the average
closing price on the NYSE of a Host REIT Common Share for the 20 trading days
after the Effective Date of the Mergers represents a fair price or (h) make
any estimates of the Partnerships' contingent liabilities.
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In connection with preparing the Fairness Opinion, AAA was not engaged to,
and consequently did not, prepare any written report or compendium of its
analysis for internal or external use beyond the analysis set forth in
Appendix B. AAA will not deliver any additional written opinion of the
analysis, other than to update the written opinion if requested by the
Operating Partnership.
Experience of AAA. AAA is the world's largest independent valuation
consulting firm and is regularly and continually engaged in the valuation of
commercial real estate and businesses and their securities in connection with
tender offers, mergers and acquisitions, recapitalizations and
reorganizations, divestitures, employee stock ownership plans, leveraged
buyout plans, private placements, limited partnerships, estate and corporate
matters, other financial advisory matters and other valuation purposes.
AAA was selected because of its experience in the valuation of businesses
and their securities in connection with tender offers, mergers and
acquisitions, recapitalizations and reorganizations, including transactions
involving hotel partnerships. In addition, Host and its affiliates have
previously engaged AAA to provide appraisals and fairness opinions in
connection with other transactions. The General Partners considered two other
firms for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partners selected AAA
based upon price and experience.
Summary of Materials Considered and Investigation Undertaken. As a basis for
rendering the Fairness Opinion, AAA has made such reviews, studies and
analyses as it deemed necessary and pertinent in order to provide it with a
reasonable basis for the Fairness Opinion, including, but not limited to, the
following: (i) reviewed the transaction documents and SEC reporting and/or
filing documents, including drafts of the Form S-4 for the Mergers; (ii)
provided the Market Value of each Hotel owned by each Partnership in a
separate short form appraisal report and each such report was reviewed and
certified by an MAI appraiser as to its preparation in accordance with the
requirements of the Standards of Professional Practice of the Appraisal
Institute and the Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation; as part of the Appraisals, AAA reviewed historical
operating statements, 1998 budget and year-to-date results, and other
financial information as it deemed necessary as a basis for the Fairness
Opinion and the Appraisals also considered market transactions of similar
lodging properties as appropriate as a basis for the Market Value of each
Hotel; (iii) reviewed the methodologies used by each of the General Partners
in their determination of the Exchange Value of each Partnership, including
the nature and amount of all adjustments to the Appraised Values in
determining such Exchange Values; AAA reviewed and tested for the fairness and
reasonableness of all adjustments as well as for consideration of all
adjustments deemed to be appropriate by AAA; (iv) reviewed the methodologies
used by each of the General Partners in their determination of the value of an
OP Unit and the allocation of the equity interest in the Operating Partnership
to be received by the partners of each Partnership, and AAA reviewed and
tested for the fairness and reasonableness of the methods and measurements
made by the General Partners; (v) reviewed the General Partners' determination
of the Liquidation Value of each Partnership, and AAA reviewed and tested for
the fairness and reasonableness of all adjustments proposed by the General
Partners, as well as for consideration of all adjustments deemed appropriate
by AAA; (vi) provided an estimate of the Continuation Value of each
Partnership based upon the estimated present value of expected benefits to be
received by each limited partner interest as though the Mergers did not occur
and each Partnership's assets were sold within a twelve year period; AAA, as
part of its analysis and review, determined appropriate rates of growth in
house profit or net operating income, as well as reviewed other key variables
affecting partnership cash flows and other economic/financial factors
affecting the Partnerships' expected operations and results; (vii) reviewed
the terms of the ground leases of the Hotels and the partnership agreement of
each Partnership; (viii) reviewed audited and unaudited historical income
statements, balance sheets and statements of sources and uses of funds of each
Partnership and Host and pro forma financial information for Host REIT; (ix)
reviewed audited and unaudited historical operating statements of each Hotel,
as well as current operating statements and budgets; (x) conducted real estate
valuation and financial due diligence with respect to the Partnerships and
their underlying assets, liabilities and equity; (xi) reviewed internal
Marriott International, Host and Partnership financial analyses and other
internally generated data for each Hotel; and (xii) discussed all of the
foregoing information, where appropriate, with management of Marriott
International, Host and the Partnerships and their respective employees.
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Assumptions. In rendering its opinion, AAA relied, without independent
verification, on the accuracy and completeness in all material respects of
certain relevant publicly available information and information provided to
AAA by the Host and the Hotels. AAA assumed that all information furnished by
Host, the Hotels and the Partnerships and their representatives, upon which
AAA relied, presented an accurate description in all material respects of the
current and prospective status of the Hotels and the Partnerships from an
operational and financial point of view. AAA also noted that the Fairness
Opinion was based upon financial, economic, market and other considerations as
they existed and could be evaluated on the date thereof.
Conclusions. AAA concluded that, based upon and subject to its analysis and
assumptions and limiting conditions, and as of the date of the Fairness
Opinion: (i) the Exchange Value and the methodologies and underlying
assumptions used to determine the Exchange Value, the Adjusted Appraised
Value, the Continuation Value and the Liquidation Value of each Partnership
(including, without limitation, the assumptions used to determine the various
adjustments to the Appraised Values of the Hotels) are fair and reasonable,
from a financial point of view, to the Limited Partners of each Partnership
and (ii) the methodologies used to determine the value of an OP Unit and the
allocation of the equity interest in the Operating Partnership to be received
by the limited partners of each Partnership are fair and reasonable to the
Limited Partners of each Partnership.
Summary of Methodology. AAA evaluated each Partnership's Hotel(s) based upon
the income capitalization approach and broadly applied the sales comparison
approach. Appraisers typically use up to three approaches in valuing real
property: the cost approach, the income capitalization approach and the sales
comparison approach. The type and age of a property, market conditions and the
quantity and quality of data affect the applicability of each approach in a
specific appraisal situation. Since the Hotels are viable, existing, ongoing
enterprises with an established market presence, work force and management
team, the cost approach was not considered by AAA in the Appraisals. The
income capitalization approach estimates a Hotel's capacity to produce income
through an analysis of the market, operating expenses and net income. Net
income may then be processed into a value through either (or a combination of)
two methods: direct capitalization or discounted cash flow analysis. The sales
comparison approach looks at similar properties which have recently sold or
are currently offered for sale in the market and are analyzed and compared
with the Hotel being valued. For further description of the methodology
employed by AAA in the Appraisals, see "Determination of Exchange Values and
Allocation of OP Units."
Compensation and Material Relationships. AAA has been paid a fee of $335,000
for its services as described herein, including the Appraisals and preparing
to deliver the Fairness Opinion. In addition, AAA will be reimbursed for all
reasonable out-of-pocket expenses, including legal fees, and will be
indemnified against certain liabilities, including certain liabilities under
the securities laws. The fee was negotiated between Host, the General Partners
and AAA. Payment of the fee to AAA is not dependent upon completion of the
Mergers. AAA has been previously engaged by Host and its affiliates to provide
appraisals, fairness opinions and solvency opinions in connection with other
transactions.
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THE MERGERS AND THE REIT CONVERSION
GENERAL
Limited Partners of each Partnership are being asked to approve the
acquisition of their Partnership by the Operating Partnership through the
merger of their Partnership with a Merger Partnership as part of the REIT
Conversion. In each Merger, the Participating Partnership will survive, and
each Limited Partner thereof will receive OP Units with a deemed value equal
to the Exchange Value of his Partnership Interests (or, if the Limited Partner
elects to tender such OP Units to the Operating Partnership, a Note in a
principal amount equal to the Note Election Amount of his Partnership
Interests). If the REIT Conversion, including the Mergers and the Blackstone
Acquisition, is consummated as contemplated, the Operating Partnership will
acquire and initially own, or have controlling interests in, approximately 120
full-service Hotels located throughout the United States and Canada,
containing approximately 57,500 rooms and operating primarily under the
Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names.
THE REIT CONVERSION
The transactions summarized below collectively constitute the REIT
Conversion. If the required approvals for the various transactions are
obtained and other conditions to the different steps in the REIT Conversion
are satisfied or waived, these transactions are expected to occur at various
times prior to the end of 1998 (or as soon thereafter as practicable). The
Mergers of the Participating Partnerships are expected to occur at the final
stage of the REIT Conversion.
. Contribution of Host's Lodging Assets to the Operating Partnership. As a
preliminary step, at various times during 1998, Host will contribute its
wholly owned full-service hotel assets, substantially all of its
interests in the Hotel Partnerships and its other assets (excluding its
senior living assets and the cash to be distributed to its shareholders)
to the Operating Partnership in exchange for (i) a number of OP Units
equal to the number of outstanding shares of common stock of Host at the
time of the REIT Conversion, (ii) preferred partnership interests in the
Operating Partnership corresponding to any shares of Host preferred
stock outstanding at the time of the REIT Conversion and (iii) the
assumption by the Operating Partnership of all liabilities of Host
(including past and future tax liabilities), other than liabilities of
SLC. Following these contributions, the Operating Partnership and its
subsidiaries will directly own all of Host's wholly owned hotels and all
of Host's interests in the Hotel Partnerships and Host's other assets
(excluding its senior living assets and the cash to be distributed to
its shareholders).
. Debt Refinancing. In August 1998, Host refinanced $1.55 billion of
outstanding public bonds through offers to purchase such debt securities
for cash and a concurrent solicitation of consents to amend the terms of
the debt securities to permit the transactions constituting the REIT
Conversion. Host obtained the funds for this Bond Refinancing primarily
from the issuance of new debt securities and the New Credit Facility.
See "Business and Properties--Indebtedness."
. Treatment of Convertible Preferred Securities. Prior to the Effective
Date, Host will seek the consent of holders of the $550 million of
outstanding Convertible Preferred Securities to the REIT Conversion. In
the REIT Conversion, the Operating Partnership will assume primary
liability for repayment of the convertible subordinated debentures of
Host underlying the Convertible Preferred Securities. As the successor
to Host, Host REIT also will be liable on the debentures and the
debentures will become convertible into Common Shares, but the Operating
Partnership will have primary responsibility for payment of the
debentures, including all costs of conversion. Upon conversion by a
Convertible Preferred Securities holder, the Operating Partnership will
acquire Common Shares from Host REIT in exchange for an equal number of
OP Units and distribute the Common Shares to the Convertible Preferred
Securities holder. As a result of the distribution of SLC common stock
and cash to Host REIT shareholders and the Blackstone Entities in
connection with the merger of Host into Host REIT, the conversion ratio
of the Convertible Preferred Securities will be adjusted pursuant to the
anti-dilution provisions of the debentures. See "Business and
Properties--Indebtedness."
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. The Mergers. On the Effective Date, each Participating Partnership will
merge with a Merger Partnership. The Participating Partnerships will be
the surviving entities of the Mergers and will continue in existence as
indirect subsidiaries of the Operating Partnership. In the Mergers, each
Limited Partner will receive a number of OP Units with a deemed value
equal to the Exchange Value of his respective Partnership Interests. If,
at the time of the vote on the Merger of his Partnership, a Limited
Partner elects to receive a Note in exchange for OP Units, such Limited
Partner will, upon receipt of his OP Units, tender such OP Units to the
Operating Partnership in exchange for a Note with a principal amount
equal to the Note Election Amount of his Partnership Interests. The
General Partners and their affiliates will also receive OP Units in
exchange for their interests in the Partnerships and such entities will
continue to be wholly owned subsidiaries of Host REIT. Partnerships that
do not participate in a Merger will continue as separate partnerships,
but the Operating Partnership likely would contribute some or all of the
interests in certain of these Partnerships (such as Atlanta Marquis,
Desert Springs, Hanover, MHP and MHP2) that it receives from Host and
its subsidiaries to a Non-Controlled Subsidiary.
. Restructuring of the Private Partnerships. The Operating Partnership
will acquire the partnership interests from unaffiliated partners of
certain Private Partnerships in exchange for OP Units and, accordingly,
will own all of the interests in those Private Partnerships. For those
Private Partnerships in which the unaffiliated partners have not elected
to exchange their interests for OP Units, (i) the Operating Partnership
will be a partner in the partnership if the unaffiliated partners
consent to a Lease of the partnership's Hotel(s) to a Lessee or (ii) if
the requisite consents to enter into a Lease are not obtained, the
Operating Partnership may transfer its interest in such partnership to a
Non-Controlled Subsidiary.
. The Blackstone Acquisition. On the Effective Date, the Operating
Partnership will acquire from the Blackstone Entities ownership of, or
controlling interests in, twelve hotels and two mortgage loans, one
secured by one of the acquired hotels and one secured by an additional
hotel. In addition, Host will acquire a 25% interest in the Swissotel
management company from the Blackstone Entities, which Host will
transfer to SLC. In exchange for the assets contributed by the
Blackstone Entities, the Operating Partnership will issue approximately
43.7 million OP Units, assume or repay debt and make cash payments
totaling approximately $862 million and distribute up to 18% of the
shares of SLC common stock to the Blackstone Entities. Fifty percent of
the OP Units issued in the Blackstone Acquisition will become redeemable
on July 1, 1999, an additional 25% will become redeemable on October 1,
1999, and the balance will become redeemable on January 1, 2000. Holders
of OP Units issuable in the Blackstone Acquisition will have
registration rights under a shelf registration statement with respect to
Host REIT Common Shares received in connection with the exercise of
their redemption rights.
In connection with the Blackstone Acquisition, Host agreed to cause a
person designated by Blackstone Real Estate Acquisitions L.L.C.
("Blackstone") to be appointed to serve as a director of Host (or a
trustee of Host REIT following the REIT Conversion) and to continue to
include a person designated by Blackstone in the slate of directors or
trustees nominated by the board of directors or trustees for so long as
Blackstone and its affiliates own at least 5% of the outstanding OP
Units. Mr. Schreiber has been appointed to be the initial Blackstone
designee. If the Blackstone Acquisition does not close, the Blackstone
designee will resign. Host also agreed that, if more than two directors
of SLC also are directors of Host REIT, Blackstone will be entitled to
designate a director of SLC. The Operating Partnership does not expect
that there will be any common directors of SLC and Host REIT.
Host also agreed to certain limitations on sales of the properties
acquired in the Blackstone Acquisition lasting for five years after the
REIT Conversion for 50% of the properties and for an additional five
years for the remaining properties.
. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold
various assets (not exceeding 20% of the assets of the Operating
Partnership) contributed by Host and its subsidiaries to the Operating
Partnership, the direct ownership of which by the Operating Partnership
could jeopardize Host REIT's status as a REIT. These assets
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primarily will consist of partnership or other interests in hotels which
are not leased, certain furniture, fixtures and equipment used in the
Hotels and certain international hotels in which Host owns interests. In
exchange for the contribution of these assets to the Non-Controlled
Subsidiaries, the Operating Partnership will receive nonvoting common
stock representing 95% of the total economic interests of the Non-
Controlled Subsidiaries. In addition, the Operating Partnership and,
prior to the Mergers (assuming they participate in the Mergers), Atlanta
Marquis, Hanover, MHP and PHLP, will sell to a NonControlled Subsidiary
an estimated $200 million in value of personal property associated with
certain Hotels for notes or cash that has been contributed or loaned to
the Non-Controlled Subsidiary by the Operating Partnership, or a
combination thereof. The Operating Partnership could not lease this
personal property to the Lessees without potentially jeopardizing Host
REIT's qualification as a REIT. The Non-Controlled Subsidiary will lease
such personal property to the applicable Lessees. The Incentive
Compensation Trust, a Delaware statutory business trust, will acquire
all of the voting common stock representing the remaining 5% of the
total economic interests, and 100% of the control, of each Non-
Controlled Subsidiary. The income beneficiaries of the Incentive
Compensation Trust will be employees of Host REIT eligible to
participate in the Comprehensive Stock Incentive Plan (excluding
Trustees of Host REIT and certain other highly compensated employees).
Upon termination of the Incentive Compensation Trust, the residual
assets, if any, are to be distributed to a charitable organization
designated in its declaration of trust.
. Leases of Hotels. The Operating Partnership, its subsidiaries and its
controlled partnerships, including the Partnerships, will lease
virtually all of their Hotels to the Lessees pursuant to the Leases. See
"Business and Properties--The Leases." The leased Hotels will be
operated by the Lessees under their existing brand names pursuant to
their existing Management Agreements, which will be assigned to the
Lessees for the terms of the applicable Leases but under which the
Operating Partnership will remain obligated. See "Business and
Properties--The Management Agreements."
. Host REIT Merger and Shareholder Distribution. Host will merge into Host
REIT upon obtaining shareholder approval of the merger. Pursuant to the
merger agreement, Host shareholders will receive, for each share of Host
common stock, one Host REIT Common Share. Immediately following the
merger, each shareholder of Host REIT will receive, for each common
share of Host REIT, a taxable distribution consisting of a fraction of a
share of common stock of SLC and cash or securities in an amount to be
determined. The aggregate value of the SLC common stock and cash or
securities to be distributed to Host REIT shareholders is currently
estimated to be approximately $400 to $550 million (approximately $2.00
to $2.75 per share). The actual amount of the distribution will be based
upon the estimated amount of accumulated earnings and profits of Host as
of the last day of its taxable year ending on or immediately following
the Effective Date. In addition, under the terms of the Blackstone
Acquisition the Blackstone Entities are entitled to receive a pro-rata
distribution to the extent they did not elect to receive additional OP
Units in lieu thereof. The distribution to the Blackstone Entities will
approximate $80 million to $115 million if the REIT Conversion is
consummated. Following the distribution, SLC's principal assets will
include the senior living assets of Host, which are expected to consist
of 31 retirement communities, a 25% interest in the Swissotel management
company acquired from the Blackstone Entities and controlling interests
in the Lessees.
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Following the REIT Conversion, assuming the Full Participation Scenario, the
organizational structure of Host REIT will be as follows:
[FLOW CHART APPEARS HERE]
- --------
(1) Immediately following the merger of Host into Host REIT and the
distribution of SLC common stock to Host REIT's shareholders and the
Blackstone Entities, the shareholders of SLC will consist of the
shareholders of Host REIT and the Blackstone Entities. The common ownership
of the two public companies, however, will diverge over time.
(2) Represents Limited Partners and others who retain OP Units and do not
receive Notes; excludes Host and its subsidiaries.
(3) The Operating Partnership will own all or substantially all of the equity
interests in the Participating Partnerships, certain Private Partnerships
and other Host subsidiaries that own Hotels, both directly and through
other direct or indirect, wholly owned subsidiaries of the Operating
Partnership or Host REIT. Host will contribute its partial equity interests
in the Non-Participating Partnerships and those Private Partnerships whose
partners have not elected to exchange their interests for OP Units to the
Operating Partnership, and the Operating Partnership will either hold such
partial interests or contribute them to the Non-Controlled Subsidiaries.
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THE MERGERS
Issuance of OP Units. If Limited Partners holding the requisite percentage
of outstanding Partnership Interests in a Partnership vote to approve a
Merger, then such Participating Partnership will merge with a Merger
Partnership, with the Participating Partnership being the surviving entity.
Each Limited Partner of the Participating Partnership will receive OP Units
with an aggregate deemed value equal to the Exchange Value of such Limited
Partner's Partnership Interests. The General Partners and their affiliates
that own limited partner interests in the Partnerships also will receive OP
Units in exchange for their general and limited partner interests in the
Partnerships. The price attributed to an OP Unit, the Exchange Value of each
Partnership and the allocation of OP Units will be established in the manner
described in detail under "Determination of Exchange Values and Allocation of
OP Units."
Right to Exchange OP Units for Notes. At the time they vote on the Merger of
their Partnership, Limited Partners can elect to tender the OP Units they will
receive in the Merger (if their Partnership approves the Merger) to the
Operating Partnership in exchange for a Note. The principal amount of the Note
received by a Limited Partner will be equal to the Note Election Amount of his
Partnership Interest, which will be less than the value of the OP Units that
such Limited Partner otherwise would have received (because the Note Election
Amount will be less than the Exchange Value for each Partnership). Holders of
Notes will receive interest payments on a semi-annual basis on June 15 and
December 15 of each year. Such election will, however, cause a Limited Partner
to recognize gain at the time he receives the Note. See "Description of the
Notes" and "Federal Income Tax Consequences--Tax Treatment of Limited Partners
Who Exercise Their Right to Make the Note Election."
No fractional OP Units will be issued by the Operating Partnership in the
Mergers. In lieu thereof, fractional amounts less than or equal to 0.50 of a
OP Unit will be rounded down to the next whole number of OP Units and
fractional amounts greater than 0.50 will be rounded up to the next whole
number of OP Units.
For a description of the OP Units, including restrictions on transfer and
the Unit Redemption Right, see "Description of OP Units."
1998 Distributions. Limited Partners at the Effective Date of the Mergers
who retain OP Units will receive cash distributions from their respective
Partnerships for all of 1998 and, if the Mergers do not occur in 1998, any
portion of 1999 prior to the Mergers for which they do not receive a cash
distribution from the Operating Partnership. Cash distributions will be made
by each Partnership in accordance with its partnership agreement on or before
June 1, 1999 in respect of 1998 operations and, if the Mergers do not occur
prior to January 1, 1999, within 90 days after the Effective Date of the
Mergers in respect of any 1999 operations. Limited Partners at the Effective
Date of the Mergers who receive a Note in exchange for OP Units will
participate in the same distributions from the Partnerships as Limited
Partners who retain OP Units but will not receive any distributions from the
Operating Partnership with respect to periods after the Effective Date of the
Mergers.
Ownership Interest of Host in the Partnerships. The table below sets forth
the current ownership interests of Host in the Partnerships. Following the
REIT Conversion, assuming all of the Partnerships participate in the Mergers,
the Partnerships will be wholly owned by the Company.
<TABLE>
<CAPTION>
PARTNERSHIP LIMITED PARTNER INTERESTS GENERAL PARTNER INTERESTS
- ----------- ------------------------- -------------------------
<S> <C> <C>
Atlanta Marquis............. Class A 0.28% 0.42%
Class B 100.0
Chicago Suites.............. 0 1
Desert Springs.............. 0 1
Hanover..................... 47.62 5
MDAH........................ 0.48 1
MHP......................... 48.33 1
MHP2........................ 52.62 1
PHLP........................ 0.06 1
</TABLE>
Vote Required for Merger. In the case of Atlanta Marquis, a majority of
Class A limited partner interests must vote to approve the Merger. Host and
its affiliates own 0.28% of the outstanding Class A limited partner
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interests. In the case of each of Chicago Suites and PHLP, the approval
required for each Merger is a majority of the outstanding limited partner
interests in such Partnership. There are no restrictions on the ability of
Host to vote its limited partner interests; however, Host owns no limited
partner interests in Chicago Suites and only 0.06% of the outstanding limited
partner interests in PHLP. In MDAH, a majority of limited partner interests
must vote to approve the Merger. Host is not entitled to vote its 0.48%
limited partner interest in MDAH on the Merger. In the case of Desert Springs,
Hanover, MHP and MHP2, a majority of the limited partner interests held by
Limited Partners must be present in person or by proxy for the vote to be
recognized and a majority of the limited partner interests actually voting on
the Merger must vote for the Merger to approve it. Host is required to vote
its limited partner interests in Hanover, MHP and MHP2 in the same manner as
the majority of the other limited partner interests actually voting on the
matter vote. Host or its subsidiaries own 47.62%, 48.33% and 52.62% of the
limited partner interests in Hanover, MHP and MHP2, respectively. Host does
not own any limited partner interests in Desert Springs. The approval of the
Merger by the requisite percentage of limited partner interests of a
Partnership will cause the Partnership to participate in the Merger and will
bind all Limited Partners of such Partnership, including Limited Partners who
voted against or abstained from voting with respect to the Merger. See "Voting
Procedures--Required Vote and Other Conditions."
Amendments to Partnership Agreements. In order to consummate each Merger as
currently proposed, there are a number of amendments required to be made to
the partnership agreements of the Partnerships. A vote in favor of a Merger
will be deemed to constitute consent to such amendments. The effectiveness of
such amendments will be conditioned upon the Partnership's participation in a
Merger. The required amendments include (i) permitting the Partnership to
enter into the Leases with the Lessees; (ii) reducing to one the number of
appraisals of the fair market value of a Partnership's Hotel(s) that the
Partnership must provide to the Limited Partners before the General Partner
can cause a Partnership to sell its assets to the General Partner or an
affiliate; and (iii) other amendments required to delete obsolete references,
reflect the passage of time or allow the transactions constituting the Mergers
or otherwise necessary or desirable to consummate the Mergers and the REIT
Conversion.
No Partner Liability. Each Partnership will make certain representations and
warranties to the Operating Partnership regarding itself and its Hotels in
connection with its Merger. The merger agreements in which such
representations and warranties are contained will provide that the Operating
Partnership will have no recourse against any of the partners in the
Participating Partnerships in the event the Operating Partnership suffers a
loss as a result of any inaccuracies in such representations and warranties.
Closing Adjustments. The General Partners currently expect that the Adjusted
Appraised Value of each Partnership will be greater than either the
Continuation Value or Liquidation Value of each Partnership (except for
Atlanta Marquis, MHP and PHLP, where the Continuation Value is expected to be
the greatest of the three values), which means that the Exchange Values of
such Partnerships (other than Atlanta Marquis, MHP and PHLP) will be equal to
their Adjusted Appraised Values. The Adjusted Appraised Values of the
Partnerships may increase or decrease as a result of adjustments made prior to
the Effective Date to reflect (i) the amount of lender and capital expenditure
reserves and the amount of deferred management fees, (ii) any amounts actually
expended by a Partnership after the Initial Valuation Date to perform deferred
maintenance previously used in determining the estimated Exchange Value of
such Partnership and (iii) any changes in the Partnership's other reserves,
such as for litigation expenses and indemnification costs and for any revised
estimates of transfer and recordation taxes and fees. See "Determination of
Exchange Values and Allocation of OP Units."
Effective Time of the Mergers. The Effective Time will be after the merger
of Host into Host REIT becomes effective (but within one day thereof), which
is expected to occur during the final stage of the REIT Conversion. This is
expected to occur on or about December 30, 1998, subject to satisfaction or
waiver of the conditions to the REIT Conversion. There is no assurance that
the Effective Time will occur before January 1, 1999, and if the Effective
Time occurs on or after January 1, 1999, the effectiveness of Host REIT's
election of REIT status could be delayed until January 1, 2000, which would
result in Host REIT continuing to pay corporate-level income taxes in 1999 and
could cause the Blackstone Acquisition not to be consummated.
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CONDITIONS TO CONSUMMATION OF THE MERGERS
Participation by each Partnership in a Merger is subject to the satisfaction
or waiver of certain conditions, including, among other things, consent of (i)
Limited Partners holding the requisite percentage of Partnership Interests in
such Partnership (as described above) and (ii) certain lenders and other third
parties. Each Merger also is contingent upon the consummation of the remainder
of the required portions of the REIT Conversion.
CONDITIONS TO CONSUMMATION OF THE REIT CONVERSION
The consummation of the REIT Conversion is subject to the satisfaction or
waiver of a number of conditions, including the conditions set forth below.
. Host Shareholder Approval. Shareholders owning 66 2/3% of the
outstanding shares of Host's common stock shall have approved the merger
of Host into Host REIT.
. REIT Qualification. Host's Board of Directors shall have determined,
based upon the advice of counsel, that Host REIT can elect to be treated
as a REIT for federal income tax purposes effective no later than the
first full taxable year commencing after the REIT Conversion.
. NYSE Listing. The Common Shares shall have been approved for listing on
the NYSE.
. Consents of Partners of Other Partnerships. Host shall have received
consents from outside partners in Private Partnerships to a lease of the
Hotels owned by such Private Partnerships to the extent required to
enable Host REIT to qualify as a REIT.
. Third-Party Consents. Host shall have received all required third-party
consents to the REIT Conversion, including consents of lenders, Marriott
International and certain of its subsidiaries and ground lessors, and
consents to transfer material operating licenses and permits and the
Management Agreements.
. No Adverse Tax Legislation. The United States Congress shall not have
enacted legislation, or proposed legislation with a reasonable
possibility of being enacted, that would have the effect of
(i) substantially impairing the ability of Host REIT to qualify as a
REIT or the Operating Partnership to qualify as a partnership, (ii)
substantially increasing the federal tax liabilities of Host REIT
resulting from the REIT Conversion or (iii) substantially reducing the
expected benefits to Host REIT resulting from the REIT Conversion. The
determination that this condition has been satisfied will be made by
Host, in its discretion.
RIGHT TO EXCLUDE PARTNERSHIPS
The Operating Partnership has reserved the right to exclude any Partnership
from participation in the REIT Conversion (even if the requisite percentage of
Limited Partners has voted to approve the Merger of the Partnership and each
of the other conditions to such Merger has been satisfied or waived) if the
Operating Partnership determines, in its sole discretion, that such exclusion
is in the best interests of the Operating Partnership. Any such Partnership
that is so excluded shall be treated as a Non-Participating Partnership, as
described below, and its Limited Partners will continue to hold their
respective Partnership Interests.
EXTENSION, AMENDMENT AND TERMINATION OF THE MERGERS
The Operating Partnership and the General Partners reserve the right,
subject to limitations under applicable law, to (i) amend the terms of any
Merger or the REIT Conversion by giving written notice of such amendment to
the Limited Partners, (ii) extend the Solicitation Period or delay
consummation of any Merger, (iii) terminate the solicitation of consents
pursuant to this Consent Solicitation as to any or all of the Partnerships and
(iv) terminate the REIT Conversion or any Merger whether or not all of the
conditions thereto have been satisfied or waived. If the terms of any Merger
or the REIT Conversion are amended in a manner determined by the Operating
Partnership and the General Partners to constitute a material adverse change
with respect to any Limited Partner, they will promptly disclose such
amendment in a manner reasonably calculated to inform the
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applicable Limited Partners of such amendment and will extend the Solicitation
Period for an appropriate time period if the Solicitation Period would
otherwise expire during such extension period.
If an event occurs or any matter is brought to the attention of the
Operating Partnership that, in its judgment, materially affects, whether
adversely or not, one or more of the Partnerships, any Merger or the REIT
Conversion, the Operating Partnership reserves the right (but does not have
the obligation) to terminate the solicitation of consents with respect to the
Merger of any Partnership, decide not to consummate the REIT Conversion,
modify the terms of REIT Conversion or any Merger or take such other actions
as may be in its best interests.
EFFECT OF REIT CONVERSION ON NON-PARTICIPATING PARTNERSHIPS
Each Non-Participating Partnership will continue to operate as a separate
legal entity with its own assets and liabilities and with its current Limited
Partners. There will be no change in its investment objectives, policies or
restrictions or the fees or distributions payable to the applicable General
Partner or Manager. Each Non-Participating Partnership will remain subject to
the terms of its current partnership agreement. Host may contribute some or
all of its ownership interest in a Non-Participating Partnership to a taxable
Non-Controlled Subsidiary.
EXPENSES
The Operating Partnership and the Partnerships will incur substantial costs
and expenses in connection with structuring and consummating the Mergers,
including legal fees, accounting fees and other costs and expenses associated
with these transactions.
The Merger Expenses, whether or not the Mergers are approved by the
Partnerships, will be borne as follows: If some or all of the Mergers are
consummated, the Merger Expenses of the Participating Partnerships would be
borne by the Operating Partnership. Transfer and recordation taxes and fees
incurred in connection with any Merger will be paid by the Operating
Partnership, but the amount of such taxes will be taken into account in
determining the Exchange Value for the applicable Partnership (except Atlanta
Marquis, MHP and PHLP, which have an Exchange Value equal to their respective
estimated Continuation Values). If a Merger is rejected, then the General
Partner of such Partnership would pay such Partnership's share of the Merger
Expenses. The REIT Conversion Expenses, other than the Merger Expenses, will
be borne by Host and the Operating Partnership.
Assuming the Full Participation Scenario, the expenses of the Mergers are
estimated to be as follows:
MERGER EXPENSES
<TABLE>
<S> <C>
Information Agent........................................................ $
Printing, postage and brochures..........................................
Travel, public relations, graphics, etc..................................
Transfer fees, taxes and title...........................................
Legal fees and expenses..................................................
Appraisals (including fees and expenses).................................
Fairness Opinion (including fees and expenses)...........................
Environmental and Engineering (including fees and expenses)..............
Accounting fees and expenses.............................................
Miscellaneous............................................................
-----
Total Merger Expenses.................................................. $
=====
</TABLE>
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ACCOUNTING TREATMENT
The contribution by Host of its assets (other than its senior living assets,
the cash to be distributed to its shareholders and certain other assets) to
the Operating Partnership in exchange for OP Units and the subsequent
contributions by the Operating Partnership of certain of such assets to the
Non-Controlled Subsidiaries will be accounted for at Host's historical
(carryover) basis. The acquisition of the Hotel Partnerships in exchange for
OP Units and the Blackstone Acquisition will be accounted for as purchases.
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BUSINESS AND PROPERTIES
BUSINESS OF THE OPERATING PARTNERSHIP
Host REIT and the Operating Partnership have been formed primarily to
continue, in an UPREIT structure, the hotel real estate ownership business
currently conducted by Host. The primary business objectives of Host REIT and
the Operating Partnership will be to (i) achieve long-term sustainable growth
in Funds From Operations per OP Unit or Common Share, (ii) increase asset
values by improving and expanding the initial Hotels, as appropriate, (iii)
acquire additional existing and newly developed upscale and luxury full-
service hotels in targeted markets (primarily focusing on downtown hotels in
core business districts in major metropolitan markets and select airport and
resort /convention locations), (iv) develop and construct upscale and luxury
full-service hotels and (v) potentially pursue other real estate investments.
Host REIT will operate as a self-managed and self-administered REIT and its
operations will be conducted solely through the Operating Partnership and its
subsidiaries. Following the REIT Conversion, the Hotels will consist of
approximately 120 hotels, representing approximately 57,500 rooms, located
throughout the United States and Canada.
The Hotels will be generally operated under the Marriott, Ritz-Carlton, Four
Seasons, Swissotel and Hyatt brand names and managed by subsidiaries of
Marriott International and other companies. These brand names are among the
most respected and widely recognized brand names in the lodging industry.
Subsequent to the REIT Conversion, the Hotels will be leased by the Operating
Partnership to the Lessees and will be managed on behalf of the Lessees by
subsidiaries of Marriott International and other companies (the "Managers").
Host REIT will be the sole general partner of the Operating Partnership and
will manage all aspects of the business of the Operating Partnership. This
will include decisions with respect to (i) sales and purchases of hotels, (ii)
the financing of the hotels, (iii) the leasing of the hotels and (iv) capital
expenditures for the hotels (subject to the terms of the leases and the
Management Agreements). Host REIT will be managed by its Board of Trustees and
will have no employees who are not also employees of the Operating
Partnership.
Under current federal income tax law, REITs are not permitted to derive
revenues directly from the operations of hotels. Therefore, the Operating
Partnership will lease the Hotels, through its subsidiaries, to the Lessees
under the Leases. See "--The Leases" below. The Lessees will pay rent to the
Operating Partnership generally equal to a specified Base Rent plus, to the
extent it would exceed Base Rent, Percentage Rent. The Lessees will operate
the Hotels pursuant to the Management Agreements with the Managers. Each of
the Management Agreements provides for certain base and incentive management
fees, plus reimbursement of certain costs, as further described below. See "--
The Management Agreements." Such fees will be the obligation of the Lessees
and not the Operating Partnership (although the obligation to pay such fees
could adversely affect the ability of the Lessees to pay the required rent to
the Operating Partnership).
The Leases, through the Percentage Rent provisions, are designed to allow
the Operating Partnership to participate in any growth in room sales at the
Hotels above specified levels, which management expects can be achieved
through increases in room rates and occupancies. Although the economic trends
affecting the hotel industry will be the major factor in generating growth in
lease revenues, the abilities of the Lessees and the Managers will also have a
material impact on future sales growth.
In addition to external growth generated by new acquisitions, the Operating
Partnership intends to carefully and periodically review its portfolio to
identify opportunities to selectively enhance existing assets to improve
operating performance. The Operating Partnership's Leases will provide the
Operating Partnership with the right to approve and finance major capital
improvements.
GENERAL
The Company's primary focus is on the acquisition of upscale and luxury
full-service hotel lodging properties. Since the beginning of 1994 through the
date hereof, the Company has acquired 76 full-service hotels representing more
than 35,000 rooms for an aggregate purchase price of approximately $3.6
billion. Based upon
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data provided by Smith Travel Research, the Company believes that its full-
service hotels outperform the industry's average occupancy rate by a
significant margin and averaged 78.4% occupancy for 1997 compared to a 71.1%
average occupancy for competing hotels in the upscale and luxury full-service
segment of the lodging industry, the segment which is most representative of
the Company's full-service hotels.
The upscale and luxury full-service segments of the lodging industry are
benefiting from a favorable supply and demand relationship in the United
States, especially in the principal sub-markets in which the Company operates,
considering hotels of similar size and quality. Management believes that
demand increases have primarily resulted from a strong domestic economic
environment and a corresponding increase in business travel. In spite of
increased demand for rooms, the room supply growth rate in the full-service
segment has not similarly increased. Management believes that this slower
increase in the supply growth rate in the full-service segment is attributable
to many factors, including (i) the limited availability of attractive building
sites for full-service hotels, (ii) the lack of available financing for new
full-service hotel construction and (iii) the availability of existing full-
service properties for sale at a discount to their replacement cost. The
relatively high occupancy rates of the Company's hotels, along with increased
demand for full-service hotel rooms, have allowed the Managers of the
Company's hotels to increase average daily room rates by selectively raising
room rates and by replacing certain discounted group business with higher-rate
group and transient business. As a result, on a comparable basis, room revenue
per available room ("REVPAR") for the Company's full-service properties
increased approximately 12.6% in 1997. The Company expects this supply/demand
imbalance in the upscale and luxury full-service segments to continue, which
should result in improved REVPAR at its hotel properties in the near term;
however, there can be no assurance that such supply/demand imbalance will
continue or that REVPAR will continue to improve.
BUSINESS OBJECTIVES
The Operating Partnership's primary business objective is to increase its
Funds from Operations per OP Unit and cash flow and enhance its value by:
. Acquiring additional existing upscale and luxury full-service hotels,
including Marriott and Ritz-Carlton hotels and other hotels operated by
leading management companies such as Four Seasons, Hyatt and Swissotel,
which satisfy the Operating Partnership's investment criteria, including
entering into joint ventures when the Operating Partnership believes its
return on investment will be maximized by doing so.
. Developing new upscale and luxury full-service hotels, including
Marriott and Ritz-Carlton hotels and other hotels operated by leading
management companies such as Four Seasons, Hyatt and Swissotel, which
satisfy the Operating Partnership's investment criteria, employing
transaction structures which mitigate risk to the Operating Partnership.
. Participating in the growth in sales for each of the hotels through
leases which provide for the payment of rent based upon the lessees'
gross hotel sales in excess of specified thresholds.
. Enhancing existing hotel operations by completing selective capital
improvements which are designed to increase gross hotel sales.
BUSINESS STRATEGY
The Company's primary business strategy is to continue to focus on
maximizing the profitability of its existing full-service hotel portfolio and
acquiring and, in limited cases, constructing, additional high quality, full-
service hotel properties, including controlling interests in joint ventures,
partnerships or other entities holding such hotel properties. Although
competition for acquisitions has increased, the Company believes that the
upscale and luxury full-service segments of the market offer opportunities to
acquire assets at attractive multiples of cash flow and at discounts to
replacement value, including underperforming hotels which can be improved by
conversion to the Marriott or Ritz-Carlton brands. The Company believes that
the upscale and luxury full-service segments are very promising because:
. There is a limited supply of new upscale and luxury full-service hotel
rooms currently under construction in the sub-markets in which the
Company operates. According to Smith Travel Research,
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from 1988 to 1991, upscale and luxury full-service room supply for the
Company's competitive set increased an average of approximately 4%
annually which resulted in an oversupply of rooms in the industry.
However, this growth slowed to an average of approximately 1% from 1992
through 1997. Furthermore, the lead time from conception to completion
of construction of a full-service hotel is generally three to five years
or more in the markets in which the Company is principally pursuing
acquisitions, which management believes will contribute to the continued
low growth of room supply relative to the growth of room demand in the
upscale and luxury full-service segments through 2000.
. Many desirable hotel properties continue to be held by inadvertent
owners such as banks, insurance companies and other financial
institutions, both domestic and international, which are motivated and
willing sellers. In recent years, the Company has acquired a number of
properties from inadvertent owners at significant discounts to
replacement cost, including luxury hotels operating under the Ritz-
Carlton brand. While in the Company's experience to date, these sellers
have been primarily U.S. financial organizations, the Company believes
that numerous international financial institutions are also inadvertent
owners of U.S. lodging properties and have only recently begun to
dispose of such properties. The Company expects that there will be
increased opportunities to acquire lodging properties from international
financial institutions and expects to dedicate significant resources to
aggressively pursue these opportunities.
. The Company believes that there are numerous opportunities to improve
the performance of acquired hotels by replacing the existing hotel
manager with Marriott International and converting the hotel to the
Marriott brand. Based upon data provided by Smith Travel Research, the
Company believes that Marriott-flagged properties have consistently
outperformed the industry. Demonstrating the strength of the Marriott
brand name, the average occupancy rate for the Company's comparable
full-service properties was 79.4%, compared to the average occupancy
rate of 71.1% for competing upscale and luxury full-service hotels. In
addition, the Company's comparable properties generated a 29% REVPAR
premium over its competitive set. Accordingly, management anticipates
that any additional full-service properties acquired by the Company in
the future and converted from other brands to the Marriott brand should
achieve higher occupancy rates and average room rates than has
previously been the case for those properties as the properties begin to
benefit from Marriott's brand name recognition, reservation system and
group sales organization. The Company intends to pursue additional full-
service hotel acquisitions, some of which may be conversion
opportunities. Sixteen of the Company's 76 acquired full-service hotels
from the beginning of 1994 through the date hereof were converted to the
Marriott brand following their acquisition.
. The Company intends to increase its pool of potential acquisition
candidates by considering acquisitions of select non-Marriott and non-
Ritz-Carlton hotels that offer long-term growth potential and are
consistent with the overall quality of its current portfolio. The
Company will focus on upscale and luxury full-service properties in
difficult to duplicate locations with high barriers to entry, such as
hotels located in downtown, airport and resort/convention locations,
which are operated by quality managers. In April 1998, the Company
reached a definitive agreement with the Blackstone Entities to acquire
interests in twelve upscale and luxury full-service hotels and a
mortgage loan secured by a thirteenth hotel in the U.S. and certain
other assets in a transaction valued at the time of the agreement at
approximately $1.735 billion, including the assumption of debt. The
Company expects to pay approximately $862 million in cash and assumed
debt, issue approximately 43.7 million OP Units and distribute up to 18%
of the shares of SLC common stock to the Blackstone Entities in exchange
for the assets received from the Blackstone Entities. The Blackstone
portfolio consists of two Ritz-Carltons, three Four Seasons (including
one in which the Operating Partnership's only interest will be a
mortgage loan), one Grand Hyatt, three Hyatt Regencies and four
Swissotel properties. See "--Blackstone Acquisition."
The Company believes it is well qualified to pursue its acquisition and
development strategy. Management has extensive experience in acquiring and
financing lodging properties and believes its industry knowledge,
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relationships and access to market information provide a competitive advantage
with respect to identifying, evaluating and acquiring hotel assets.
During 1997, the Company acquired, or purchased controlling interests in, 17
full-service hotels, containing 8,624 rooms, for an aggregate purchase price
of approximately $765 million (including the assumption of approximately $418
million of debt). The Company also completed the acquisition of the 504-room
New York Marriott Financial Center, following the acquisition of the mortgage
on the hotel for $101 million in late 1996.
The Company holds minority interests and serves as a general partner or
limited partner in various partnerships that own, as of the date hereof, an
aggregate of 240 hotel properties, 20 of which are full-service properties,
managed or franchised by Marriott International. In 1997, the Company
acquired, or obtained controlling interests in, five affiliated partnerships,
adding 10 hotels to its portfolio. In January, the Company acquired a
controlling interest in MHP. MHP owns the 1,503-room Marriott Orlando World
Center and a 50.5% interest in the 624-room Marriott Harbor Beach Resort. In
April, the Company acquired a controlling interest in the 353-room Hanover
Marriott. In the fourth quarter, the Company acquired the Chesapeake Hotel
Limited Partnership ("CHLP"). CHLP owns the 430-room Boston Marriott Newton;
the 681-room Chicago Marriott O'Hare; the 595-room Denver Marriott Southeast;
the 588-room Key Bridge Marriott in Virginia; the 479-room Minnesota Airport
Marriott; and the 221-room Saddle Brook Marriott in New Jersey. In December
1997, the Company obtained a controlling interest in the partnership that owns
the 884-room Marriott's Desert Springs Resort and Spa in California.
In 1998, the Company acquired a controlling interest in the partnership that
owns the Atlanta Marriott Marquis, containing 1,671 rooms, for approximately
$239 million, including the assumption of approximately $164 million of
mortgage debt. The Company also acquired a controlling interest in a
partnership that owns three full-service hotels, containing a total of 1,029
rooms, for approximately $50 million and the outstanding interest in the 289-
room Park Ridge Marriott in New Jersey for $24 million. More recently, the
Company acquired the 281-room Ritz-Carlton, Phoenix for $75 million, the 397-
room Ritz-Carlton in Tysons Corner, Virginia for $96 million and the 487-room
Torrance Marriott for $52 million. The Company is continually engaged in
discussions with respect to other potential acquisition properties.
In addition to investments in partnerships in which it already held minority
interests, the Company has been successful in adding properties to its
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). During 1997, the Company acquired interests in five such
partnerships which owned five full-service hotels, including the 197-room
Waterford Hotel in Oklahoma City, Oklahoma; the 404-room Norfolk Waterside
Marriott in Norfolk, Virginia; the 380-room Hartford/Farmington Marriott near
Farmington, Connecticut; the 380-room former Manhattan Beach Radisson Plaza in
Manhattan Beach, California; and the 299-room Ontario Airport Marriott in
Ontario, California. The Waterford Hotel and the Manhattan Beach Radisson
Plaza have been converted to the Marriott brand. As discussed above, in 1998,
the Company acquired a controlling interest in a partnership that owns three
hotels: the 359-room Albany Marriott in New York; the 350-room San Diego
Marriott Mission Valley in California; and the 320-room Minneapolis Marriott
Southwest in Minnesota. The Company has the financial flexibility and, due to
its existing partnership investment portfolio, the administrative
infrastructure in place to accommodate such arrangements. The Company views
this ability as a competitive advantage and expects to enter into similar
arrangements to acquire additional properties in the future.
The Company believes there is a significant opportunity to acquire
additional Ritz-Carlton hotels due to the Company's relationship with Marriott
International and due to the number of Ritz-Carlton brand hotels currently
owned by inadvertent owners. The Company also intends to purchase upscale and
luxury full-service hotels with the intention of converting them to the Ritz-
Carlton brand.
The Company currently owns six international properties, with 2,550 rooms,
located in Canada and Mexico. The overbuilding and economic stress currently
being experienced in some European and Pacific Rim countries may eventually
lead to additional international acquisition opportunities. The Company will
acquire international
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properties only when such acquisitions achieve satisfactory returns after
adjustments for currency and country risks.
In addition to acquisitions, the Company plans to selectively develop new
upscale and luxury full-service hotels in major urban markets and
convention/resort locations with strong growth prospects, unique or difficult
to duplicate sites, high barriers to entry for other new hotels and limited
new supply. The Company intends to target only development projects that show
promise of providing financial returns that represent a premium to
acquisitions. In 1997, the Company announced that it will develop the 717-room
Tampa Convention Center Marriott for $104 million, including a $16 million
subsidy provided by the City of Tampa.
The Company may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to the Company as the success of the market is generally
known and development time is significantly shorter than new construction. The
Company recently committed to add approximately 500 rooms and an additional
15,000 square feet of meeting space to the 1,503-room Marriott Orlando World
Center.
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to
supply. The Company believes that upscale and luxury full-service hotel room
supply growth will remain limited through at least 1998. Accordingly, the
Company believes this supply/demand imbalance will result in improving
occupancy and room rates which should result in improved REVPAR and operating
profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest and
largely offset by the number of rooms taken out of service each year. Due to
an increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years and room rates have improved. The Company
believes that room demand for upscale and luxury full-service properties will
continue to grow at approximately the rate of inflation. Increased room demand
should result in increased hotel occupancy and room rates. According to Smith
Travel Research, upscale and luxury full-service occupancy for the Company and
its competitive set grew in 1997 to 72.5%, while room rate growth continued to
exceed inflation. While room demand has been rising, new hotel supply growth
has been minimal. Smith Travel Research data shows that upscale and luxury
full-service room supply increased an average of only 1% annually from 1991
through 1997. According to Coopers & Lybrand, hotel supply in the upscale and
luxury full-service segment is expected to grow annually at 1.8% to 1.9%
through 1998. The increase in room demand and minimal growth in new hotel
supply has also led to increased room rates. The Company believes that these
recent trends will continue, with overall occupancy increasing slightly and
room rates increasing at more than one and one-half times the rate of
inflation in 1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies and savings and loans) to foreclose and become "inadvertent owners"
who are motivated to sell these assets. In the Company's experience to date,
these sellers have been primarily U.S. financial organizations. The Company
believes that numerous international financial institutions are also
inadvertent owners of lodging properties and expects there will be increased
opportunities to acquire lodging properties from international financial
institutions. While the interest of inadvertent owners to sell has created
attractive acquisition opportunities with strong current yields, the lack of
supply growth and increasing room night demand should contribute to higher
long-term returns on invested capital. Given the relatively long lead time to
develop urban, convention and resort hotels, as well as the lack of project
financing, management believes the growth in room supply in this segment will
be limited, at least until the year 2000.
89
<PAGE>
HOTEL LODGING PROPERTIES
The Company's lodging portfolio, as of the date hereof, consists of 101
upscale and luxury full-service hotels with over 49,000 rooms. The Company's
hotel lodging properties represent quality assets in the upscale and luxury
full-service lodging segments. All but three of the Company's hotel properties
are currently operated under the Marriott or Ritz-Carlton brand names.
The following tables set forth certain information with respect to the
operations of the Hotels to be owned by the Operating Partnership following
the REIT Conversion on a historical and pro forma basis for fiscal year 1997
and for the First Two Quarters 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
-------------------------------------------
AVERAGE
PARTNERSHIP NO. OF HOTELS NO. OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR
----------- ------------- ------------ -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis(1)...... 1 1,671 $ 36,471 69.8% $127.36 $ 88.95
Chicago Suites.......... 1 256 6,568 83.2 146.83 122.14
Desert Springs.......... 1 884 26,626 73.0 169.55 123.77
Hanover................. 1 353 6,735 80.8 123.55 99.82
MDAH.................... 6 1,692 26,699 76.4 102.97 78.63
MHP(2).................. 2 2,127 75,211 80.3 155.44 124.84
MHP2(3)................. 4 3,411 69,014 80.7 133.75 107.91
PHLP(4)................. 8 3,181 50,323 78.5 105.21 82.63
Blackstone Hotels....... 12 5,520 147,524 72.8 166.72 121.33
Host (historical)(5).... 95 45,718 946,726 78.4 133.74 104.84
Host (pro forma)(5)(6)
....................... 121 57,048 1,281,520 77.7 132.73 103.17
</TABLE>
<TABLE>
<CAPTION>
FIRST TWO QUARTERS 1998
-------------------------------------------
AVERAGE
PARTNERSHIP NO. OF HOTELS NO. OF ROOMS HOTEL REVENUES OCCUPANCY DAILY RATE REVPAR
----------- ------------- ------------ -------------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis(1)...... 1 1,671 $ 19,060 69.1% $138.66 $ 95.81
Chicago Suites.......... 1 256 3,358 82.0 159.98 131.18
Desert Springs.......... 1 884 27,291 79.7 214.47 170.93
Hanover................. 1 353 3,391 71.5 142.62 101.97
MDAH.................... 6 1,692 14,521 77.0 114.66 88.29
MHP(2).................. 2 2,127 47,968 85.0 176.75 150.24
MHP2(3)................. 4 3,411 37,946 80.4 152.56 122.66
PHLP(4)................. 8 3,181 29,480 81.1 117.81 95.54
Blackstone Hotels....... 12 5,520 79,346 72.0 175.53 126.41
Host (historical)(5).... 101 49,019 577,472 78.6 145.04 114.02
Host (pro forma)(5)(6)
....................... 123 57,558 704,123 77.9 145.74 113.61
</TABLE>
- --------
(1) Atlanta Marquis has an 80% residual interest in the Atlanta Marriott
Marquis and, for 1998, is expected to receive substantially all of the
cash flow from the hotel.
(2) Includes Marriott's Harbor Beach Resort, in which MHP owns a 50.5%
interest.
(3) Includes the Santa Clara Marriott, in which MHP2 owns a 50% interest and
Host owns the remaining 50% interest.
(4) Includes the Tampa Westshore Marriott and the Raleigh Crabtree Marriott,
which are currently consolidated by Host. A subsidiary of Host provided
100% non-recourse financing totaling approximately $35 million to PHLP, in
which Host owns the sole general partner interest, for the acquisition of
these two hotels.
(5) Includes the hotels owned by Desert Springs, Hanover, MHP and MHP2 for
both fiscal year 1997 and First Two Quarters 1998 and Atlanta Marquis for
First Two Quarters 1998.
(6) Includes the hotels owned by all Hotel Partnerships and the Blackstone
Hotels, assuming the Full Participation Scenario.
90
<PAGE>
One commonly used indicator of market performance for hotels is room revenue
per available room, or REVPAR, which measures daily room revenues generated on
a per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. The
Company has reported annual increases in REVPAR since 1993.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of
five years, based on an annual review of the condition of each property. For
the First Two Quarters 1998, First Two Quarters 1997, fiscal year 1997, 1996
and 1995, the Company spent $79 million, $60 million, $131 million, $87
million and $56 million, respectively, on capital improvements to existing
properties. As a result of these expenditures, the Company will be able to
maintain high quality rooms at its properties.
The Company's hotels average nearly 500 rooms. Twelve of the Company's
hotels have more than 750 rooms. Hotel facilities typically include meeting
and banquet facilities, a variety of restaurants and lounges, swimming pools,
gift shops and parking facilities. The Company's hotels primarily serve
business and pleasure travelers and group meetings at locations in downtown
and suburban areas, near airports and at resort convention locations
throughout the United States. The properties are generally well situated in
locations where there are significant barriers to entry by competitors
including downtown areas of major metropolitan cities at airports and
resort/convention locations where there are limited or no development sites.
Marriott International serves as the manager for 85 of the 101 hotels owned by
the Company and all but three are part of Marriott International's full-
service hotel system. The average age of the properties is 15 years, although
several of the properties have had substantial, more recent renovations or
major additions. In 1997, for example, the Company substantially completed a
two-year $30 million capital improvement program at the New York Marriott
Marquis which included renovations to all guestrooms, refurbishment of
ballrooms, restaurant updates and retail additions. In early 1998, the Company
completed a $15 million capital improvement program at the Denver Marriott
Tech Center. The program included replacement of guestroom interiors,
remodeling of the lobby, ballroom, meeting rooms and corridors, as well as
renovations to the exterior of the building.
The chart below sets forth performance information for the Company's
comparable hotels:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------
1998 1997 1997 1996
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Comparable Full-Service Hotels(1)
Number of properties................ 78 78 54 54
Number of rooms..................... 38,589 38,589 27,074 27,044
Average daily rate.................. $ 146.64 $ 135.21 $134.49 $121.58
Occupancy percentage................ 79.6% 79.8% 79.4% 78.0%
REVPAR.............................. $ 116.66 $ 107.85 $106.76 $ 94.84
REVPAR % change..................... 8.2% -- 12.6% --
</TABLE>
- --------
(1) Consists of the 78 properties owned by the properties for the entire First
Two Quarters 1998 and First Two Quarters 1997, respectively, and the 54
properties owned by the Company for the entire 1997 and 1996 fiscal years,
respectively, except for the 85-room Sacramento property, which is
operated as an independent hotel. These properties, for the respective
periods, represent the "comparable properties." Properties held for less
than all of the periods discussed above, respectively, are not considered
comparable.
91
<PAGE>
The chart below sets forth certain performance information for the Company's
hotels:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -------------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties........... 101 86 95 79 55
Number of rooms................ 49,019 40,387 45,718 37,210 25,932
Average daily rate(1).......... $145.04 $135.74 $133.74 $119.94 $110.30
Occupancy percentage(1)........ 78.6% 79.7% 78.4% 77.3% 75.5%
REVPAR(1)...................... $114.02 $108.15 $104.84 $ 92.71 $ 83.32
</TABLE>
- --------
(1) Excludes the information related to the 85-room Sacramento property, which
is operated as an independent hotel.
Revenues in 1997 for nearly all of the Company's hotels were improved or
comparable to 1996. This improvement was achieved through steady increases in
customer demand, as well as yield management techniques applied by the manager
to maximize REVPAR on a property-by-property basis. REVPAR for comparable
properties increased 12.6% for fiscal year 1997 as average room rates
increased almost 11% and average occupancy increased over one percentage
point. Overall, this resulted in outstanding sales growth. Sales expanded at a
9% rate for comparable hotels and house profit margins increased by over two
percentage points. For the First Two Quarters 1998, REVPAR for comparable
properties increased 8.2% as average room rates increased 8.5% and average
occupancy decreased slightly. Sales for the First Two Quarters 1998 expanded
at 9% rate for comparable hotels and the house profit margin increased by one
percentage point. The Company believes that its hotels consistently outperform
the industry's average REVPAR growth rates. The relatively high occupancy
rates of the Company's hotels, along with increased demand for upscale and
luxury full-service hotel rooms, allowed the managers of the Company's hotels
to increase average room rates by selectively raising room rates and replacing
certain discounted group business with higher-rate group and transient
business. The Company believes that these favorable REVPAR growth trends
should continue due to the limited new construction of full-service properties
and the expected improvements from the conversion of seven properties to the
Marriott brand in 1996 and 1997.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition--most recently the Coronado Island
Marriott Resort and the Manhattan Beach Marriott were converted in the second
half of 1997. The conversion of these properties to the Marriott brand is
intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems, its Marriott
Rewards program, group sales force, as well as customer recognition of the
Marriott brand name. The Marriott brand name has consistently delivered
occupancy and REVPAR premiums over other brands. Based upon data provided by
Smith Travel Research, the Company's comparable properties have an eight
percentage point occupancy premium and a 29% REVPAR premium over its
competitive set for 1997. The Company actively manages the conversions and, in
many cases, has worked closely with the manager to selectively invest in
enhancements to the physical product to make the property more attractive to
guests or more efficient to operate. The invested capital with respect to
these properties is primarily used for the improvement of common areas, as
well as upgrading soft and hard goods (i.e., carpets, drapes, paint, furniture
and additional amenities). The conversion process typically causes periods of
disruption to these properties as selected rooms and common areas are
temporarily taken out of service. Historically, the conversion properties have
shown improvements as the benefits of Marriott International's marketing and
reservation programs, group sales force and customer service initiatives take
hold. In addition, these properties have generally been integrated into
Marriott International's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing.
Following the REIT Conversion, the Lessees and the Managers will continue to
focus on cost control in an attempt to ensure that hotel sales increases serve
to maximize house and operating profit. While control of fixed costs serves to
improve profit margins as hotel sales increase, it also results in more
properties reaching financial performance levels that allow the Managers to
share in the growth of profits in the form of incentive management
92
<PAGE>
fees. The Company believes this is a positive development as it strengthens
the alignment of the Company's, the Lessees' and the Managers' interests.
During 1996, the Company completed its divestiture of limited-service
properties through the sale and leaseback of 16 Courtyard and 18 Residence Inn
properties. These properties, along with 37 Courtyard properties sold and
leased back during 1995, continue to be reflected in the Company's revenues
and are managed by Marriott International under long-term management
agreements. Following the REIT Conversion, these properties will be subleased
to a subsidiary of SLC. During 1997, limited-service properties represented 2%
of the Company's hotel EBITDA, compared to 5% in 1996, and the Company expects
this percentage to continue to decrease as the Company continues to acquire
primarily full-service properties.
The following table presents full-service hotel information by geographic
region for fiscal year 1997:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE
NUMBER AVERAGE RENOVATION
OF GUEST AVERAGE DAILY EXPENDITURES
GEOGRAPHIC REGION ROOMS OCCUPANCY RATE REVPAR (IN "000'S)
- ----------------- -------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Atlanta......................... 441 76.5% $131.69 $100.74 $ 4,115
Florida......................... 511 80.9 131.78 106.64 14,007
Mid-Atlantic.................... 364 76.1 111.71 85.00 3,477
Midwest......................... 418 74.3 107.65 79.99 2,751
New York........................ 708 84.7 173.85 147.22 15,232
Northeast....................... 367 75.2 96.75 72.72 9,260
South Central................... 525 76.5 120.81 92.39 15,190
Western......................... 519 79.5 140.07 111.39 19,806
Latin America................... 436 62.7 129.54 81.17 290
Average-all regions........... 485 78.4 133.74 104.84 --
</TABLE>
93
<PAGE>
HOTEL PROPERTIES
The following table sets forth, as of the date hereof, the location and
number of rooms relating to each of the Company's hotels. All of the
properties are operated under Marriott brands by Marriott International,
unless otherwise indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Grand Hotel Resort and Golf Club......................................... 306
Arizona
Scottsdale Suites........................................................ 251
The Ritz-Carlton, Phoenix (1)............................................ 281
California
Coronado Island Resort (2)............................................... 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa (3)(4)..................................... 884
Manhattan Beach (5)...................................................... 380
Marina Beach (6)......................................................... 368
Newport Beach............................................................ 570
Newport Beach Suites..................................................... 250
Ontario Airport (7)...................................................... 299
Sacramento Airport (6)(8)................................................ 85
San Diego Marriott Hotel and Marina (6).................................. 1,355
San Diego Mission Valley (9)............................................. 350
San Francisco Airport.................................................... 684
San Francisco Fisherman's Wharf (10)..................................... 285
San Francisco Moscone Center (6)......................................... 1,498
San Ramon (6)............................................................ 368
Santa Clara (6).......................................................... 754
The Ritz-Carlton, Marina del Rey (11)(1)................................. 306
Torrance................................................................. 487
Colorado
Denver Southeast (12).................................................... 595
Denver Tech Center....................................................... 625
Denver West (6).......................................................... 307
Marriott's Mountain Resort at Vail....................................... 349
Connecticut
Hartford/Farmington (7).................................................. 380
Hartford/Rocky Hill (6).................................................. 251
Florida
Fort Lauderdale Marina................................................... 580
Harbor Beach Resort (3)(4)............................................... 624
Jacksonville (9)......................................................... 256
Miami Airport (6)........................................................ 782
Orlando World Center (3)(4).............................................. 1,503
Palm Beach Gardens (6)(10)............................................... 279
Singer Island (Holiday Inn) (8).......................................... 222
Tampa Airport (6)........................................................ 295
Tampa Westshore (6)(13).................................................. 309
The Ritz-Carlton, Naples (1)............................................. 463
Georgia
Atlanta Marriott Marquis (3)(4).......................................... 1,671
Atlanta Midtown Suites (6)............................................... 254
Atlanta Norcross......................................................... 222
Atlanta Northwest........................................................ 400
Atlanta Perimeter (6).................................................... 400
JW Marriott Hotel at Lenox (6)........................................... 371
The Ritz-Carlton, Atlanta (1)............................................ 447
The Ritz-Carlton, Buckhead (1)........................................... 553
Illinois
Chicago/Deerfield Suites................................................. 248
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Chicago/Downers Grove Suites............................................. 254
Chicago/Downtown Courtyard............................................... 334
Chicago O'Hare (12)...................................................... 681
Indiana
South Bend (6)........................................................... 300
Louisiana
New Orleans (4).......................................................... 1,290
Maryland
Bethesda (6)............................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton (3)........................................................ 430
Michigan
Detroit Romulus.......................................................... 245
Minnesota
Minneapolis/Bloomington (12)............................................. 479
Minneapolis City Center (6).............................................. 583
Minneapolis Southwest (9)................................................ 320
Missouri
Kansas City Airport (6).................................................. 382
St. Louis Pavilion (6)................................................... 672
New Hampshire
Nashua................................................................... 251
New Jersey
Hanover (3)(4)........................................................... 353
Newark Airport (6)....................................................... 590
Park Ridge .............................................................. 289
Saddle Brook (12)........................................................ 221
New York
Albany (9)............................................................... 359
New York Marriott Financial Center (14).................................. 504
New York Marriott Marquis (6)............................................ 1,911
Marriott World Trade Center (6).......................................... 820
North Carolina
Charlotte Executive Park (10)............................................ 298
Raleigh Crabtree Valley (13)............................................. 375
Oklahoma
Oklahoma City............................................................ 354
Oklahoma City Waterford (5).............................................. 197
Oregon
Portland................................................................. 503
Pennsylvania
Philadelphia (Convention Center) (6)..................................... 1,200
Philadelphia Airport (6)................................................. 419
Pittsburgh City Center (6)(10)........................................... 400
Texas
Dallas/Fort Worth........................................................ 492
Dallas Quorum (6)........................................................ 547
El Paso (6).............................................................. 296
Houston Airport (6)...................................................... 566
JW Marriott Houston...................................................... 503
Plaza San Antonio (10)................................................... 252
San Antonio Rivercenter (4)(6)........................................... 999
San Antonio Riverwalk (6)................................................ 500
</TABLE>
94
<PAGE>
HOTEL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
Utah
Salt Lake City (6)..................................................... 510
Virginia
Dulles Airport (6)..................................................... 370
Key Bridge (12)........................................................ 588
Norfolk Waterside (7).................................................. 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner........................................ 397
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport (15)................................................... 423
Toronto Eaton Centre (6)............................................... 459
Toronto Delta Meadowvale (8)........................................... 374
Mexico
Mexico City Airport (15)............................................... 600
JW Marriott Hotel, Mexico City (15).................................... 314
------
TOTAL.................................................................. 49,019
======
</TABLE>
Properties that are currently not consolidated by Host and are subject to
the Mergers:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
MDAH
Fairview Park............................................. Virginia 395
Dayton.................................................... Ohio 399
Research Triangle Park.................................... North Carolina 224
Detroit Marriott Southfield............................... Michigan 226
Detroit Marriott Livonia.................................. Michigan 224
Fullerton (6)............................................. California 224
-----
1,692
-----
</TABLE>
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Chicago Suites
Marriott O'Hare Suites (6)................................ Illinois 256
-----
PHLP
Albuquerque (6)........................................... New Mexico 411
Greensboro-High Point (6)................................. North Carolina 299
Houston Medical Center (6)................................ Texas 386
Miami Biscayne Bay (6).................................... Florida 605
Marriott Mountain Shadows Resort.......................... Arizona 337
Seattle SeaTac Airport.................................... Washington 459
-----
2,497
-----
TOTAL.................................................................... 4,445
=====
</TABLE>
Properties that are included in the Blackstone portfolio are as follows:
<TABLE>
<CAPTION>
HOTEL STATE ROOMS
- ----- ----- -----
<S> <C> <C>
Four Seasons, Atlanta...................................... Georgia 246
Four Seasons, Philadelphia................................. Pennsylvania 365
Grand Hyatt, Atlanta....................................... Georgia 439
Hyatt Regency, Burlingame.................................. California 793
Hyatt Regency, Cambridge................................... Massachusetts 469
Hyatt Regency, Reston...................................... Virginia 514
Swissotel, Atlanta......................................... Georgia 348
Swissotel, Boston.......................................... Massachusetts 498
Swissotel, Chicago......................................... Illinois 630
The Drake (Swissotel), New York............................ New York 494
The Ritz-Carlton, Amelia Island............................ Florida 449
The Ritz-Carlton, Boston (5)............................... Massachusetts 275
-----
TOTAL................................................................... 5,520
=====
</TABLE>
- --------
(1) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is wholly owned by Marriott
International.
(2) This property was acquired by the Company and converted to the Marriott
brand in 1997.
(3) The Company acquired a controlling interest in the partnership that owns
this property in 1997 or 1998. The Company previously owned a general
partner interest in the partnership.
(4) Property is held within a partnership and is currently consolidated by
Host.
(5) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property was converted
to the Marriott brand and is operated as a Marriott franchised property.
(6) The land on which the hotel is built is leased under a long-term lease
agreement.
(7) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property is operated as
a Marriott franchised property.
(8) Property is not operated under the Marriott brand and is not managed by
Marriott International.
(9) The Company acquired a controlling interest in the partnership that owns
this property in 1998. The property will be operated as a Marriott
franchised property.
(10) Property is operated as a Marriott franchised property.
(11) Property was acquired by the Company in 1997.
(12) The Company acquired the partnership that owns this property in 1997. The
Company previously owned a general partner interest in the partnership.
(13) Property is owned by PHLP. A subsidiary of the Company provided 100% non-
recourse financing totaling approximately $35 million to PHLP, in which
the Company owns the sole general partner interest, for the acquisition
of these two hotels. The Company consolidates these properties in the
accompanying financial statements.
(14) The Company completed the acquisition of this property in early 1997. The
Company previously had purchased the mortgage loan secured by the hotel
in late 1996.
(15) Property will be transferred to the Non-Controlled Subsidiary in
conjunction with the REIT Conversion and no longer consolidated by the
Company.
95
<PAGE>
1998 ACQUISITIONS
In January 1998, the Company acquired an interest in Atlanta Marquis, which
owns an interest in the 1,671-room Atlanta Marriott Marquis Hotel, for
approximately $239 million, including the assumption of approximately $164
million of mortgage debt. The Company previously owned a 1.3% general and
limited partnership interest. In March 1998, the Company acquired a
controlling interest in the partnership that owns three hotels: the 359-room
Albany Marriott, the 350-room San Diego Marriott Mission Valley and the 320-
room Minneapolis Marriott Southwest for approximately $50 million. In the
second quarter of 1998, the Company acquired the partnership that owns the
289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million. The
Company previously owned a 1% managing general partner interest and a note
receivable interest in such partnership. In addition, the Company acquired the
281-room Ritz-Carlton, Phoenix for $75 million, the 397-room Ritz-Carlton in
Tysons Corner, Virginia for $96 million and the 487-room Torrance Marriott
near Los Angeles, California for $52 million. In April 1998, the Company,
through the Operating Partnership, entered into an agreement to acquire
certain assets from various affiliates of The Blackstone Group. See "--
Blackstone Acquisition."
BLACKSTONE ACQUISITION
In April 1998, the Company reached a definitive agreement with the
Blackstone Entities to acquire ownership of, or controlling interests in,
twelve hotels and two mortgage loans, one secured by one of the acquired
hotels and one secured by an additional hotel. In addition, the Company will
acquire a 25% interest in the Swissotel management company from the Blackstone
Entities, which the Company will transfer to SLC in connection with the
distribution of SLC common stock to the Company's shareholders and the
Blackstone Entities. In exchange for these assets, the Operating Partnership
will issue approximately 43.7 million OP Units, assume or repay debt and make
cash payments totaling approximately $862 million and distribute approximately
% of the shares of SLC common stock to the Blackstone Entities. Each OP Unit
will be exchangeable for one Host REIT Common Share (or its cash equivalent,
at the Company's election). Upon completion of the Blackstone Acquisition and
the REIT Conversion, the Blackstone Entities will own approximately % of the
primary shares outstanding of Host REIT Common Shares. John G. Schreiber, co-
chairman of the Blackstone Real Estate Partners' investment committee, has
joined the Board of Directors of the Company.
The Blackstone portfolio is one of the premier collections of hotel real
estate properties. It includes: The Ritz-Carlton, Amelia Island (449 rooms);
The Ritz-Carlton, Boston (275 rooms); Hyatt Regency Burlingame at San
Francisco Airport (793 rooms); Hyatt Regency Cambridge, Boston (469 rooms);
Hyatt Regency Reston, Virginia (514 rooms); Grand Hyatt Atlanta (439 rooms);
Four Seasons Philadelphia (365 rooms); Four Seasons Atlanta (246 rooms); The
Drake (Swissotel) New York (494 rooms); Swissotel Chicago (630 rooms);
Swissotel Boston (498 rooms) and Swissotel Atlanta (348 rooms). Additionally,
the transaction includes: the first mortgage loan on the Four Seasons Beverly
Hills (285 rooms); as two office buildings in Atlanta--the offices at The
Grand (97,879 sq. ft.) and the offices at the Swissotel (67,110 sq. ft.); and
a 25% interest in the Swissotel U.S. management company.
At the closing of the REIT Conversion, the Blackstone portfolio will be
contributed to the Operating Partnership and its hotels will be leased to
subsidiaries of SLC and will continue to be managed on behalf of the Lessees
under their existing management agreements. The Operating Partnership's
acquisition of the Blackstone portfolio is subject to certain conditions,
including the REIT Conversion being consummated by March 31, 1999.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company and certain of its subsidiaries also manage the Company's
partnership investments and conduct the partnership services business. As
such, as of the date hereof, the Company and/or its subsidiaries own an
investment in, and generally serve as a general partner or managing general
partner for, 18 unconsolidated partnerships which collectively own 20 Marriott
full-service hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield
Inns. In addition, the Company holds notes receivable (net of reserves) from
partnerships totaling approximately $23 million at January 2, 1998. Thirteen
of the 20 full-service hotels owned by the unconsolidated partnerships will be
acquired by the Operating Partnership in connection with the REIT Conversion.
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As the managing general partner of these partnerships, the Company and its
subsidiaries are responsible for the day-to-day management of partnership
operations, which includes payment of partnership obligations from partnership
funds, preparation of financial reports and tax returns and communications
with lenders, limited partners and regulatory bodies. The Company or its
subsidiaries are usually reimbursed for the cost of providing these services.
Hotel properties owned by the unconsolidated partnerships generally were
acquired from the Company or its subsidiaries in connection with limited
partnership offerings. These hotel properties are currently operated under
management agreements with Marriott International. As the managing general
partner of such partnerships, the Company or its subsidiaries oversee and
monitor Marriott International's performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company were $1 million for
the First Two Quarters 1998, $4 million for the First Two Quarters 1997, $5
million in each of 1997 and 1996 and $3 million in 1995. All partnership debt
is nonrecourse to the Company and its subsidiaries, except that the Company is
contingently liable under various guarantees of debt obligations of certain of
these partnerships. Such commitments are limited in the aggregate to $60
million at January 2, 1998. Subsequent to year-end, such maximum commitments
were reduced to $20 million in connection with the refinancing and acquisition
of a controlling interest in the Atlanta Marriott Marquis. In most cases,
fundings of such guarantees represent loans to the respective partnerships.
MARKETING
As of the date hereof, 85 of the Company's 101 hotel properties are managed
or franchised by Marriott International as Marriott or Ritz-Carlton brand
hotels. Thirteen of the 16 remaining hotels are operated as Marriott brand
hotels under franchise agreements with Marriott International. The Company
believes that these Marriott-managed and franchised properties will continue
to enjoy competitive advantages arising from their participation in the
Marriott International hotel system. Marriott International's nationwide
marketing programs and reservation systems as well as the advantage of the
strong customer preference for Marriott brands should also help these
properties to maintain or increase their premium over competitors in both
occupancy and room rates. Repeat guest business in the Marriott hotel system
is enhanced by the Marriott Rewards program, which expanded the previous
Marriott Honored Guest Awards program. Marriott Rewards membership includes
more than 7.5 million members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the properties. The reservation system also features
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for all Marriott and Ritz-Carlton lodging
properties. In addition, software at Marriott's centralized reservations
centers enables agents to immediately identify the nearest Marriott or Ritz-
Carlton brand property with available rooms when a caller's first choice is
fully occupied.
COMPETITION
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily
on the level of service, quality of accommodations, convenience of locations
and room rates. Although the competitive position of each of the Company's
hotel properties differs from market to market, the Company believes that its
properties compare favorably to their competitive set in the markets in which
they operate on the basis of these factors. The following table presents key
participants in segments of the lodging industry in which the Company
competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
- ------- ---------------------------
<S> <C>
Luxury Full-Service..... Ritz-Carlton; Four Seasons
Upscale Full-Service.... Crowne Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels, Resorts
and Suites; Radisson; Red Lion; Sheraton; Swissotel; Westin; Wyndham
</TABLE>
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RELATIONSHIP WITH HM SERVICES
On December 29, 1995, the Company distributed to its shareholders through a
special dividend (the "Special Dividend") all of the outstanding shares of
common stock of Host Marriott Services Corporation ("HM Services"), formerly a
direct, wholly owned subsidiary of the Company which, as of the date of the
Special Dividend, owned and operated the food, beverage and merchandise
concessions at airports, on tollroads and at stadiums and arenas and other
tourist attractions. The Special Dividend provided Company shareholders with
one share of common stock of HM Services for every five shares of Company
common stock held by such shareholders on the record date of December 22,
1995.
For the purpose of governing certain of the ongoing relationships between
the Company and HM Services after the Special Dividend, and to provide an
orderly transition, the Company and HM Services have entered into various
agreements, including agreements to (i) allocate certain responsibilities with
respect to employee compensation, benefit and labor matters; (ii) define the
respective parties' rights and obligations with respect to deficiencies and
refunds of Federal, state and other income or franchise taxes relating to the
Company's businesses for tax years prior to the Special Dividend and with
respect to certain tax attributes of the Company after the Special Dividend;
(iii) provide certain administrative and other support services to each other
for a transitional period on an as-needed basis and (iv) to provide for the
issuance of HM Services common stock in connection with the exercise of
certain outstanding warrants to purchase shares of Company common stock.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL; MARRIOTT INTERNATIONAL DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing hotel ownership business and the business
of HM Services (prior to its distribution to shareholders through the Special
Dividend), Marriott Corporation engaged in lodging and senior living services
management, timeshare resort development and operation, food service and
facilities management and other contract services businesses (the "Management
Business"). On October 8, 1993, the Company completed the Marriott
International Distribution (as defined herein). Marriott International
conducts the Management Business as a separate publicly traded company.
The Company and Marriott International have entered into agreements which
provide, among other things, for Marriott International to (i) manage or
franchise various hotel properties owned or leased by the Company, (ii)
advance up to $225 million to the Company under the Marriott International
line of credit, which was terminated in 1997, (iii) provide first mortgage
financing of $109 million for the Philadelphia Marriott Hotel, which was
repaid in December 1996, (iv) provide financing for certain Company
acquisitions, (v) guarantee the Company's performance in connection with
certain loans or other obligations and (vi) provide certain limited
administrative services. The Company views its relationship with Marriott
International as providing various advantages, including access to high
quality management services, strong brand names and superior marketing and
reservation systems.
Marriott International has the right to purchase up to 20% of the voting
stock of the Company if certain events involving a change of control (or
potential change of control) of the Company occur, subject to certain
limitations. See "Certain Relationships and Related Transactions--Relationship
Between Host and Marriott International."
EMPLOYEES
Currently, the Company and its subsidiaries collectively have approximately
225 corporate employees, and approximately 300 other employees (primarily
employed at one of its non-U.S. hotels) which are covered by collective
bargaining agreements that are subject to review and renewal on a regular
basis. The Company believes that it has good relations with its labor unions
and has not experienced any material business interruptions as a result of
labor disputes. Following the REIT Conversion, the Operating Partnership
expects to have 175 employees. The balance of the Company's current employees
are expected to become employees of SLC following the REIT Conversion.
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ENVIRONMENTAL AND REGULATORY MATTERS
Under various 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 may 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, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), 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 business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
LEGAL PROCEEDINGS
Following the Mergers and the REIT Conversion, the Operating Partnership
will assume all liability arising under legal proceedings filed against Host
and will indemnify Host REIT as to all such matters. Host and the other
defendants believe all of the lawsuits in which Host is a defendant, including
the following lawsuits, are without merit and the defendants intend to defend
vigorously against such claims. However, no assurance can be given as to the
outcome of any of the lawsuits.
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by Host filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al v. Marriott International,
Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District Court of
Bexar County, Texas, alleging that the defendants conspired to sell hotels to
the partnerships for inflated prices and that they charged the partnerships
excessive management fees to operate the partnerships' hotels. The plaintiffs
further allege that the defendants committed fraud, breached fiduciary duties
and violated the provisions of various contracts. The plaintiffs are seeking
unspecified damages. Although the partnerships have not been named as
defendants, their partnership agreements include provisions which require the
partnerships to indemnify the general partners against losses, expenses and
fees. The defendants filed answers and defenses to the petition.
Limited Service Transaction. On February 11, 1998, a group of four
individuals, all of whom are limited partners in partnerships sponsored by
Host, filed a putative class action lawsuit, Ruben, et al. v. Host Marriott
Corporation, et al., Civil Action No. 16186, in Delaware State Chancery Court,
alleging that the proposed merger of the partnerships (the "Consolidation")
into an UPREIT structure constitutes a breach of the fiduciary duties owed to
the limited partners of the partnerships by Host and the general partners of
the partnerships. In addition, the plaintiffs allege that the Consolidation
breaches various agreements relating to the partnerships. The plaintiffs are
seeking, among other things, certification of a class, injunctive relief to
prohibit the consummation of the Consolidation or, in the alternative,
rescission of the merger and damages. Although the partnerships have not been
named as defendants, their partnership agreements include provisions which
require the partnerships to indemnify the general partners against losses,
expenses and fees. The defendants have filed a motion to dismiss.
Atlanta Marquis. Certain limited partners of Atlanta Marriott Marquis
Limited Partnership ("AMMLP"), filed a putative class action lawsuit, Hiram
and Ruth Strum v. Marriott Marquis Corporation, et al., Case No. 97-CV-3706,
in the U.S. District Court for the Northern District of Georgia, on December
12, 1997 against AMMLP's general partner, its directors and Host, regarding
the merger of AMMLP into a new partnership (the "AMMLP Merger") as part of
refinancing of the partnership's debt. The plaintiffs allege that the
defendants misled the limited partners in order to induce them to approve the
AMMLP Merger, violated securities regulations and federal roll-up regulations
and breached their fiduciary duties to the partners. The plaintiffs sought to
enjoin, or in the alternative, rescind, the AMMLP Merger and damages. The
partnership agreement includes provisions which require the partnership to
indemnify the general partners against losses, expenses and fees. The
defendants have filed a motion to dismiss.
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Another limited partner of AAMLP sought similar relief and filed a separate
lawsuit, styled Poorvu v. Marriott Marquis Corporation, et al., Civil Action
No. 16095-NC, on December 19, 1997, in Delaware State Chancery Court. The
defendants have filed an answer to the complaint.
Courtyard II. A group of partners in Courtyard by Marriott II Limited
Partnership ("CBM II") filed a lawsuit, Whitey Ford, et al. v. Host Marriott
Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the 285th
Judicial District Court of Bexar County, Texas, against Host, Marriott
International and others alleging breach of fiduciary duty, breach of
contract, fraud, negligent misrepresentation, tortious interference, violation
of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in
connection with the formation, operation and management of CBM II and its
hotels. The plaintiffs are seeking unspecified damages. On January 29, 1998,
two other limited partners filed a petition in intervention seeking to convert
the lawsuit into a class action. The defendants have filed an answer, the
class has been certified, class counsel has been appointed and discovery is
underway.
MHP2. Two groups of limited partners of Marriott Hotel Properties II
Limited Partnership ("MHP2"), are each asserting putative class claims in a
lawsuit, on April 24, 1996, Leonard Rosenblum, as Trustee of the Sylvia
Bernice Rosenblum Trust, et al. v. Marriott MHP Two Corporation, et al., Case
No. 96-8377-CIV-HURLEY, and, on December 18, 1997, Mackenzie Patterson Special
Fund 2, L.P. et al. v. Marriott MHP Two Corporation, et al., Case No. 97-8989-
CIV-HURLEY respectively, against Host and certain of its affiliates alleging
that the defendants violated their fiduciary duties and engaged in fraud and
coercion in connection with a tender offer for MHP2 units. The plaintiffs
sought certification as a class action to enjoin the tender offer and damages.
The Rosenblum plaintiffs filed a fifth amended complaint and the defendants
filed a motion to dismiss and the case has been remanded to state court. The
Mackenzie Patterson plaintiffs filed a response to the judge's order to show
cause why the complaint should not be dismissed and the defendants responded
to the plaintiffs' filing and the case has been dismissed.
PHLP. On July 15, 1998, one limited partner in PHLP filed a class action
lawsuit styled Michael C. deBerardinis v. Host Marriott Corporation, Civil
Action No. WMN 98-2263, in the United States District Court for the District
of Maryland. The plaintiff alleges that Host misled the limited partners in
order to induce them into approving the sale of one of the Partnership's
hotels, violated the securities regulations by issuing a false and misleading
consent solicitation and breached fiduciary duties and the partnership
agreement. The complaint seeks unspecified damages. Host has not yet been
served with the complaint but intends to vigorously defend against the claims
asserted in the lawsuit.
THE LEASES
In order for Host REIT to qualify as a REIT, neither Host REIT nor the
Operating Partnership may operate the Hotels or related properties.
Accordingly, the Operating Partnership will lease the Hotels to the Lessees,
which will be subsidiaries of SLC. The following summary of the principal
terms of the Leases is qualified in its entirety by reference to the Leases, a
form of which has been filed as an exhibit to the Registration Statement of
which this Consent Solicitation is a part.
Lessees. There will be a separate Lessee for each Hotel or group of Hotels
that has separate mortgage financing or that has owners other than the
Operating Partnership and its wholly owned subsidiaries. Each Lessee will be a
Delaware limited liability company, whose purpose will be limited to acting as
lessee under the applicable Lease(s) and will be a subsidiary of SLC. SLC's
principal business following the Effective Date will consist of owning the
senior living facilities and operating hotels leased from the Company. SLC
will succeed to hotel's current asset management group, which is responsible
for maintaining the performance of no hotel managers and evaluating requests
for capital expenditures.
The Lessees under leases of Hotels that are managed by subsidiaries of
Marriott International will be owned 99% by a wholly owned subsidiary of SLC
and 1% by Marriott International or its appropriate subsidiary. The operating
agreement for such lessees will provide that the SLC member of the Lessee will
have full control over the management of the business of the Lessee, except
with respect to certain decisions for which the consent of both members will
be required. These decisions include (i) terminating any Management Agreement
for the
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Hotels leased by the Lessee, except by reason of a default by the Manager or
pursuant to an express termination right in the Management Agreement; (ii)
asserting that the Manager is not an independent contractor or is not entitled
to injunctive relief preventing termination (except for terminations described
in clause (i)); (iii) dissolving, liquidating, consolidating, merging or
selling all or substantially all of the assets of the Lessee; (iv) engaging in
any other business or acquiring any assets or incurring any liabilities not
reasonably related to the conduct of the Lessee's business or (v) instituting
voluntary bankruptcy proceedings or consenting to involuntary bankruptcy
proceedings. Upon any termination of the applicable Management Agreement,
these special voting rights of the Manager will cease and the SLC member will
be required to purchase the Manager's interest in the Lessee at its fair
market value.
Lease Terms. Each Lease will have a fixed term ranging from seven to ten
years (depending upon the Lease), subject to earlier termination upon the
occurrence of certain contingencies described in the Leases (including,
particularly, the provisions described herein under "Damage to the Hotels,"
"Condemnation of the Hotels," "Termination of Leases upon Disposition of the
Hotels" and "Termination of the Leases upon Changes in Tax Laws"). The Lessee
will have a right of first offer to renew its Leases within a specified period
prior to expiration. If the Lessee does not accept the terms offered by the
Operating Partnership, the Operating Partnership will be free to lease the
applicable Hotel for rental rates that are at least 90% of the rates offered
to the Lessee.
Minimum Rent; Percentage Rent; Additional Charges. Each Lease will require
the Lessee to pay (i) Minimum Rent (as defined below) in a fixed dollar amount
per annum plus (ii) to the extent it exceeds Minimum Rent, Percentage Rent
based upon specified percentages of aggregate sales from the applicable Hotel,
including room sales, food and beverage sales and telephone and other sales
("Gross Revenues"), in excess of specified thresholds.
"Minimum Rent"will be a fixed dollar amount specified in each Lease less the
FF&E Adjustment (which is described under "FF & E Limitation" below).
The amount of Minimum Rent and the Percentage Rent thresholds will be
increased each year by a percentage of any increase in the Consumer Price
Index ("CPI") during the previous twelve months. Neither Minimum Rent nor
Percentage Rent thresholds will be decreased because of changes in the CPI.
Rental payments will be made on a Fiscal Year basis. [The "Fiscal Year"
shall mean the fiscal year used by the Manager.] Payments of rent will be made
within two days after the required payment date under the Management Agreement
for each Accounting Period. "Accounting Period" shall mean the four week
accounting periods which are used in Marriott International's accounting
system. The amount of rent payable for each Accounting Period will be the sum
of Minimum Rent due for that Accounting Period, plus, to the extent it would
exceed rent paid year-to-date, Percentage Rent. Payments of rent with respect
to the period commencing on the first day of the Accounting Period including
December 31 and ending December 31 of each year will be prorated based upon
the number of days from the end of the last accounting period prior to
December 31 through December 31 relative to the total number of days in such
Accounting Period. Similarly, rent for the period commencing January 1 of each
year and ending on the last day of the Accounting Period including January 1
will be prorated based upon the number of days from January 1 through the end
of such Accounting Period relative to the total number of days in such
Accounting Period. A final adjustment of the Percentage Rent for each calendar
year will be made after financial statements are available. The rent payable
on any payment date will never be less than zero, other than at the time of
the final adjustment of the Percentage Rent for any Fiscal Year.
The Leases will provide for a rent reduction in the event of damage,
destruction or a partial taking.
Lessee Expenses. Each Lessee will be responsible for paying all of the
expenses of operating the applicable Hotel(s), including all personnel costs,
utility costs and general repair and maintenance of the facilities. The Lessee
will also be responsible for all fees payable to the applicable manager,
including base and incentive management fees, chain services payments and
franchise or system fees, with respect to periods covered by the term of the
Lease. The Lessee will not be obligated to bear the cost of any capital
improvements or capital repairs to the Hotels or the other expenses borne by
the Lessor, as described below.
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Lessor Expenses. The Lessor will be responsible for the following expenses:
real estate taxes, personal property taxes, casualty insurance on the
structures, ground rent payments, required expenditures for FF&E (including
maintaining the FF&E reserve, to the extent such is required by the manager)
and major capital expenditures.
The consent of the Lessor and Lessee will be required for major capital
expenditures or a change in the amount of the FF&E reserve payment.
Parent Guarantee. SLC will enter into a limited guarantee of the Lease
obligations of each Lessee. For each of the four identified "pools" of Hotels,
the cumulative limit of the guarantee at any time will be 15% of the aggregate
rents under all Leases paid with respect to the preceding 12 full calendar
months (with an annualized amount based on the Minimum Rent for Leases that
have not been in effect for 12 full calendar months).
Security. The obligations of the Lessee will be secured by a pledge of all
personal property (tangible and intangible) of the Lessee related to or used
in connection with the operation of the Hotels (including any cash and
receivables from the manager or others held by the Lessee as part of "hotel
working capital").
Working Capital. Each Lessor will sell the existing hotel working capital
(including Inventory and Fixed Asset Supplies (as defined in the Uniform
System of Accounts for Hotels), net receivables due from the manager, net of
accounts payable and accrued expenses) to the applicable Lessee upon the
commencement of the Lease at a price equal to the book value of such assets.
The purchase price will be represented by a note that bears interest at a rate
per annum equal to the "applicable federal rate" in effect on the commencement
date. A portion of the Minimum Rent under the Lease will represent payment of
interest on the working capital. The principal amount of the purchase price
will be payable upon termination of the Lease. At the termination or
expiration of the Lease, the Lessee will transfer to the Lessor the then
existing working capital, in satisfaction, in whole or in part, of the
principal of such loan. To the extent that the value of the working capital
delivered to the Lessor exceeds the value of the working capital delivered by
the Lessor to the Lessee at the commencement of the Lease, the Lessor shall
pay to the Lessee cash equal to the difference. To the extent that the value
of the working capital delivered to the Lessor is less than the value of the
working capital delivered by the Lessor to the Lessee at the commencement of
the Lease, the Lessee shall pay to the Lessor cash equal to the difference.
Termination of Leases upon Disposition of Hotels. In the event the Lessor
enters into an agreement to sell or otherwise transfer any Hotel free and
clear of the applicable Lease, the Lessor must pay the Lessee a termination
fee equal to the fair market value of the Lessee's leasehold interest in the
remaining term of the Lease. For purposes of determining the fair market
value, a discount rate of 12% per annum will be assumed, and the annual income
for each remaining year of the Lease will be assumed to be the income
generated by the Lessee during the 12 months preceding the termination date
(which shall be determined on a pro forma basis if the Hotel has not been in
operation for at least 12 months). Alternatively, the Lessor will be entitled
(i) to substitute a comparable Hotel or Hotels (in terms of economics for the
Lessor and the Lessee) for any Hotel that is sold or (ii) to sell the Hotel
subject to the lease (subject to the Lessee's reasonable approval if the sale
is to an entity that does not have sufficient financial resources and
liquidity to fulfill the "owner's" obligations under the Management Agreement,
or is controlled by a person convicted of a felony involving moral turpitude),
without being required to pay a termination fee.
Termination of Leases upon Changes in Tax Laws. In the event that changes
in the federal income tax laws allow the Lessors, or a subsidiary or an
affiliate of the Lessors, to directly operate the Hotels without jeopardizing
Host REIT's status as a REIT, the Lessors will have the right to terminate the
Leases, in return for paying the Lessee the fair market value of the remaining
terms of the Leases, valued in the same manner as provided above under
"Termination of Leases upon Disposition of the Hotels." The payment will be
payable in cash or shares of Host REIT, at the election of Host REIT.
Damage or Destruction. If a Hotel is partially or totally destroyed, and is
no longer suitable for use as a Hotel (as determined by the applicable
Lessee), the Lease of such Hotel shall automatically terminate and the
insurance proceeds shall be retained by the Lessor, except to the extent of
any personal property owned by the
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Lessee. In this event, no termination fee shall be owed to Lessee. If a Hotel
is partially destroyed, but is still suitable for use as a Hotel (as
determined by the applicable Lessee), the Lessee shall apply the insurance
proceeds to restore the Hotel to its preexisting condition, with the Lessor at
its election being responsible for any shortfall in insurance proceeds. If and
to the extent any damage or destruction results in a reduction of Gross
Revenues which would otherwise be realizable from the operation of the Hotel,
the applicable Lessor shall receive all loss of income insurance and Lessee
shall have no obligation to pay rent in excess of the Percentage Rent
realizable from Gross Revenues generated by the Hotel during the period of
destruction.
Events of Default. A Lease may be terminated without penalty by the
applicable Lessor if any of the following Events of Default occur:
. Failure to pay Rent within ten days after the due date;
. Failure to comply with or observe any of the terms of the lease for 30
days after notice from Lessor, including failure to properly maintain
the Hotel (other than by reason of the failure of the Lessor to perform
its obligations under the Lease);
. Failure of SLC to maintain minimum required total asset value;
. Filing of any petition for relief, bankruptcy or liquidation by the
Lessee or any parent company of the Lessee;
. Lessee voluntarily ceases to operate the Hotel for 30 consecutive days,
except as a result of a casualty, condemnation or emergency situation;
or
. A change in control of SLC, the Lessee or OpCo, a subsidiary of SLC
Assignment of Lease. A Lessee will be permitted to sublet all or part of
the Hotel or assign its interest under its Lease, without the consent of the
Lessor, to any wholly owned or majority controlled subsidiary of SLC or OpCo,
provided SLC continues to meet the Minimum Net Worth requirements in the
Lease. Transfers to other parties will be permitted if approved by the Lessor.
Subordination to Qualifying Mortgage Debt. The rights of each Lessee will be
expressly subordinate to qualifying mortgage debt and any refinancing thereof.
A default under the loan documents may result in the termination of the Lease
by the lender. The lender will not be required to provide a non-disturbance
agreement to the lessee.
The Lessor (and the Operating Partnership) will be obligated to compensate
the Lessee, on a basis equal to the lease termination provision, if the Lease
is terminated because of a non-monetary default under the terms of a loan that
occurs because of an action or omission by the Lessor (or its affiliates) or a
monetary default where there is not an Unsecured Event of Default of Lessee.
In addition, if any loan is not refinanced in a timely manner, and the loan
amortization schedule is converted to a cash flow sweep amortization
structure, the Lease will terminate after a twelve-month cure period and the
Lessor (and the Operating Partnership) will owe a termination fee as provided
above and will also compensate Lessee for any cost revenue resulting from the
cash flow sweep amortization.
Indemnification. Each Lessee will indemnify the applicable Lessor for any
loss suffered by the Lessor as a result of the Lessee's actions or inactions
in operating the properties, including accident or injury to any person on the
properties or misuse of the properties by Lessee (including actions of the
manager and its employees). Each Lessee will maintain liability insurance as
required by the applicable management agreement.
Each Lessee will indemnify the applicable Lessor for any liability resulting
from environmental matters caused by the Lessee's intentionally wrongful acts
or grossly negligent failures, except for pre-existing conditions in which
case Lessor will indemnify Lessee.
Personal Property Limitation. If a Lessor reasonably anticipates that the
average tax basis of the items of the Lessor's FF&E and other personal
property that are leased to the applicable Lessee will exceed 15% of the
aggregate average tax basis of the real and personal property subject to the
applicable Lease, the following procedures will apply:
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. The Lessor would not be obligated to acquire and lease to the Lessee any
replacement FF&E that would cause the applicable limits to be exceeded
(the "Excess FF&E").
. The Lessee would be responsible for obtaining the Excess FF&E from
another source, but would agree to give a right of first opportunity to
a Non-Controlled Subsidiary to lease the Excess FF&E to the Lessee at an
annual rental equal to the Market Leasing Factor (as defined below)
times the cost of the Excess FF&E. If the Non-Controlled Subsidiary does
not agree to such a lease, then Lessee will obtain the Excess FF&E from
another source.
. The annual Base Rent under the applicable Lease would be reduced by an
amount (the "FF&E Adjustment") equal to (x) the Market Leasing Factor
times the cost of the Excess FF&E (if the Non-Controlled Subsidiary
agrees to acquire and lease the FF&E to the Lessee) or (y) 110% of the
Market Leasing Factor times the cost of the replacement FF&E (if the
Non-Controlled Subsidiary does not agree to acquire and lease the FF&E
to the Lessee), for a period equal to the weighted average useful life
of the Excess FF&E.
The Market Leasing Factor for the first two years under a Lease will be set
forth on a schedule to the Lease. For each year thereafter, the Market Leasing
Factor will be based upon the median of the leasing rates of at least three
nationally recognized companies engaged in the business of leasing similar
personal property.
Assignment of Management Agreements. The Management Agreements applicable
to each Hotel will be assigned to the applicable Lessee for the term of the
Lease of such Hotel. The Lessee will be obligated to perform all of the
obligations of the Lessor under the Management Agreement during the term of
its Lease, other than the obligations relating to payment of property taxes,
property casualty insurance and ground rent, maintaining a reserve fund for
FF&E replacements, and capital expenditures, for which the Lessor will retain
responsibility. Although the Lessee will assume obligations of the Lessor
under the Management Agreement, the Lessor will not be released from its
obligations and, if the Lessee fails to perform any obligations, the Manager
will be entitled to seek performance by or damages from the Lessor.
The assignment of each Management Agreement will prohibit the Lessee from
taking the following actions with respect to the Management Agreement without
notice to the Lessor and, if the action would have a material adverse effect
on the Lessor, the consent of the Lessor: (i) terminate the Management
Agreement prior to the expiration of the term thereof; (ii) amend or modify
the Management Agreement; (iii) waive (or fail to enforce) any right of the
"Owner" under the Management Agreement; (iv) waive any breach or default by
the Manager under the Management Agreement (or fail to enforce any right of
the "Owner" in connection therewith); (v) agree to any change in the Manager
or consent to any assignment by the Manager; or (vi) take any other action
which materially adversely affects Lessor's rights or obligations under the
Management Agreement for periods following termination of the Lease (whether
upon the expiration of its term or upon earlier termination as provided for
herein).
Change in Manager. A Lessee will be permitted to change the Manager or the
brand affiliation of a Hotel only with the approval of the applicable Lessor,
which approval will not be unreasonably withheld; provided that the
replacement manager is a nationally recognized manager with substantial
experience in managing hotels of comparable quality. No such replacement can
extend beyond the term of the Lease without the consent of the Lessor, and any
replacement must be acceptable to the lender under any qualifying mortgage
debt of the Lessor.
THE MANAGEMENT AGREEMENTS
General
The Lessees will lease the Hotels from the Hotel Partnerships under the
Management Agreements between the Hotel Partnerships and the subsidiaries of
Marriott International and other companies that currently manage the Hotels.
Following the REIT Conversion as a result of their assumptions of obligations
under the Management Agreements, the Lessees will have substantially all of
the rights and obligations of the "Owners" of the Hotels under the Management
Agreements for the period during which the Leases are in effect (including the
obligation to pay the management and other certain fees thereunder) and will
hold the Operating Partnership harmless with respect thereto. See "The
Leases--Assignment of Management Agreements."
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Relationship with Marriott International
Subsidiaries of Marriott International will serve as Managers for a majority
of the Operating Partnership's Hotels which will be leased to the Lessees,
pursuant to the Management Agreements. Marriott International and its
subsidiaries also provide various other services to Host REIT and its
affiliates and to SLC and its affiliates. With respect to these contractual
arrangements, the potential exists for disagreement as to contract compliance.
Additionally, the possible desire of Host REIT and the Operating Partnership
to finance, refinance or effect a sale of any of the Hotels leased to the
Lessees and managed by subsidiaries of Marriott International may, depending
upon the structure of such transactions, result in a need to modify the
Management Agreements with respect to such Hotel. Any such modification
proposed by Host REIT or the Operating Partnership may not be acceptable to
Marriott International or the applicable Lessee, and the lack of consent from
either Marriott International or the applicable Lessee that has assumed the
Management Agreement could adversely affect the Operating Partnership's
ability to consummate such financing or sale. In addition, certain situations
could arise where actions taken by Marriott International in its capacity as
manager of competing lodging properties would not necessarily be in the best
interests of the Operating Partnership, Host REIT or the Lessees.
Nevertheless, the Operating Partnership believes that there is sufficient
mutuality of interest between the Operating Partnership, the Lessees and
Marriott International to result in a mutually productive relationship.
Management Services Provided by Marriott International and Affiliates
Under each Management Agreement related to a Marriott International-managed
Hotel, the Manager will provide complete management services to the applicable
Lessees in connection with its management of such Lessee's Hotels following
the REIT Conversion. Except where specifically noted, these relationships are
identical to those that exist between the applicable Manager and Host or the
applicable Hotel Partnership currently, and that would exist between the
Operating Partnership's subsidiaries and the Manager in the event the Leases
expire or otherwise terminate while the Management Agreements remain in
effect. The services provided by each Manager to each Lessee will include the
following:
Operational Services. The Managers will have sole responsibility and
exclusive authority for all activities necessary for the day-to-day operation
of the Hotels, including establishment of all room rates, the processing of
reservations, procurement of inventories, supplies and services, periodic
inspection and consultation visits to the Hotels by the Managers' technical
and operational experts and promotion and publicity of the Hotels. The Manager
will receive compensation from the Lessee in the form of a base management fee
and an Incentive Management Fee, which are normally calculated as percentages
of gross revenues and operating profits, respectively.
Executive Supervision and Management Services. The Managers will provide all
managerial and other employees for the Hotels; review the operation and
maintenance of the Hotels; prepare reports, budgets and projections; provide
other administrative and accounting support services, such as planning and
policy services, financial planning, divisional financial services, risk
planning services, product planning and development, employee planning,
corporate executive management, legislative and governmental representation
and certain in-house legal services; and protect the "Marriott" trademark and
other tradenames and service marks. The Manager also will provide a national
reservations system.
Chain Services. The Management Agreements will require the Manager to
furnish certain services (the "Chain Services") that are furnished generally
on a central or regional basis to hotels in the Marriott hotel system. Such
services will include the following: (i) the development and operation of
computer systems and reservation services, (ii) regional management and
administrative services, regional marketing and sales services, regional
training services, manpower development and relocation costs of regional
personnel and (iii) such additional central or regional services as may from
time to time be more efficiently performed on a regional or group level. Costs
and expenses incurred in providing such services are allocated among all
hotels in the Marriott hotel system managed by the Manager or its affiliates
and each applicable Lessee will be required to reimburse the Manager for its
allocable share of such costs and expenses.
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<PAGE>
Working Capital and Fixed Asset Supplies. The Lessee will be required to
maintain working capital for each Hotel and fund the cost of fixed asset
supplies, which principally consist of linen and similar items. The applicable
Lessee will also be responsible for providing funds to meet the cash needs for
the operations of the Hotels if at any time the funds available from
operations are insufficient to meet the financial requirements of the Hotels.
Use of Affiliates. The Manager employs the services of its affiliates to
provide certain services under the Management Agreements. Certain of the
Management Agreements provide that the terms of any such employment must be no
less favorable to the applicable Lessee, in the reasonable judgment of the
Manager, than those that would be available from the Manager.
FF&E Replacements. The Management Agreements generally provide that once
each year the Manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
("FF&E Replacements") and an estimate of the funds necessary therefor. Under
the terms of the Leases, the Operating Partnership, as lessor, is required to
provide to the applicable Lessee, all necessary FF&E for the operation of the
Hotels (including funding any required FF&E Replacements). For purposes of
funding the FF&E Replacements, a specified percentage (generally 5%) of the
gross revenues of the Hotel will be deposited by the Manager into a book entry
account (the "FF&E Reserve Account"). These amounts will be treated under the
Leases as paid by the Lessees to the Operating Partnership and will be
credited against their rental payments. If the Manager determines that more
than 5% of the gross revenues of the Hotel will be required to fund repairs
for a certain period, the Manager may increase the percentage of gross
revenues to be deposited into the FF&E Reserve Account for such periods. In
such event, the Operating Partnership may elect to agree to such increases
which shall be treated as deductions for purposes of calculating operating
profits under the Management Agreement or to make a lump-sum contribution to
the FF&E Reserve Account of the additional amounts required. If the Operating
Partnership adopts the first election, the deductions will be credited against
the rental obligations of the Lessee. If the Operating Partnership fails to
elect either option within thirty days of the request for additional funds or
fails to pay the lump-sum within 60 days of its election to do so, the Manager
may terminate the Management Agreement. Under certain circumstances, the
Manager may make repairs in addition to those set forth on its list, but in no
event may it expend more than the amount in the FF&E Reserve Account without
the consent of the Operating Partnership and the Lessee.
Under certain of the Management Agreements, the Operating Partnership must
approve the FF&E Replacements, including any FF&E Replacements proposed by the
Manager that are not contained on the annual list which was approved by the
Operating Partnership and the Lessee. If the Manager and the Operating
Partnership agree, the Operating Partnership will acquire or otherwise provide
the FF&E Replacements set forth on the approved list. If the Operating
Partnership and the Manager are unable to agree on the list within 60 days of
its submission, the Operating Partnership will be required to make only those
FF&E Replacements specified on such list that are no more extensive than the
system standards for FF&E Replacements that the Manager requires for Marriott
hotels. For purposes of funding the FF&E Replacements required to be paid for
by the Operating Partnership, each Management Agreement and the Operating
Partnership's loan agreements require the Operating Partnership to deposit a
designated amount into the FF&E Reserve Account periodically. The Lessees will
have no obligation to fund the FF&E Reserve Accounts (and any amounts
deposited therein by the Manager from funds otherwise due the Lessee under the
Management Agreement will be credited against the Lessee's rental obligation).
Under each Lease, the Operating Partnership will be responsible for the
costs of FF&E Replacements and for decisions with respect thereto (subject to
its obligations to the Lessee under the Lease).
Building Alterations, Improvements and Renewals. The Management Agreements
require the Manager to prepare an annual estimate of the expenditures
necessary for major repairs, alterations, improvements, renewals and
replacements to the structural, mechanical, electrical, heating, ventilating,
air conditioning, plumbing and vertical transportation elements of each Hotel.
Such estimate will be submitted to the Operating Partnership and the Lessee
for their approval. In addition to the foregoing, the Management Agreements
generally provide that the Manager may propose such changes, alterations and
improvements to the Hotel as are required, in the
106
<PAGE>
Manager's reasonable judgment, to keep the Hotel in a competitive, efficient
and economical operating condition or in accordance with Marriott standards.
The cost of the foregoing shall be paid from the FF&E Reserve Account; to the
extent that there are insufficient funds in such account, the Operating
Partnership is required to pay any shortfall. Under the Management Agreements
(and the Leases), neither the Operating Partnership nor the Lessee may
unreasonably withhold consent to repairs and other changes which are required
under applicable law or any of the Manager's "life-safety" standards and, if
the Operating Partnership and the Lessee fail to approve any of the other
proposed repairs or other changes within 60 days of the request therefor, the
Manager may terminate the Management Agreement. Under certain other of the
Management Agreements, if the Operating Partnership and the Manager are unable
to agree on the estimate within 60 days of its submission, the Operating
Partnership will be required to make only those expenditures that are no more
extensive than the Manager requires for Marriott hotels generally, as the case
may be. Under the terms of the Leases, the Operating Partnership will be
responsible for the costs of the foregoing items and for decisions with
respect thereto (subject to its obligations to the Lessees under the Leases).
Service Marks. During the term of the Management Agreements, the service
mark "Marriott" and other symbols, logos and service marks currently used by
the Manager and its affiliates may be used in the operation of the Hotels.
Marriott International (or its applicable affiliates) intends to retain its
legal ownership of these marks. Any right to use the service marks, logo and
symbols and related trademarks at a Hotel will terminate with respect to that
Hotel upon termination of the Management Agreement with respect to such Hotel.
Termination Fee. Certain of the Management Agreements provide that if the
Management Agreement is terminated prior to its full term due to casualty,
condemnation or the sale of the Hotel, the Manager will receive a termination
fee as specified in the specific Management Agreement. Under the Leases, the
responsibility for the payment of any such termination fee as between the
Lessee and the Operating Partnership will depend upon the cause for such
termination.
Termination for Failure to Perform. Substantially all of the Management
Agreements may be terminated based upon a failure to meet certain financial
performance criteria, subject to the Manager's right to prevent such
termination by making certain payments to the Lessee based upon the shortfall
in such criteria.
Events of Default. Events of default under the Management Agreements
include, among others, the following: (i) the failure of either party to make
payments pursuant to the Management Agreement within ten days after written
notice of such nonpayment has been made, (ii) the failure of either party to
perform, keep or fulfill any of the covenants, undertakings, obligations or
conditions set forth in the Management Agreement and the continuance of such
default for a period of 30 days after notice of said failure or, if such
default is not susceptible of being cured within 30 days, the failure to
commence said cure within 30 days or thereafter fails to diligently pursue
such efforts to completion, (iii) if either party files a voluntary petition
in bankruptcy or insolvency or a petition for reorganization under any
bankruptcy law or admits that it is unable to pay its debts as they become
due, (iv) if either party consents to an involuntary petition in bankruptcy or
fails to vacate, within 90 days from the date of entry thereof, any order
approving an involuntary petition by such party; or (v) if an order, judgment
or decree by any court of competent jurisdiction, on the application of a
creditor, adjudicating either party as bankrupt or insolvent or approving a
petition seeking reorganization or appointing a receiver, trustee, or
liquidator or all or a substantial part of such party's assets is entered, and
such order, judgment or decree's continues unstayed and in effect for any
period of 90 days.
As described above, all fees payable under the Management Agreements will
become obligations of the Lessees, to be paid by the Lessees, as modified
prior to the consummation of the REIT Conversion, for so long as the Leases
remain in effect. The Lessees' obligations to pay these fees, however, could
adversely affect the ability of one or more Lessees to pay Base Rent or
Percentage Rent payable under the Leases, even though such amounts otherwise
are due and owing to the Operating Partnership.
NONCOMPETITION AGREEMENTS
Following the REIT Conversion, Host REIT, the Operating Partnership and SLC
will be subject to the noncompetition agreements currently in effect between
Host and Marriott International. See "Certain Relationships and Related
Transactions--Relationship Between Host and Marriott International."
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INDEBTEDNESS
As of June 19, 1998, the Company had the following debt outstanding:
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL BALANCE
AT JUNE 19, 1998
------------------
(IN MILLIONS)
<S> <C>
Properties Notes, with a rate of 9 1/2% due May 2005....... $ 600
New Properties Notes, with a rate of 8 7/8% due July 2007.. 600
Acquisitions Notes, with a rate of 9% due December 2007.... 350
Senior Notes, with an average rate of 9 3/4% at June 19,
1998, maturing through 2012............................... 35
-------
Total Notes.............................................. 1,585
-------
Mortgage debt (non-recourse) secured by $2.6 billion of
real estate assets,
with an average rate of 8.5% at June 19, 1998, maturing
through 2022.............................................. 1,868(1)
Line of Credit, secured by $500 million of real estate as-
sets, with a variable rate of Eurodollar plus 1.7% or Base
Rate (as defined) plus 0.7% at the option of the Operating
Partnership (7.4% at June 19, 1998) due June 2004 ........ 22
-------
Total Mortgage Debt...................................... 1,890
-------
Other notes, with an average rate of 7.4% at June 19, 1998,
maturing through 2017..................................... 87
Capital lease obligations.................................. 8
-------
Total Other Debt......................................... 95
-------
Total Debt............................................... $ 3,570(2)
=======
</TABLE>
- --------
(1) Includes consolidated mortgage indebtedness of Atlanta Marquis, Desert
Springs, Hanover, MHP and MHP2, which, on an individual Partnership basis,
is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL BALANCE AT MATURITY INTEREST 1998
JUNE 19, 1998 DATE RATE DEBT SERVICE
-------------------- --------- --------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Atlanta Marquis
First mortgage debt... $163 02/11/10 7.4% $12.4
---- -----
Desert Springs
First mortgage debt... 102 12/11/22 7.8% 9.4
Mezzanine debt........ 20 12/12/10 10.365% 2.8
---- -----
Total Desert Springs
debt............... 122 12.2
---- -----
Hanover
Mortgage debt......... 30 08/01/04 8.58% 3.0
---- -----
MHP
First mortgage debt... 151 01/01/08 7.48% 12.7
Second mortgage debt.. 83 05/01/00 9.125% 9.2
Construction loan..... 3 01/01/08 7.48% --
---- -----
Total MHP debt...... 237 21.9
---- -----
MHP2
Mortgage debt......... 220 10/11/07 8.22% 22.6
---- -----
Total consolidated
debt included
above.............. $772 $72.1
==== =====
</TABLE>
108
<PAGE>
(2) The consolidated Company debt of $3,570 million does not include
indebtedness of Chicago Suites, MDAH and PHLP, which, on an individual
Partnership basis, is as follows, and would increase the Operating
Partnership's total indebtedness to $3,873 million at June 19, 1998.
<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL BALANCE AT MATURITY 1998
JUNE 19, 1998 DATE INTEREST RATE DEBT SERVICE
-------------------- -------- ------------------ -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Chicago Suites
Mortgage debt......... $ 24.3 06/12/01 3 month LIBOR + 2% $ 3.4
------
MDAH
Note A................ 73.1 12/15/99 LIBOR + 1% 6.4
Note B................ 27.8 12/15/99 LIBOR 2.2
Note C................ 9.3 12/15/10 No interest --
------ -----
110.2 8.6
------
PHLP
Mortgage debt......... 168.9 12/22/98(1) LIBOR + 1.5% N/A(2)
------
Total unconsolidated
debt............... $303.4
======
</TABLE>
--------
(1) Maturity can be extended to December 1999.
(2) Interest expense is budgeted at $14.2 million for 1998. Minimum
principal payments are $6.0 million. On February 23, 1998, $3.8 million
was repaid in principal from 1997 excess cash. A principal payment is
budgeted to be made in February 1999 from 1998 excess cash.
Aggregate debt maturities at June 19, 1998, excluding capital lease
obligations, are (in millions):
<TABLE>
<S> <C>
1998.................................................................. $ 302
1999.................................................................. 29
2000.................................................................. 133
2001.................................................................. 76
2002.................................................................. 150
Thereafter............................................................ 2,871
------
$3,561
======
</TABLE>
Bond Refinancing. On August 5, 1998, HMH Properties issued $1.7 billion of 7
7/8% senior notes issued in two series, consisting of $500 million due 2005
and $1.2 billion due 2008 (the "New Senior Notes"). The New Senior Notes are
guaranteed by Host Marriott and Host Marriott Hospitality, Inc. and certain
subsidiaries of HMH Properties and are secured by pledges of equity interests
in certain subsidiaries of HMH Properties. The guarantee by Host Marriott will
terminate on the Effective Date.
The indenture under which the New Senior Notes were issued contains
covenants restricting the ability of HMH Properties and certain of its
subsidiaries to incur indebtedness, acquire or sell assets or make investments
in other entities, and make distributions to equityholders of HMH Properties
and (following the REIT Conversion) the Operating Partnership. The New Senior
Notes also contain a financial covenant requiring the maintenance of a
specified ratio of unencumbered assets to unsecured debt.
Credit Facility. On August 5, 1998, HMH Properties, Inc. ("HMH Properties")
a subsidiary of Host that will merge into the Operating Partnership prior to
the Effective Date, entered into a $1.25 billion credit facility (the "Credit
Facility") provided by a syndicate of financial institutions (the "Lenders")
led by Bankers Trust Company. The Credit Facility provides the Company with
(i) a $350 million term loan facility (subject to increases as provided in the
succeeding paragraph) and (ii) a $900 million revolving credit facility. The
Credit Facility will have an initial term of three years with two one-year
options to extend. The proceeds of the Credit
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<PAGE>
Facility, along with the proceeds from the New Senior Notes, were used to fund
the purchase of $1.55 billion of senior notes of HMH Properties at the initial
closing on August 5, 1998, and repay $22 million of outstanding borrowings
under a line of credit provided by the Lenders to certain subsidiaries of Host
and will be used (i) to acquire full-service hotels and other real estate
assets including, under certain circumstances, senior living properties, (ii)
under certain circumstances, to develop new full-service hotels and (iii) for
general working capital purposes.
The term loan facility was funded on the closing date of the Credit
Facility. The $350 million term loan facility may be increased by up to $250
million after the initial closing and will be available, subject to terms and
conditions thereof and to the commitment of sufficient Lenders, in up to two
drawings to be made on or prior to the second anniversary of the closing of
the Credit Facility. The Lenders will advance funds under the revolving credit
facility as requested by the Company with minimum borrowing amounts and
frequency limitations to be agreed upon, subject to customary conditions
including, but not limited to, (i) no existing or resulting default or event
of default under the Credit Facility and (ii) continued accuracy of
representations and warranties in all material respects.
The interest rate applicable to the Credit Facility and the unused
commitment fee applicable to the revolving portion of the Credit Facility will
be calculated based on a spread over LIBOR that will fluctuate based on the
quarterly recalculation of a leverage ratio set forth in the Credit Facility.
The Credit Facility will provide that in the event that the Company achieves
one of several investment grade long-term unsecured indebtedness ratings, the
spread over LIBOR applicable to the Credit Facility will be fixed based on the
particular rating achieved. If the Company elects to exercise its one-year
extensions, the Company will be required to amortize approximately 22.5% per
annum of the principal amount outstanding under the Credit Facility at the end
of the initial three-year term.
The Company's obligations under the Credit Facility will be guaranteed,
subject to certain conditions, on a senior basis by Host Marriott Corporation
("Host Marriott"), Host Marriott Hospitality, Inc. and certain of HMH
Properties' existing and future subsidiaries. The guarantee of Host Marriott
will terminate on the Effective Date. In addition, certain subsidiaries of
Host Marriott other than HMH Properties and its subsidiaries may, under
certain circumstances, guarantee the obligations under the Credit Facility in
the future. Borrowings under the Credit Facility will rank pari passu with the
New Senior Notes and other existing and future senior indebtedness of the
Company. The Credit Facility is secured, on an equal and ratable basis, with
the New Senior Notes by a pledge of the capital stock of certain direct and
indirect subsidiaries of HMH Properties. In addition, the Credit Facility may
under certain circumstances in the future be secured by a pledge of capital
stock of certain subsidiaries of Host Marriott other than HMH Properties and
its subsidiaries.
The Credit Facility includes financial and other covenants that require the
maintenance of certain ratios with respect to, among other things, maximum
leverage, limitations on indebtedness, minimum net worth and interest and
fixed charge coverage and restrict payment of distributions and investments,
acquisitions, and sales of assets by the Company.
110
<PAGE>
DISTRIBUTION AND OTHER POLICIES
The following is a discussion of the anticipated policies with respect to
distributions, investments, financing, lending, conflicts of interest and
certain other activities of the Operating Partnership and Host REIT. Upon
consummation of the REIT Conversion, the Operating Partnership's policies with
respect to these activities will be determined by the Board of Trustees of
Host REIT and may be amended or revised from time to time at the discretion of
the Board of Trustees without notice to, or a vote of, the shareholders of
Host REIT or the limited partners of the Operating Partnership, except that
changes in certain policies with respect to conflicts of interest must be
consistent with legal and contractual requirements.
DISTRIBUTION POLICY
Host REIT and the Operating Partnership intend to pay regular quarterly
distributions to holders of Common Shares and OP Units. The distributions to
shareholders per Common Share will be in an amount equal to the amount
distributed by the Operating Partnership per OP Unit. The Operating
Partnership will establish its initial distribution at a level that will
enable Host REIT to distribute to its shareholders an amount equal to 100% of
its taxable income. The Operating Partnership anticipates that distributions
will be paid from cash provided by operations. To the extent that cash
provided by operations is insufficient, the Operating Partnership intends to
borrow funds in order to make distributions to holders of OP Units to enable
Host REIT to distribute 100% of its taxable income. Based upon Host's
preliminary estimates of its taxable income for 1999, Host currently estimates
that this policy will result in an initial annual distribution of
approximately $1.00 to $1.10 per OP Unit ($0.25 to $0.275 per quarter).
Investors are cautioned that Host expects that its preliminary estimate may
materially change as a result of issuances of additional common or preferred
stock by Host prior to the REIT Conversion (which could reduce the
distribution per OP Unit), changes in operations, changes in the preliminary
estimate of taxable income for 1999 and various other factors (some of which
may be beyond the control of Host). The actual distributions made by the
Operating Partnership will be affected by a number of factors, including the
rental payments received by the Operating Partnership from the Lessees with
respect to the Leases on the Hotels, the operating expenses of the Operating
Partnership, the interest expense incurred in borrowing, the taxable income of
the Operating Partnership, unanticipated capital expenditures and
distributions required to be made on any preferred units issued by the
Operating Partnership. No assurance can be given that the Operating
Partnership's estimates will prove accurate or that any level of distributions
will be made or sustained. The Operating Partnership anticipates that
distributions will exceed net income determined in accordance with generally
accepted accounting principles due to non-cash expenses, primarily
depreciation and amortization.
For a discussion of the tax treatment of distributions to holders of OP
Units, see "Federal Income Tax Consequences--Tax Treatment of Holders of OP
Units--Treatment of Operating Partnership Distributions." For a discussion of
the annual distribution requirements applicable to REITs, see "Federal Income
Tax Consequences--Taxation of Host REIT Following the REIT Conversion--Annual
Distribution Requirements Applicable to REITs." For a discussion of the tax
treatment of distributions to the holders of Common Shares, see "Federal
Income Tax Consequences--Taxation of Taxable U.S. Shareholders of Host REIT
Generally," "Taxation of Tax-Exempt Shareholders of Host REIT" and "--Taxation
of Non-U.S. Shareholders of Host REIT."
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. Host REIT is
required to conduct all of its investment activities through the Operating
Partnership. The Operating Partnership's investment objectives are to (i)
achieve long-term sustainable growth in Funds From Operations per OP Unit or
Common Share, (ii) increase asset values by improving and expanding the
initial Hotels, as appropriate, (iii) acquire additional existing and newly
developed upscale and luxury full-service hotels in targeted markets, (iv)
develop and construct upscale and luxury full-service hotels and (v)
potentially pursue other real estate investments. The Operating Partnership's
business will be primarily focused on upscale and luxury full-service hotels.
Where appropriate, and subject to REIT qualification rules and limitations
contained in the Partnership Agreement, the Operating Partnership may sell
certain of its hotels.
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<PAGE>
The Operating Partnership also may participate with other entities in
property ownership through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness or such financing or indebtedness may be incurred in connection
with acquiring investments. Any such financing or indebtedness will have
priority over the Operating Partnership's equity interest in such property.
Investments in Real Estate Mortgages. While the Operating Partnership will
emphasize equity real estate investments, it may, in its discretion, invest in
mortgages and other similar interests. The Operating Partnership does not
intend to invest to a significant extent in mortgages or deeds of trust, but
may acquire mortgages as a strategy for acquiring ownership of a property or
the economic equivalent thereof, subject to the investment restrictions
applicable to REITs. See "Business and Properties--Blackstone Acquisition,"
"Federal Income Tax Consequences--Taxation of Host REIT Following the REIT
Conversion--Income Tests Applicable to REITs" and "--Asset Tests Applicable to
REITs." As of June 19, 1998, the Operating Partnership held two mortgages
secured by hotels. In addition, the Operating Partnership may invest in
mortgage-related securities and/or may seek to issue securities representing
interests in such mortgage-related securities as a method of raising
additional funds.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage ownership limitations
and gross and asset income tests necessary for REIT qualification, the
Operating Partnership also may invest in securities of other entities engaged
in real estate activities or invest in securities of other issuers, including
for the purpose of exercising control over such entities. The Operating
Partnership may acquire all or substantially all of the securities or assets
of other REITs or similar entities where such investments would be consistent
with the Operating Partnership's investment policies. No such investments will
be made, however, unless the Board of Trustees determines that the proposed
investment would not cause either Host REIT or the Operating Partnership to be
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
FINANCING POLICIES
The Operating Partnership's and Host REIT's organizational documents
currently contain no restrictions on incurring debt. Host REIT and the
Operating Partnership, however, will have a policy of incurring debt only if
upon such incurrence the debt-to-total market capitalization of Host REIT and
the Operating Partnership would be % or less. In addition, the Indenture
limits the amount of Debt (as defined in the Indenture, see "Description of
the Notes--Limitations on Incurrence of Debt") that the Operating Partnership
may incur if, immediately after giving effect to the incurrence of such
additional Debt, the aggregate principal amount of all outstanding Debt of the
Operating Partnership and its Subsidiaries (as defined in the Indenture) on a
consolidated basis (i) is greater than 60% of the Total Market Capitalization
(as defined herein) of the Operating Partnership on the date of such
incurrence or (ii) is greater than 75% of the Operating Partnership's
undepreciated total assets on the date of such incurrence. Indentures for debt
issued to replace the public bonds may contain other restrictions. The
Operating Partnership may, from time to time, reduce its outstanding
indebtedness by repurchasing a portion of such outstanding indebtedness,
subject to certain restrictions contained in the Partnership Agreement and the
terms of its outstanding indebtedness. The Operating Partnership will from
time to time reevaluate its borrowing policies in light of then current
economic conditions, relative costs of debt and equity capital, market values
of properties, growth and acquisition opportunities and other factors.
Consequently, the Operating Partnership's financing policy is subject to
modification and change. The Operating Partnership may modify its borrowing
policy without any vote of the shareholders of Host REIT or the limited
partners of the Operating Partnership.
To the extent that the Board of Trustees determines to seek additional
capital, Host REIT or the Operating Partnership may raise such capital through
equity offerings, debt financing or retention of cash flow or a combination of
these methods. As long as the Operating Partnership is in existence, the net
proceeds of all equity capital raised by Host REIT will be contributed to the
Operating Partnership in exchange for OP Units in the Operating Partnership,
which will dilute the ownership interest of limited partners of the Operating
Partnership.
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In the future, the Operating Partnership may seek to extend, expand, reduce
or renew its New Credit Facility, or obtain new credit facilities or lines of
credit, subject to its general policy relating to the ratio of debt-to-total
market capitalization, for the purpose of making acquisitions or capital
improvements or providing working capital or meeting the taxable income
distribution requirements for REITs under the Code. In the future, Host REIT
and the Operating Partnership also may determine to issue securities senior to
the Common Shares or OP Units, including preferred shares and debt securities
(either of which may be convertible into Common Shares or OP Units or may be
accompanied by warrants to purchase Common Shares or OP Units).
The Operating Partnership has not established any limit on the number or
amount of mortgages that may be placed on any single hotel or on its portfolio
as a whole, although the Operating Partnership's objective is to reduce its
reliance on secured indebtedness.
LENDING POLICIES
The Operating Partnership may consider offering purchase money financing in
connection with the sale of a hotel where the provision of such financing will
increase the value received by the Operating Partnership for the hotel sold.
CONFLICTS OF INTEREST POLICIES
Host REIT's Board of Trustees is subject to provisions of Maryland law
designed to address conflicts of interest. There can be no assurance, however,
that these policies and provisions or these agreements always will be
successful in eliminating the influence of such conflicts. If they are not
successful, decisions could be made that may fail to reflect fully the
interests of all limited partners of the Operating Partnership.
Absence of Arm's Length Negotiations. Pursuant to Maryland law (where Host
REIT is organized), any contract or transaction between Host REIT and a
trustee, or any entity in which the trustee is a trustee or has a material
financial interest, generally must be (i) disclosed to the Board of Trustees
and approved by the affirmative vote of a majority of the trustees not having
such an interest ("disinterested trustees"), (ii) disclosed to the
shareholders and approved by the affirmative vote of a majority of the
disinterested shareholders or (iii) be in fact fair and reasonable to Host
REIT. In addition, under Delaware law (where the Operating Partnership is
formed), Host REIT, as general partner, has a fiduciary duty to the Operating
Partnership and, consequently, such transactions are subject to the duties of
care and loyalty that Host REIT, as general partner, owes to limited partners
of the Operating Partnership (to the extent such duties have not been
eliminated pursuant to the terms of the Partnership Agreement). The
Partnership Agreement provides that (i) in considering to dispose of any of
the assets of the Operating Partnership, Host REIT shall take into account the
tax consequences to it of any such disposition and shall have no liability to
the Operating Partnership or the limited partners for decisions based upon or
influenced by such tax consequences (and the Operating Partnership generally
is obligated to pay any taxes Host REIT incurs as result of such
transactions), (ii) Host REIT, as general partner, is under no obligation to
consider the separate interests of the limited partners (including, without
limitation, tax consequences) in deciding whether to cause the Operating
Partnership to take, or decline to take, any action and (iii) any act or
omission by Host REIT, as a general partner, undertaken in the good faith
belief that such action is necessary or desirable to protect the ability of
Host REIT to continue to qualify as a REIT or to allow Host REIT to avoid
incurring liability for taxes under Section 857 or 4981 of the Code (relating
to required distributions) is deemed approved by all limited partners.
Officers and Trustees of Host REIT. Host REIT has adopted a policy which
would require that all material contracts and transactions between Host REIT,
the Operating Partnership or any of its subsidiaries, on the one hand, and a
trustee or executive officer of Host REIT or any entity in which such trustee
or executive officer is a trustee or has a material financial interest, on the
other hand, must be approved by the affirmative vote of a majority of the
disinterested trustees. Where appropriate in the judgment of the disinterested
trustees, the Board of Trustees may obtain a fairness opinion or engage
independent counsel to represent the interests of nonaffiliated security
holders, although the Board of Trustees will have no obligation to do so.
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POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Operating Partnership may, but does not presently intend to, make
investments other than as previously described. Host REIT will make
investments only through the Operating Partnership. Host REIT and the
Operating Partnership will have authority to offer their securities and to
repurchase or otherwise reacquire their securities and may engage in such
activities in the future. Host REIT and the Operating Partnership also may
make loans to joint ventures in which they may participate in the future to
meet working capital needs. Neither Host REIT nor the Operating Partnership
will engage in trading, underwriting, agency distribution or sale of
securities of other issuers. At all times, Host REIT intends to cause the
Operating Partnership to make investments in such a manner as to be consistent
with the requirements of the Code for Host REIT to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or the regulations
promulgated thereunder), the Board of Trustees determines that (i) it is no
longer in the best interests of Host REIT to continue to qualify as a REIT and
(ii) that the Operating Partnership will still qualify as a partnership for
federal income tax purposes, or, alternatively, it is no longer in the
interests of the holders of OP Units for the Operating Partnership to continue
to qualify as a partnership. Host REIT's policies with respect to such
activities may be reviewed and modified from time to time by Host REIT's
trustees without notice to, or the vote of, its shareholders.
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SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Company's audited Combined
Consolidated Financial Statements for the five most recent fiscal years ended
January 2, 1998 and the unaudited condensed combined consolidated financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
income statement data for fiscal year 1993 does not reflect the Marriott
International Distribution and related transactions and, accordingly, the
table presents data for the Company for 1993 that includes amounts
attributable to Marriott International. As a result of the Marriott
International Distribution and related transactions, the assets, liabilities
and businesses of the Company have changed substantially.
The information contained in the following table is not comparable to the
operations of the Operating Partnership on a going-forward basis because the
historical information relates to an operating entity which owns and operates
its hotels, while the Operating Partnership will own the Hotels but will lease
them to the Lessees and receive rental payments in connection therewith.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------
1998 1997 1997(1) 1996(2) 1995(3) 1994(1) 1993(1)(4)
--------- --------- ------- ------- ------- ------- ----------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............. $ 708 $ 522 $1,110 $ 732 $ 484 $ 380 $ 659
Operating profit...... 355 215 432 233 114 152 92
Interest expense...... 151 122 287 237 178 165 164
Income (loss) from
continuing
operations........... 93 32 47 (13) (62) (13) 56
Net income (loss)(5).. 93 37 50 (13) (143) (25) 50
OTHER OPERATING DATA:
Cash from operations.. 206 193 432 201 142 146 415
Cash used in investing
activities........... (49) (200) (807) (504) (208) (178) (262)
Cash provided by (used
in) financing
activities........... (155) (188) 165 806 200 26 (389)
Comparative FFO(6)
(unaudited).......... 190 145 285 164 136 N/A N/A
Depreciation and
amortization......... 114 102 231 168 122 113 N/A
RATIO DATA (UNAUDITED):
Ratio of earnings to
fixed charges(7)..... 2.0x 1.5x 1.3x 1.0x -- -- N/A
Deficiency of earnings
to fixed charges(7).. -- -- -- -- 70 12 N/A
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
marketable
securities........... $ 542 $ 509 $ 848 $ 704 $ 201 $ 67 $ 73
Total assets.......... 6,194 5,324 5,907 5,152 3,557 3,366 3,362
Debt.................. 3,570 2,715 3,466 2,647 2,178 1,871 2,113
</TABLE>
- --------
(1) In the First Two Quarters 1997 and fiscal year 1997, the Company
recognized a $5 million and $3 million, respectively, extraordinary gain,
net of taxes, on the extinguishment of certain debt. In 1994, the Company
recognized a $6 million extraordinary loss, net of taxes, on the required
redemption of senior notes. In 1993, the Company recognized a $4 million
extraordinary loss, net of taxes, on the completion of an exchange offer
for its then outstanding bonds.
(2) Fiscal year 1996 includes 53 weeks.
(3) Operating results for 1995 include a $10 million pre-tax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pre-tax charge to write down an
undeveloped land parcel to its estimated sales value. In 1995, the Company
recognized a $20 million extraordinary loss, net of taxes, on the
extinguishment of debt.
(4) Operating results for 1993 include the operations of Marriott
International through the Marriott International Distribution date of
October 8, 1993. These operations had a net pre-tax effect on income of
$211 million for the year ended December 31, 1993 and are recorded as
"Profit from operations distributed to Marriott International" on the
Company's consolidated statements of operations and are, therefore, not
included in sales, operating profit before corporate expenses
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and interest, interest expense and interest income for the same period. The
net pre-tax effect of these operations is, however, included in income
before income taxes, extraordinary item and cumulative effect of changes in
accounting principles and in net income for the same periods. Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," was adopted in the first quarter of 1993. In the second quarter of
1993, the Company changed its accounting method for assets held for sale.
During 1993, the Company recorded a $34 million credit to reflect the
adoption of SFAS No. 109 and a $32 million charge, net of taxes, to reflect
the change in its accounting method for assets held for sale. Operating
results in 1993 included pre-tax expenses related to the Marriott
International Distribution totaling $13 million.
(5) The Company recorded a loss from discontinued operations, net of taxes,
as a result of the Special Dividend (as defined herein) of $61 million in
1995, $6 million in 1994, and $4 million in 1993. The 1995 loss from
discontinued operations includes a pre-tax charge of $47 million for the
adoption of SFAS No. 121, "Accounting For the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of," a pre-tax $15 million
restructuring charge and an extraordinary loss of $10 million, net of
taxes, on the extinguishment of debt.
(6) The Company considers Comparative Funds From Operations ("Comparative
FFO," which represents Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, Inc. ("NAREIT"), plus
deferred tax expense) a meaningful disclosure that will help the
investment community to better understand the financial performance of
the Company, including enabling its shareholders and analysts to more
easily compare the Company's performance to REITs. FFO is defined by
NAREIT as net income computed in accordance with GAAP, excluding gains or
losses from debt restructurings and sales of properties, plus real estate
related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. FFO should not be
considered as an alternative to net income, operating profit, cash flows
from operations or any other operating or liquidity performance measure
prescribed by GAAP. FFO is also not an indicator of funds available to
fund the Company's cash needs, including its ability to make
distributions. The Company's method of calculating FFO may be different
from methods used by other REITs and, accordingly, may not be comparable
to such other REITs.
(7) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $122 million and $113 million in 1995
and 1994, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
LACK OF COMPARABILITY FOLLOWING THE CONSOLIDATION
Because the Company's Hotels will be leased following the Mergers and the
REIT Conversion, the Company does not believe that the historical results of
operations will be comparable to the results of operations of the Company
following the Mergers and the REIT Conversion. For pro forma information
giving effect to the Mergers and the REIT Conversion (including the Leases),
see "Unaudited Pro Forma Financial Information."
HISTORICAL RESULTS OF OPERATIONS
Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in the
earnings (losses) of affiliates. House profit reflects the net revenues
flowing to the Company as property owner and represents gross hotel sales less
property-level expenses (excluding depreciation, management fees, property
taxes, ground and equipment rent, insurance and certain other costs which are
classified as operating costs and expenses included in the accompanying
financial statements). Other operating costs and expenses include idle land
carrying costs and certain other costs.
The Company's hotel operating costs and expenses are, to a great extent,
fixed. Therefore, the Company derives substantial operating leverage from
increases in revenue. This operating leverage is somewhat diluted, however, by
the impact of base management fees which are calculated as a percentage of
sales, variable lease payments and incentive management fees tied to operating
performance above certain established levels. Successful hotel performance
resulted in certain of the Company's properties reaching levels which allowed
the manager to share in the growth of profits in the form of higher management
fees. The Company expects that this trend will continue in 1998 as the upscale
and luxury full-service segments continue to strengthen. At these higher
operating levels, the Company's and the managers' interests are closely
aligned, which helps to drive further increases in profitability, but
moderates operating leverage.
For the periods discussed herein, the Company's hotel properties have
experienced substantial increases in room revenues generated per available
room ("REVPAR"). REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the average daily room rate charged
and the average occupancy achieved. REVPAR does not include food and beverage
or other ancillary revenues generated by the property. The REVPAR increase
primarily represents strong percentage increases in room rates, while
occupancy increases have been more moderate. Increases in average room rates
have generally been achieved by the managers through shifting occupancies away
from discounted group business to higher-rated group and transient business
and by selectively increasing room rates. This has been made possible by
increased travel due to improved economic conditions and by the favorable
supply/demand characteristics existing in the upscale and luxury full-service
segments of the lodging industry. The Company expects this favorable
relationship between supply growth and demand growth to continue in the
upscale and luxury markets in which it operates, which should result in
improved REVPAR and operating profits at its hotel properties in the near
term. However, there can be no assurance that REVPAR will continue to increase
in the future.
FIRST TWO QUARTERS 1998 COMPARED TO FIRST TWO QUARTERS 1997 (HISTORICAL)
Revenues. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in earnings
(losses) of affiliates. Revenues increased $186 million, or 36%, to $708
million for the twenty-four weeks ended June 19, 1998 ("First Two Quarters
1998") from $522 million for the twenty-four weeks ended June 20, 1997 ("First
Two Quarters 1997"). The Company's revenue and operating profit were impacted
by improved lodging results for comparable full-service hotel properties, the
addition of 18 full-service hotel properties during 1997 and eight full-
service properties during the First Two Quarters 1998 and the gain on the sale
of two hotel properties in the First Two Quarters 1998.
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Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $317
million, or 25%, to $1,574 million in the First Two Quarters 1998, reflecting
the REVPAR increases for comparable units and the addition of full-service
properties in 1997 and 1998. Improved results for the Company's full-service
hotels were driven by strong increases in REVPAR for comparable units of 8.2%
to $116.66 for the First Two Quarters 1998. Results were further enhanced by a
one percentage point increase in the house profit margin for comparable full-
service properties. On a comparable basis for the Company's full-service hotel
properties, average room rates increased over eight percent, while average
occupancy decreased slightly.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, management fees, property taxes, ground, building and
equipment rent, insurance and certain other costs. Operating costs and
expenses increased $46 million to $353 million in the First Two Quarters 1998
from $307 million for the First Two Quarters 1997, primarily representing
increased hotel operating costs, including depreciation and management fees.
Hotel operating costs increased $52 million to $343 million for the First Two
Quarters 1998 primarily due to the addition of 26 full-service properties
during 1997 and the First Two Quarters 1998 and increased management fees and
rentals tied to improved property results. As a percentage of hotel revenues,
hotel operating costs and expenses decreased to 53% of revenues in the First
Two Quarters 1998 from 57% of revenues in the First Two Quarters 1997 due to
the significant increases in REVPAR discussed above, as well as the operating
leverage as a result of a significant portion of the Company's hotel operating
costs and expenses being fixed.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $140
million, or 65%, to $355 million for the First Two Quarters 1998. Hotel
operating profit increased $88 million, or 40%, to $309 million, or 47% of
hotel revenues, for the First Two Quarters 1998 from $221 million, or 43% of
hotel revenues, for the First Two Quarters 1997. Specifically, hotels in New
York City and Toronto reported significant improvements for the First Two
Quarters 1998. Results in Mexico City have also improved as the Mexican
economy continues to strengthen. Properties in Florida reported some minor
softness in results due to exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $6 million to $30
million for the First Two Quarters 1998, primarily reflecting the impact of
the consolidation of affiliated partnerships and the acquisition of
controlling interests in newly-formed partnerships during 1997 and the First
Two Quarters 1998.
Corporate Expenses. Corporate expenses increased $2 million to $20 million
for the First Two Quarters 1998. As a percentage of revenues, corporate
expenses decreased to 2.8% of revenues for the First Two Quarters 1998 from
3.4% in the First Two Quarters 1997, reflecting the Company's efforts to
carefully control its corporate expenses in spite of the substantial growth in
revenues.
REIT Conversion Expenses. REIT Conversion Expenses reflect the professional
fees and other expenses associated with the Company's conversion to a REIT.
Interest Expense. Interest expense increased 24% to $151 million in the
First Two Quarters 1998, primarily due to additional debt of approximately
$580 million assumed in connection with the 1997 and 1998 full-service hotel
additions, as well as the issuance of $600 million of 8 7/8% senior notes in
July 1997.
Dividends on Convertible Preferred Securities. The Dividends on Convertible
Preferred Securities reflect the dividends accrued on the $550 million in
6.75% Convertible Preferred Securities issued by the Company in December 1996.
Interest Income. Interest income increased $4 million to $26 million for the
First Two Quarters 1998, primarily reflecting interest earned on cash held for
future hotel investments.
Income before Extraordinary Item. Income before extraordinary item for the
First Two Quarters 1998 was $93 million, compared to $32 million for the First
Two Quarters 1997.
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Extraordinary Gain. In March 1997, the Company purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. The Company purchased the bonds for $219 million, which was an $11
million discount to the face value of $230 million. In connection with the
redemption and defeasance of the bonds, the Company recognized an
extraordinary gain of $5 million, which represents the $11 million discount
and the write-off of deferred financing fees, net of taxes.
Net Income. The Company's net income for the First Two Quarters 1998 was $93
million compared to $37 million for the First Two Quarters 1997.
1997 COMPARED TO 1996 (HISTORICAL)
Revenues. Revenues increased $378 million, or 52%, to $1.1 billion for 1997.
The Company's revenue and operating profit were impacted by:
-- improved lodging results for comparable full-service hotel properties;
-- the addition of 23 full-service hotel properties during 1996 and 18
full-service properties during 1997;
-- the 1996 sale and leaseback of 16 Courtyard properties and 18 Residence
Inns; and
-- the 1997 results including 52 weeks versus 53 weeks in 1996.
Hotel sales increased $864 million, or 44%, to over $2.8 billion in 1997,
reflecting the REVPAR increases for comparable units and the addition of full-
service properties during 1996 and 1997. Improved results for the Company's
full-service hotels were driven by strong increases in REVPAR for comparable
units of 12.6% in 1997. Results were further enhanced by a more than two
percentage point increase in the house profit margin for comparable full-
service properties. On a comparable basis for the Company's full-service
properties, average room rates increased almost 11%, while average occupancy
increased over one percentage point.
Operating Costs and Expenses. Operating costs and expenses increased $179
million to $678 million for 1997, primarily representing increased hotel
operating costs, including depreciation and management fees. Hotel operating
costs increased $188 million to $649 million, primarily due to the addition of
41 full-service properties during 1996 and 1997, and increased management fees
and rentals tied to improved property results. As a percentage of hotel
revenues, hotel operating costs and expenses decreased to 59% of revenues for
1997, from 64% of revenues for 1996, reflecting the impact of increased 1997
revenues on relatively fixed operating costs and expenses.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $199
million, or 85%, to $432 million in 1997. Hotel operating profit increased
$188 million, or 73%, to $444 million, or 41% of hotel revenues, for 1997
compared to $256 million, or 36% of hotel revenues, for 1996. In nearly all
markets, the Company's hotels recorded improvements in comparable operating
results. In particular, the Company's hotels in the Northeast, Mid-Atlantic
and Pacific coast regions benefited from the upscale and luxury full-service
room supply and demand imbalance. Hotels in New York City, Philadelphia, San
Francisco/Silicon Valley and in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of the Company's hotel rooms in Atlanta are in
the core business districts in downtown and Buckhead where they realized
strong year-over-year results and were only marginally impacted by the
additional supply.
Minority Interest. Minority interest expense increased $26 million to $32
million for 1997, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1996 and 1997.
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Corporate Expenses. Corporate expenses increased $2 million to $45 million
in 1997. As a percentage of revenues, corporate expenses decreased to 4.1% of
revenues in 1997 from 5.9% of revenues in 1996. This reflects the Company's
efforts to carefully control its corporate expenses in spite of the
substantial growth in revenues.
Interest Expense. Interest expense increased $50 million to $287 million in
1997, primarily due to the additional mortgage debt of approximately $1.1
billion assumed in connection with the 1996 and 1997 full-service hotel
additions, as well as the issuance of $600 million of 8 7/8% senior notes in
July 1997.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the Convertible Preferred Securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by the Company
in December 1996.
Interest Income. Interest income increased $4 million to $52 million for
1997, primarily reflecting the interest income on the available proceeds
generated by the December 1996 offering of Convertible Preferred Securities
and the proceeds generated by the issuance of the 8 7/8% senior notes in July
1997.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $47 million, compared to a $13 million loss before extraordinary
items for 1996 as a result of the items discussed above.
Extraordinary Gain (Loss). In March 1997, the Company purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. The Company purchased the bonds for $219 million, which was an $11
million discount to the face value of $230 million. In connection with the
redemption and defeasance of the bonds, the Company recognized an
extraordinary gain of $5 million, which represents the $11 million discount
less the write-off of unamortized deferred financing fees, net of taxes. In
December 1997, the Company refinanced the mortgage debt secured by the
Marriott's Orlando World Center. In connection with the refinancing, the
Company recognized an extraordinary loss of $3 million, which represents
payment of a prepayment penalty and the write-off of unamortized deferred
financing fees, net of taxes.
Net Income (Loss). The Company's net income in 1997 was $50 million,
compared to a net loss of $13 million in 1996.
1996 COMPARED TO 1995 (HISTORICAL)
Revenues. Revenues increased $248 million, or 51%, to $732 million in 1996.
The Company's revenue and operating profit were impacted by:
-- improved lodging results for comparable full-service hotel properties;
-- the addition of nine full-service hotel properties during 1995 and 23
full-service properties during 1996;
-- the 1996 and 1995 sale and leaseback of 53 of the Company's Courtyard
properties and 18 of the Company's Residence Inns;
-- the 1996 change in the estimated depreciable lives and salvage values
for certain hotel properties which resulted in additional depreciation
expense of $15 million;
-- the 1996 results including 53 weeks versus 52 weeks in 1995;
-- the $60 million pre-tax charge in 1995 to write down the carrying value
of one undeveloped land parcel to its estimated sales value;
-- a $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their
net realizable values included in "Net gains (losses) on property
transactions"; and
-- the 1995 sale of four Fairfield Inns.
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Hotel revenues increased $243 million, or 51%, to $717 million in 1996, as
all three of the Company's lodging concepts reported growth in REVPAR. Hotel
sales increased $590 million, or 44%, to $1.9 billion in 1996, reflecting the
REVPAR increases for comparable units and the addition of full-service
properties during 1995 and 1996.
Improved results for the Company's full-service hotels were driven by strong
increases in REVPAR for comparable units of 11% in 1996. Results were further
enhanced by an almost two percentage point increase in the house profit margin
for comparable full-service properties. On a comparable basis for the
Company's full-service properties, average room rates increased 8%, while
average occupancy increased over two percentage points.
Operating Costs and Expenses. Operating costs and expenses increased $129
million to $499 million for 1996, primarily representing increased hotel
operating costs, including depreciation, partially offset by the $60 million
pre-tax charge in 1995 to write down the carrying value of one undeveloped
land parcel to its estimated sales value. Hotel operating costs increased $180
million to $461 million, primarily due to the addition of 32 full-service
properties during 1995 and 1996, increased management fees and rentals tied to
improved property results and a change in the depreciable lives and salvage
values of certain large hotel properties ($15 million). As a percentage of
hotel revenues, hotel operating costs and expenses increased to 64% of
revenues for 1996, from 59% of revenues for 1995, reflecting the impact of the
lease payments on the Courtyard and Residence Inn properties which have been
sold and leased back, and the change in depreciable lives and salvage values
for certain large hotel properties discussed above, as well as the shifting
emphasis to full-service properties. Full-service hotel rooms accounted for
100% of the Company's total hotel rooms on January 3, 1997, versus 84% on
December 29, 1995.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $119
million, or 104%, to $233 million in 1996. Hotel operating profit increased
$63 million, or 33%, to $256 million, or 36% of hotel revenues, for 1996
compared to $193 million, or 41% of hotel revenues, for 1995. Across the
board, the Company's hotels recorded substantial improvements in comparable
operating results. In addition, several hotels, including the New York
Marriott Marquis, the New York Marriott East Side, the Philadelphia Marriott,
the San Francisco Marriott and the Miami Airport Marriott posted particularly
significant improvements in operating profit for the year. The Company's
Atlanta properties also posted outstanding results, primarily due to the 1996
Summer Olympics. Additionally, several hotels which recently converted to the
Marriott brand, including the Denver Marriott Tech Center, the Marriott's
Mountain Resort at Vail and the Williamsburg Marriott, recorded strong results
compared to the prior year as they completed renovations and began to realize
the benefit of their conversions.
Corporate Expenses. Corporate expenses increased $7 million to $43 million
in 1996. As a percentage of revenues, corporate expenses decreased to 5.9% of
revenues in 1996 from 7.4% of revenues in 1995. This reflects the Company's
efforts to carefully control its corporate administrative expenses in spite of
the substantial growth in revenues.
Interest Expense. Interest expense increased 33% to $237 million in 1996,
primarily due to the additional mortgage debt of approximately $696 million
incurred in connection with the 1996 full-service hotel additions and the
issuance of $350 million of notes issued by HMC Acquisition Properties, Inc.,
a wholly-owned subsidiary of the Company, in December 1995, partially offset
by the net impact of the 1995 redemptions of Host Marriott Hospitality, Inc.
notes ("Hospitality Notes").
Loss from Continuing Operations. The loss from continuing operations for
1996 decreased $49 million to $13 million, as a result of the changes
discussed above.
Net Loss. The Company's net loss in 1996 was $13 million, compared to a net
loss of $143 million in 1995, which included a $61 million loss from
discontinued operations and a $20 million extraordinary loss primarily
representing premiums paid on bond redemptions and the write-off of deferred
financing fees and discounts on the debt.
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PRO FORMA RESULTS OF OPERATIONS
Because the Company's Hotels will be leased following the REIT Conversion,
the Company does not believe that the historical results of operations will be
comparable to the results of operations of the Company following the REIT
Conversion. Accordingly, a comparison of the Company's pro forma results of
operations for the First Two Quarters 1998 to First Two Quarters 1997 and
fiscal year 1997 to fiscal year 1996 have been included below. The following
discussion and analysis should be read in conjunction with the Company's
combined consolidated financial statements and the Company's unaudited pro
forma financial statements and related notes thereto included elsewhere in
this Consent Solicitation. The following discussion and analysis has been
prepared assuming the following two scenarios:
. All Partnerships participate and no Notes are issued ("100% Participation
with No Notes Issued").
. All Partnerships participate and Notes are issued with respect to 100% of
the OP Units allocable to each Partnership ("100% Participation with
Notes Issued").
These presentations do not purport to represent what combination will result
from the Mergers and the REIT Conversion, but instead are designed to
illustrate what the composition of the Company would have been like under the
above scenarios. Furthermore, the unaudited pro forma financial statements do
not purport to represent what the Company's results of operations or cash
flows would actually have been if the Mergers and REIT Conversion had in fact
occurred on such date or at the beginning of such period or to project the
Company's results of operations or cash flows for any future date or period.
The following table presents the results of operations for the First Two
Quarters 1998 and the First Two Quarters 1997 on a pro forma basis under the
scenarios discussed above:
<TABLE>
<CAPTION>
100% PARTICIPATION 100% PARTICIPATION
WITH NO NOTES ISSUED WITH NOTES ISSUED
---------------------- --------------------
FIRST TWO QUARTERS FIRST TWO QUARTERS
---------------------- --------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Rental revenues(1)............... $ 625 $ 560 $ 625 $ 560
Total revenues................... 634 567 634 567
Operating costs and expenses..... 297 288 296 288
Operating profit before minority
interest, corporate expenses and
interest expense................ 337 279 338 279
Minority interest................ (11) (7) (11) (7)
Corporate expenses............... (20) (18) (20) (18)
Interest expense................. (203) (206) (211) (214)
Dividends on Convertible
Preferred Securities............ (17) (17) (17) (17)
Interest income.................. 20 12 20 12
---------- ---------- --------- ---------
Income (loss) before income
taxes........................... 106 43 99 35
Provision for income taxes....... (5) (2) (5) (2)
---------- ---------- --------- ---------
Income before extraordinary items
................................ $ 101 $ 41 $ 94 $ 33
========== ========== ========= =========
</TABLE>
- --------
(1) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
100% PARTICIPATION WITH NO NOTES ISSUED--FIRST TWO QUARTERS 1998 COMPARED TO
FIRST TWO QUARTERS 1997 (PRO FORMA)
Revenues. Revenues primarily represent lease revenues, net gains (losses) on
property transactions and equity in earnings (losses) of affiliates, including
the Non-Controlled Subsidiaries. Revenues increased $67 million, or 12%, to
$634 million for the First Two Quarters 1998 from $567 million for the First
Two Quarters 1997.
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<PAGE>
Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $133
million, or 7.5%, to over $1.9 billion in the First Two Quarters 1998,
reflecting the REVPAR increases for the Company's hotels. Improved results for
the Company's hotels were driven by strong increases in REVPAR of 8.2% to
$113.61 for the First Two Quarters 1998. Average room rates increased 9%,
while average occupancy decreased nearly one percentage point to 77.9%.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, property taxes, ground, rent, insurance and certain
other costs. Operating costs and expenses increased $9 million to $297 million
in the First Two Quarters 1998. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 47% of rental revenues in the First
Two Quarters 1998 from 50% of rental revenues in the First Two Quarters 1997
due to the significant increases in REVPAR discussed above, as well as the
operating leverage as a result of a significant portion of the Company's hotel
operating costs and expenses being fixed.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $58
million, or 21%, to $337 million for the First Two Quarters 1998. Hotel
operating profit increased $56 million, or 20%, to $333 million, or 53% of
rental revenues, for the First Two Quarters 1998 from $278 million, or 50% of
rental revenues, for the First Two Quarters 1997. Once again, the Company's
hotel recorded significant improvements in comparable operating results.
Specifically, hotels in New York City, Boston, Toronto and Atlanta reported
significant improvements for the First Two Quarters 1998. Properties in
Florida reported some temporary declines in operating results due to
exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $4 million to $11
million for the First Two Quarters 1998, primarily reflecting improved lodging
results.
Corporate Expenses. Corporate expenses increased $2 million to $20 million
for the First Two Quarters 1998 due to increased staffing levels and the
impact of inflation.
Interest Expense. Interest expense decreased $3 million to $203 million in
the First Two Quarters 1998, primarily due to the impact of principal
amortization on the Company's mortgage debt.
Dividends on Convertible Preferred Securities. The Dividends on Convertible
Preferred Securities reflect the dividends accrued during the First Two
Quarters 1998 and First Two Quarters 1997 on the $550 million in 6.75%
Convertible Preferred Securities issued by the Company in December 1996.
Interest Income. Interest income increased $8 million to $20 million for the
First Two Quarters 1998, primarily reflecting interest earned on cash, cash
equivalents and short-term marketable securities held for future hotel
investments.
Income before Extraordinary Items. Income before extraordinary items for the
First Two Quarters 1998 was $101million, compared to $41 million for the First
Two Quarters 1997.
100% PARTICIPATION WITH NOTES ISSUED--FIRST TWO QUARTERS 1998 COMPARED TO
FIRST TWO QUARTERS 1997 (PRO FORMA)
Revenues. Revenues increased $67 million, or 12%, to $634 million for the
First Two Quarters 1998 from $567 million for the First Two Quarters 1997.
Hotel sales (gross hotel sales, including room sales, food and beverage
sales, and other ancillary sales such as telephone sales) increased $133
million, or 7.5%, to over $1.9 billion in the First Two Quarters 1998,
reflecting the REVPAR increases for the Company's hotels. Improved results for
the Company's hotels were driven by strong increases in REVPAR of 8.2% to
$113.61 for the First Two Quarters 1998. Average room rates increased 9%,
while average occupancy decreased nearly one percentage point to 77.9%.
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<PAGE>
Operating Costs and Expenses. Operating costs and expenses increased $8
million to $296 million in the First Two Quarters 1998. As a percentage of
rental revenues, hotel operating costs and expenses decreased to 46% of
revenues in the First Two Quarters 1998 from 50% of rental revenues in the
First Two Quarters 1997 due to the significant increases in REVPAR discussed
above, as well as the operating leverage as a result of a significant portion
of the Company's hotel operating costs and expenses being fixed.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $59
million, or 21%, to $338 million for the First Two Quarters 1998. Hotel
operating profit increased $56 million, or 20%, to $334 million, or 54% of
rental revenues, for the First Two Quarters 1998 from $279 million, or 50% of
rental revenues, for the First Two Quarters 1997. Once again, the Company's
hotels recorded significant improvements in comparable operating results.
Specifically, hotels in New York City, Boston, Toronto and Atlanta reported
significant improvements for the First Two Quarters 1998. Properties in
Florida reported some temporary declines in operating results due to
exceptionally poor weather in 1998.
Minority Interest. Minority interest expense increased $4 million to $11
million for the First Two Quarters 1998, primarily reflecting improved lodging
results.
Corporate Expenses. Corporate expenses increased $2 million to $20 million
for the First Two Quarters 1998 due to increased staffing levels and the
impact of inflation.
Interest Expense. Interest expense decreased $3 million to $214 million in
the First Two Quarters 1998, primarily due to the impact of principal
amortization on the Company's mortgage debt.
Dividends on Convertible Preferred Securities. The Dividends on Convertible
Preferred Securities reflect the dividends accrued during the First Two
Quarters 1998 and First Two Quarters 1997 on the $550 million in 6.75%
Convertible Preferred Securities issued by the Company in December 1996.
Interest Income. Interest income increased $8 million to $20 million for the
First Two Quarters 1998, primarily reflecting interest earned on cash, cash
equivalents and short term marketable securities held for future hotel
investments.
Income (loss) before Extraordinary Items. Income before extraordinary items
for the First Two Quarters 1998 was $94 million, compared to $33 million for
the First Two Quarters 1997.
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<PAGE>
The following table presents the results of operations 1997 and 1996 on a
pro forma basis under the two pro forma scenarios:
<TABLE>
<CAPTION>
100% 100%
PARTICIPATION PARTICIPATION
WITH NO NOTES WITH NOTES
ISSUED ISSUED
-------------- --------------
FISCAL YEAR FISCAL YEAR
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Rental revenues(1)............................ $1,164 $1,054 $1,164 $1,054
Total revenues................................ 1,179 1,061 1,179 1,061
Operating costs and expenses.................. 642 603 640 601
Operating profit before minority interest,
corporate expenses and interest expense...... 537 458 539 460
Minority interest............................. (9) (9) (9) (9)
Corporate expenses............................ (44) (39) (44) (39)
Interest expense.............................. (437) (452) (454) (469)
Dividends on Convertible Preferred
Securities................................... (37) (37) (37) (37)
Interest income............................... 28 28 28 28
------ ------ ------ ------
Income (loss) before income taxes............. 38 (51) 23 (66)
Benefit (provision) for income taxes.......... (2) 3 (1) 3
------ ------ ------ ------
Income (loss) before extraordinary items ..... $ 36 $ (48) $ 22 $ (63)
====== ====== ====== ======
</TABLE>
- --------
(1) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
100% PARTICIPATION WITH NO NOTES ISSUED--1997 COMPARED TO 1996 (PRO FORMA)
Revenues. Revenues increased $118 million, or 11%, to $1,179 million for
1997. The Company's revenue and operating profit were principally impacted by
improved lodging results for its hotel properties, which led to a substantial
increase in rental revenues. The 1997 results also included 52 weeks versus 53
weeks in 1996.
Hotel sales increased $256 million, or 7.3%, to nearly $3.8 billion in 1997,
reflecting the increases in REVPAR. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR of 9.1% to $103.02 in
1997. Average room rates increased nearly 9%, while average occupancy
increased slightly to 77.8%.
Operating Costs and Expenses. Operating costs and expenses increased $39
million to $642 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of revenues for 1997, from 56%
of revenues for 1996, reflecting the impact of increased 1997 revenues on
relatively fixed operating costs and expenses.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's operating profit increased
$79 million, or 17%, to $537 million in 1997. Hotel operating profit increased
$71 million, or 15%, to $534 million, or 46% of rental revenues, for 1997
compared to $463 million, or 44% of rental revenues, for 1996. In nearly all
markets, the Company's hotels recorded improvements in comparable operating
results. In particular, the Company's hotels in the Northeast, Mid-Atlantic
and Pacific coast regions benefited from the upscale and luxury full-service
room supply and demand imbalance. Hotels in New York City, Philadelphia, San
Francisco/Silicon Valley and in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of the Company's hotel
125
<PAGE>
rooms in Atlanta are in the core business districts in downtown and Buckhead
where they realized strong year-over-year results and were only marginally
impacted by the additional supply.
Minority Interest. Minority interest expense remained at $9 million in 1997.
Corporate Expenses. Corporate expenses increased $5 million to $44 million
in 1997 due to increased staffing levels and the impact of inflation.
Interest Expense. Interest expense decreased $15 million to $437 million in
1997, primarily due to the impact of principal amortization on the Company's
mortgage debt.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the Convertible Preferred Securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by the Company.
Interest Income. Interest income remained unchanged at $28 million for 1997,
reflecting the interest income earned on the loan to the Non-Controlled
Subsidiary for its acquisition of furniture and equipment and loans to SLC.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $36 million, compared to a $48 million loss before extraordinary
items for 1996 as a result of the items discussed above.
100% PARTICIPATION WITH NOTES ISSUED--1997 COMPARED TO 1996 (PRO FORMA)
Revenues. Revenues increased $118 million, or 11%, to $1,179 million for
1997. The Company's revenue and operating profit were principally impacted by
improved lodging results for the Company's hotel properties, which led to a
substantial increase in rental revenues. The 1997 results also included 52
weeks versus 53 weeks in 1996.
Hotel sales increased $256 million, or 7.3%, to nearly $3.8 billion in 1997,
reflecting increases in REVPAR. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR of 9.1% to $103.02 in
1997. Average room rates increased nearly 9%, while average occupancy
increased slightly to 77.8%.
Operating Costs and Expenses. Operating costs and expenses increased $39
million to $640 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of revenues for 1997, from 56%
of revenues for 1996, reflecting the impact of increased 1997 rental revenues
on relatively fixed operating costs and expenses.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $79
million, or 17%, to $539 million in 1997. Hotel operating profit increased $71
million, or 15%, to $535 million, or 46% of rental revenues, for 1997 compared
to $465 million, or 44% of rental revenues, for 1996. In nearly all markets,
the Company's hotels recorded improvements in comparable operating results. In
particular, the Company's hotels in the Northeast, Mid-Atlantic and Pacific
coast regions benefited from the upscale and luxury full-service room supply
and demand imbalance. Hotels in New York City, Philadelphia, San
Francisco/Silicon Valley and in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of the Company's hotel rooms in Atlanta are in
the core business districts in downtown and Buckhead where they realized
strong year-over-year results and were only marginally impacted by the
additional supply.
Minority Interest. Minority interest remained at $9 million for 1997.
Corporate Expenses. Corporate expenses increased $5 million to $44 million
in 1997 due to increased staffing levels and the impact of inflation.
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<PAGE>
Interest Expense. Interest expense decreased $13 million to $454 million in
1997, reflecting the impact of principal amortization on the Company's
mortgage debt.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the Convertible Preferred Securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by the Company.
Interest Income. Interest income remained unchanged at $28 million for 1997,
reflecting the interest income earned on the loan to the Non-Controlled
Subsidiary for its acquisition of furniture and equipment and loans to SLC.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $22 million, compared to a $63 million loss before extraordinary
items for 1996 as a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating
cash flow, debt and equity financing and proceeds from sales of selected
properties and other assets. The Company utilizes these sources of capital to
acquire new properties, fund capital additions and improvements, and make
principal payments on debt.
Capital Transactions. The Company has recently substantially changed its
debt financing through the following series of transactions which were
intended to facilitate the consummation of the REIT Conversion.
On April 20, 1998, the Host Marriott and certain of its subsidiaries filed a
shelf registration statement on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for $2.5 billion in securities, which may
include debt, equity or any combination thereof. The Company anticipates that
any net proceeds from the sale of offered securities will be used for
refinancing of the Company's indebtedness, for acquisitions and general
corporate purposes.
On August 5, 1998, HMH Properties, Inc. ("HMH Properties"), an indirect
wholly-owned subsidiary of the Company, which owns 61 of the Company's hotels,
purchased substantially all of its (i) $600 million in 9 1/2% senior notes due
2005, (ii) $350 million in 9% senior notes due 2007 and (iii) $600 million in
8 7/8% senior notes due 2007 (collectively, the "Old Senior Notes").
Concurrently with each offer to purchase, HMH Properties solicited consents
(the "1998 Consent Solicitations") from registered holders of the Old Senior
Notes to certain amendments to eliminate or modify substantially all of the
restrictive covenants and certain other provisions contained in the indentures
pursuant to which the Old Senior Notes were issued. HMH Properties
simultaneously utilized the Shelf Registration to issue an aggregate of $1.7
billion in senior notes (the "New Senior Notes"). The New Senior Notes were
issued in two series, $500 million of 7 7/8 Series A notes due in 2005 and
$1.2 billion of 7 7/8 Series B notes due in 2008. The 1998 Consent
Solicitations facilitated the merger of HMC Capital Resources Holdings
Corporation ("Capital Resources"), a wholly-owned subsidiary of the Company,
with and into HMH Properties. Capital Resources, the owner of eight of the
Company's hotel properties, was the obligor under the $500 million credit
facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility") with
a group of commercial banks. The New Credit Facility will initially have a
three year term with two one-year extension options. Borrowings under the New
Credit Facility generally bear interest at the Eurodollar rate plus 1.75%. The
interest rate and commitment fee (currently 0.35%) on the unused portion of
the New Credit Facility fluctuate based on certain financial ratios. The New
Senior Notes and the New Credit Facility are guaranteed by Host Marriott and
its wholly owned subsidiary, Host Marriott Hospitality, Inc. and certain
subsidiaries of HMH Properties and are secured by pledges of equity interests
in certain subsidiaries of HMH Properties.
127
<PAGE>
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
distributions to equityholders of HMH Properties, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT. The
New Credit Facility and the New Senior Notes also contain certain financial
covenants relating to, among other things, maintaining certain levels of
tangible net worth and certain ratios of EBITDA to interest and fixed charges,
total debt to EBITDA, unencumbered assets to unsecured debt, and secured debt
to total debt.
The New Credit Facility replaces the Company's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility were
used by the Company to purchase substantially all of the Existing Senior
Notes, to repay amounts outstanding under the Existing Credit Facility and to
make bond premium and consent payments totaling $178 million. These costs,
along with the write-off of deferred financing fees of approximately $55
million related to the Existing Senior Notes and the Existing Credit Facility,
will be recorded as a pre-tax extraordinary loss on the extinguishment of debt
in the third quarter of 1998.
In June 1997, HMC Capital Resources Corporation ("Capital Resources"), a
wholly owned subsidiary of the Company, entered into a revolving line of
credit agreement ("the Existing Credit Facility") with a group of commercial
banks under which it may borrow up to $500 million for certain permitted uses.
As a result of this transaction, the Company terminated its line of credit
with Marriott International.
In July 1997, HMH Properties, Inc. ("Properties") and HMC Acquisition
Properties, Inc. ("Acquisitions"), indirect, wholly-owned subsidiaries of the
Company, completed consent solicitations with holders of their senior notes
(the "1997 Consent Solicitations") to amend certain provisions of their senior
notes indentures. The 1997 Consent Solicitations facilitated the merger of
Acquisitions with and into Properties (the "Properties Merger"). The
amendments to the indentures also increased the ability of Properties to
acquire, through certain subsidiaries, additional properties subject to non-
recourse indebtedness and controlling interests in corporations, partnerships
and other entities holding attractive properties and increased the threshold
for distributions to affiliates to the excess of Properties' earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items subsequent to the 1997 Consent Solicitations over 220% of
Properties' interest expense. Properties paid dividends to the Company of $54
million, $29 million and $36 million in 1997, 1996 and 1995, respectively, as
permitted under the indentures.
Concurrent with the 1997 Consent Solicitations and the Properties Merger,
Properties issued an aggregate of $600 million of 8 7/8% senior notes at par
with a maturity of July 2007. Properties received net proceeds of
approximately $570 million, net of the costs of the 1997 Consent Solicitations
and the offering.
In addition to the capital resources provided by its new debt financings,
Host Marriott Financial Trust (the "Issuer"), a wholly owned subsidiary trust
of Host Marriott, has outstanding 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million) issued in December 1996. The Convertible
Preferred Securities represent an undivided beneficial interest in the assets
of the Issuer and, pursuant to various agreements entered into in connection
with the transaction, are fully, irrevocably and unconditionally guaranteed by
Host. Proceeds from the issuance of the Convertible Preferred Securities were
invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures") due
December 2, 2026 issued by Host. The Issuer exists solely to issue the
Convertible Preferred Securities and its own common securities (the "Common
Securities") and invest the proceeds therefrom in the Debentures, which are
its sole assets. Each of the Convertible Preferred Securities is convertible
at the option of the holder into shares of Host common stock at the rate of
2.6876 shares per Convertible Preferred Security (equivalent to a conversion
price of $18.604 per share of Host common stock). The Debentures are
convertible at the option of the holders into shares of Company common stock
at a conversion rate of 2.6876 shares for each $50 in principal amount of
Debentures. The Issuer will only convert Debentures pursuant to a notice of
conversion by a holder of Securities. During 1997 and 1996, no shares were
converted into common stock. Holders of the Convertible Preferred Securities
128
<PAGE>
are entitled to receive preferential cumulative cash distributions at an
annual rate of 6 3/4% accruing from the original issue date, commencing March
1, 1997, and payable quarterly in arrears thereafter. The distribution rate
and the distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other payment
dates on the Debentures. Host may defer interest payments on the Debentures
for a period not to exceed 20 consecutive quarters. If interest payments on
the Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, Host will not be permitted to declare or
pay any cash distributions with respect to its capital stock or debt
securities that rank pari passu with or junior to the Debentures. Subject to
certain restrictions, the Convertible Preferred Securities are redeemable at
the Issuer's option upon any redemption by Host of the Debentures after
December 2, 1999. Upon repayment at maturity or as a result of the
acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
The obligation for the Convertible Preferred Securities has been pushed down
to these financial statements because it is expected that, upon the REIT
Conversion, the Operating Partnership will assume primary liability for
repayment of the convertible debentures of Host underlying the Convertible
Preferred Securities. Upon conversion by a Convertible Preferred Securities
holder, the Operating Partnership will purchase Common Shares from Host REIT
in exchange for a like number of OP Units and distribute the Common Shares to
the Convertible Preferred Securities holder.
In March 1996, Host Marriott completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
In December 1995, Acquisitions issued $350 million of 9% senior notes (the
"Acquisitions Notes"). The Acquisitions Notes were issued at par and have a
final maturity of December 2007. The net proceeds totaled $340 million and
were utilized to repay in full the outstanding borrowings of $210 million
under Acquisitions' $230 million revolving credit facility (the "Revolver"),
which was then terminated to acquire three full-service properties and to
finance future acquisitions of full-service hotel properties with the
remaining proceeds.
In May 1995, two wholly owned subsidiaries of Host Marriott Hospitality,
Inc. ("Hospitality"), a wholly- owned subsidiary of the Company, issued an
aggregate of $1 billion of 9.5% senior secured notes in two concurrent
offerings. Properties, and Host Marriott Travel Plazas, Inc. ("HMTP"), the
operator/manager of HM Services' food, beverage and merchandise concessions
business, issued $600 million and $400 million, respectively, of senior notes.
The net proceeds of approximately $971 million were used to defease, and
subsequently redeem, all of Hospitality's remaining bonds and to repay
borrowings under the line of credit with Marriott International. The HMTP
senior notes were included in the HM Services' special dividend.
During 1995, the Company replaced its line of credit with a line of credit
from Marriott International pursuant to which the Company had the right to
borrow up to $225 million. The line of credit with Marriott International was
terminated as a result of the Capital Resources transaction discussed above.
Asset Dispositions. The Company historically has sold, and may from time to
time in the future consider opportunities to sell, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. During the second quarter of 1998,
the Company sold the 662-room New York Marriott East Side for proceeds of $191
million and recorded a pre-tax gain of approximately $40 million and the Napa
Valley Marriott for proceeds of $21 million and recorded a pre-tax gain of
approximately $10 million. During 1997, the Company sold the 255-room Sheraton
Elk Grove Suites for proceeds of approximately $16 million. The Company also
sold 90% of its 174-acre parcel of undeveloped land in Germantown, Maryland,
for approximately $11 million, which approximated its carrying value. During
the first and second quarters of 1996, 16 of the Company's Courtyard
properties and 18 of the Company's Residence Inn properties were sold (subject
to a leaseback) to Hospitality Properties Trust for approximately $314 million
and the Company will receive approximately $35 million upon expiration of the
leases. A gain on the transactions of approximately $46 million was deferred
and is being amortized over the initial term of the leases.
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During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold to and leased back from Hospitality Properties Trust for
approximately $330 million. The Company received net proceeds from the two
1995 transactions of approximately $297 million and will receive approximately
$33 million upon expiration of the leases. A deferred gain of $14 million on
the sale/leaseback transactions is being amortized over the initial term of
the leases. In 1995, the Company also sold its four remaining Fairfield Inns
for net cash proceeds of approximately $6 million, which approximated their
carrying value.
In cases where the Company has made a decision to dispose of particular
properties, the Company assesses impairment of each individual property to be
sold on the basis of expected sales price less estimated costs of disposal.
Otherwise, the Company assesses impairment of its real estate properties based
on whether it is probable that undiscounted future cash flows from such
properties will be less than their net book value. If a property is impaired,
its basis is adjusted to its fair market value. In the second quarter of 1995,
the Company made a determination that its owned Courtyard and Residence Inn
properties were held for sale and recorded a $10 million charge to write down
the carrying value of five individual Courtyard and Residence Inn properties
to their estimated net sales values.
Capital Acquisitions, Additions and Improvements. The Company seeks to grow
primarily through opportunistic acquisitions of full-service hotels. The
Company believes that the upscale and luxury full-service hotel segments of
the market offer opportunities to acquire assets at attractive multiples of
cash flow and at discounts to replacement value, including under performing
hotels which can be improved by conversion to the Marriott or Ritz-Carlton
brands. During 1997, the Company acquired eight full-service hotels (3,600
rooms) and controlling interests in nine additional full-service hotels (5,024
rooms) for an aggregate purchase price of approximately $766 million
(including the assumption of approximately $418 million of debt). The Company
also completed the acquisition of the 504-room New York Marriott Financial
Center, after acquiring the mortgage on the hotel for $101 million in late
1996. During 1996, the Company acquired six full-service hotels (1,964 rooms)
for an aggregate purchase price of $189 million and controlling interests in
17 additional full-service properties (8,917 rooms) for an aggregate purchase
price of approximately $1.1 billion (including the assumption of $696 million
of debt). During 1995, the Company acquired nine hotels totaling approximately
3,900 rooms in separate transactions for approximately $390 million ($141
million of which was financed through first mortgage financing on four of the
hotels).
In First Quarter 1998, the Company acquired a controlling interest in the
partnership that owns the 1,671-room Atlanta Marriott Marquis Hotel for $239
million, including the assumption of $164 million of mortgage debt. The
Company also acquired a controlling interest in the partnership that owns the
359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and
the 320-room Minneapolis Marriott Southwest for approximately $50 million. In
the second quarter of 1998, the Company acquired the 289-room Park Ridge
Marriott for $24 million and acquired the 281-room Ritz-Carlton, Phoenix for
$75 million. The Company is continually engaged in discussions with respect to
other potential acquisition properties. In addition, the Company acquired the
397-room Ritz-Carlton, Tysons Corner, Virginia and the 487-room Torrance
Marriott near Los Angeles, California.
On April 17, 1998, the Company announced that it had reached a definitive
agreement with the Blackstone Entities to acquire interests in twelve world-
class luxury hotels and certain other assets in a transaction valued at
approximately $1.735 billion, including the assumption of debt. The Company
expects to pay approximately $862 million in cash and assumed debt and to
issue approximately 43.7 million OP Units. The Blackstone portfolio consists
of two Ritz-Carltons, two Four Seasons, one Grand Hyatt, three Hyatt Regencies
and four Swissotel properties and the mortgage on a third Four Seasons. These
hotels are located in major urban and convention/resort markets with
significant barriers to new competition. The Blackstone Acquisition is
expected to close simultaneously with the REIT Conversion. At that time, the
Blackstone hotels and other assets will be purchased by the Operating
Partnership. The hotels will be leased to Lessees and will be managed on
behalf of the Lessees under their existing management contracts.
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Under the terms of its hotel management agreements, the Company is generally
required to spend approximately 5% of gross hotel sales to cover the capital
needs of the properties, including major guest room and common area
renovations which occur every five to six years.
The Company completed the construction of the 1,200-room Philadelphia
Marriott, which opened on January 27, 1995. The construction costs of this
hotel were funded 60% through a loan from Marriott International which was
repaid in the fourth quarter of 1996. In March 1997, the Company obtained a
$90 million mortgage which bears interest at a fixed rate of 8.49% and matures
in 2009. Construction of a second hotel in Philadelphia, the 419-room
Philadelphia Airport Marriott (the "Airport Hotel"), was completed and opened
on November 1, 1995. The Airport Hotel was financed principally with $40
million of proceeds from an industrial development bond financing. The Company
also completed construction of a 300-room Residence Inn in Arlington,
Virginia, which opened in March 1996. Capital expenditures for these three
hotels totaled $11 million in 1996 and $64 million in 1995.
In November 1997, the Company announced that it had committed to develop and
construct the 717-room Tampa Convention Center Marriott for a cost estimated
at approximately $88 million, net of an approximate $16 million subsidy
provided by the City of Tampa.
The Company may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to the Company as the success of the market is generally
known and development time is significantly shorter than new construction. The
Company recently committed to add approximately 500 rooms and an additional
15,000 square feet of meeting space to the 1,503-room Marriott's Orlando World
Center.
Debt Payments. At January 2, 1998, the Company and its subsidiaries had
$1,585 million of senior notes, $1,784 million of non-recourse mortgage debt
secured by real estate assets and $97 million of unsecured and other debt.
Scheduled maturities over the next five years were $763 million as of
January 2, 1998, a significant portion of which represents the maturity of the
mortgage on the New York Marriott Marquis of approximately $270 million in
December 1998. Management anticipates that the mortgage will be refinanced by
the end of 1998 on comparable terms. The Company's interest coverage, defined
as EBITDA divided by cash interest expense, improved to nearly 2.5 times in
1997 from 2.0 times in 1996.
At January 2, 1998, the Company was party to an interest rate exchange
agreement with a financial institution (the contracting party) with an
aggregate notional amount of $100 million. Under this agreement, the Company
collects interest based on specified floating interest rates of one month
LIBOR (rate of 6% at January 2, 1998) and pays interest at fixed rates (rate
of 7.99% at January 2, 1998). This agreement expires in 1998, in conjunction
with the maturity of the mortgage on the New York Marriott Marquis. Also in
1997, the Company was party to two additional interest rate swap agreements
with an aggregate notional amount of $400 million. These agreements expired in
May 1997. The Company realized a net reduction of interest expense of $1
million in 1997, $6 million in 1996 and $5 million in 1995 related to interest
rate exchange agreements. The Company monitors the creditworthiness of its
contracting parties by evaluating credit exposure and referring to the ratings
of widely accepted credit rating services. The Standard and Poors' long-term
debt ratings for the contracting party is A- for its sole outstanding interest
rate exchange agreement. The Company is exposed to credit loss in the event of
non-performance by the contracting party to the interest rate swap agreement;
however, the Company does not anticipate non-performance by the contracting
party.
Cash Flows. The Company's cash flow from continuing operations in 1997,
1996 and 1995 totaled $432 million, $205 million and $110 million,
respectively. Cash flow from operations in the First Two Quarters 1998 and
First Two Quarters 1997 totaled $206 million and $193 million, respectively.
Cash flow from operations increased principally due to improved lodging
results and the significant acquisitions of hotels.
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The Company's cash used in investing activities from continuing operations
in 1997, 1996 and 1995 totaled $807 million, $504 million and $156 million,
respectively. Cash used in investing activities was $49 million and $200
million for the First Two Quarters 1998 and the First Two Quarters 1997,
respectively. Cash from investing activities primarily consists of net
proceeds from the sales of certain assets, offset by the acquisition of hotels
and other capital expenditures previously discussed, as well as the purchases
and sales of short-term marketable securities. Cash used in investing
activities was significantly impacted by the purchase of $354 million of
short-term marketable securities in 1997 and the net sale of $308 million of
short-term marketable securities in the First Two Quarters 1998.
The Company's cash from financing activities from continuing operations was
$165 million for 1997, $806 million for 1996 and $204 million for 1995. Cash
used in financing activities was $155 million and $188 million, respectively,
for the First Two Quarters 1998 and First Two Quarters 1997. The Company's
cash from financing activities primarily consists of the proceeds from debt
and equity offerings, the issuance of the Convertible Preferred Securities,
mortgage financing on certain acquired hotels and borrowings under the Line of
Credit, offset by redemptions and payments on senior notes, prepayments on
certain hotel mortgages and other scheduled principal payments.
The ratio of earnings to fixed charges was 2.0 to 1.0, 1.5 to 1.0, 1.3 to
1.0, 1.0 to 1.0 and .7 to 1.0 for the First Two Quarters 1998, the First Two
Quarters 1997, 1997, 1996 and 1995, respectively. The deficiency of earnings
to fixed charges of $70 million for 1995 is largely the result of depreciation
and amortization of $122 million. In addition, the deficiency for 1995 was
impacted by the $60 million pre-tax charge to write down the carrying value of
one undeveloped land parcel to its estimated sales value.
Comparative FFO.
The Company believes that Comparative Funds From Operations ("Comparative
FFO," which represents Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, Inc. plus deferred tax expense)
is a meaningful disclosure that will help the investment community to better
understand the financial performance of the Company, including enabling its
shareholders and analysts to more easily compare the Company's performance to
REITs. FFO is defined by NAREIT as net income computed in accordance with
GAAP, excluding gains or losses from debt restructurings and sales of
properties, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. FFO should not
be considered as an alternative to net income, operating profit, cash flows
from operations or any other operating or liquidity performance measure
prescribed by GAAP. FFO is also not an indicator of funds available to fund
the Company's cash needs, including its ability to make distributions. The
Company's method of calculating FFO may be different from methods used by
other REITs and, accordingly, is not comparable to such other REITs.
Comparative FFO increased $45 million, or 31%, to $190 million in the First
Two Quarters 1998. Comparative FFO increased $121 million, or 74%, to $285
million in 1997. The following is a reconciliation of the Company's income
(loss) before extraordinary items to Comparative FFO (in millions):
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
------------------ ------------
1998 1997 1997 1996
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Income (loss) before extraordinary
items.................................. $ 93 $ 32 $ 47 $ (13)
Real estate related depreciation and
amortization........................... 114 101 231 168
Other real estate activities............ (52) 2 5 7
Partnership adjustments................. (8) -- (13) 1
REIT Conversion expenses................ 6 -- -- --
Deferred taxes.......................... 37 10 15 1
--------- --------- ----- -----
Comparative FFO....................... $ 190 $ 145 $ 285 $ 164
========= ========= ===== =====
</TABLE>
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The Company considers Comparative FFO to be an indicative measure of the
Company's operating performance due to the significance of the Company's long-
lived assets and because such data is considered useful by the investment
community to better understand the Company's results, and can be used to
measure the Company's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as an
alternative to net income, operating profit, cash from operations or any other
operating or liquidity performance measure prescribed by generally accepted
accounting principles. Cash expenditures for various long-term assets and
income taxes have been, and will be, incurred which are not reflected in the
Comparative FFO presentation.
Partnership Activities. The Company has general and limited partner
interests in numerous limited partnerships which own 240 hotels (including 20
full-service hotels) as of the date hereof, managed by Marriott International.
Debt of the hotel limited partnerships is typically secured by first mortgages
on the properties and is generally nonrecourse to the partnership and the
partners. However, the Company has committed to advance amounts to certain
affiliated limited partnerships, if necessary, to cover certain future debt
service requirements. Such commitments were limited, in the aggregate, to an
additional $60 million at January 2, 1998. Subsequent to year-end, this amount
was reduced to $20 million in connection with the refinancing and acquisition
of a controlling interest in the partnership which owns the Atlanta Marriott
Marquis. Amounts repaid to the Company under these guarantees totaled $2
million and $13 million in 1997 and 1996, respectively. Fundings by the
Company under these guarantees amounted to $10 million in 1997 and $8 million
for 1995.
Leases. The Company leases certain property and equipment under
noncancelable operating leases, including the long-term ground leases for
certain hotels, generally with multiple renewal options. The leases related to
the 53 Courtyard properties and 18 Residence Inn properties sold during 1995
and 1996 are non- recourse to the Company and contain provisions for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts. The Company remains contingently liable on certain leases
related to divested non-lodging properties. Such contingent liabilities
aggregated $110 million at January 2, 1998. However, management considers the
likelihood of any substantial funding related to these divested properties'
leases to be remote.
Inflation. The Company's hotel lodging properties are impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers.
A substantial portion of the Company's debt bears interest at fixed rates.
This debt structure largely mitigates the impact of changes in the rate of
inflation on future interest costs. However, the Company currently is exposed
to variable interest rates through an interest rate exchange agreement with a
financial institution with an aggregate notional amount of $100 million. Under
this agreement, the Company collects interest based on the specified floating
rates of one month LIBOR (rate of 6% at January 2, 1998) and pays interest at
fixed rates (rate of 7.99% at January 2, 1998). This agreement expires in 1998
in conjunction with the maturity of the mortgage on the New York Marriott
Marquis. The Company's Line of Credit and the mortgage on the San Diego
Marriott Hotel and Marina ($199 million at January 2, 1998) bears interest
based on variable rates. Accordingly, the amount of the Company's interest
expense under the interest rate swap agreements and the floating rate debt for
a particular year will be affected by changes in short-term interest rates.
Year 2000 Issues. Over the last few years, the Company has invested in
implementing new accounting systems which are Year 2000 compliant.
Accordingly, the Company believes that future costs associated with Year 2000
issues will be minimal and not material to the Company's consolidated
financial statements.
However, the Company does rely upon accounting software used by the managers
and operators of its properties to obtain financial information. Management
believes that the managers and operators have begun to implement changes to
the property specific software to ensure that software will function properly
in the Year 2000 and does not expect to incur significant costs related to
these modifications.
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Accounting Standards. The Company adopted Statements of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during 1995. Adoption of these statements
did not have a material effect on the Company's continuing operations. See the
discussion below for a discussion of the impact of the adoption of SFAS No.
121 on discontinued operations.
SFAS No. 121 requires that an impairment loss be recognized when the
carrying amount of an asset exceeds the sum of the undiscounted estimated
future cash flows associated with the asset. Under SFAS No. 121, the Company
reviewed the impairment of its assets employed in its operating group business
lines (airport, toll plaza and sports and entertainment) on an individual
operating unit basis. For each individual operating unit determined to be
impaired, an impairment loss equal to the difference between the carrying
value and the fair market value of the unit's assets was recognized. Fair
market value was estimated to be the present value of expected future cash
flows of the individual operating unit, as determined by management, after
considering such factors as future air travel and toll-pay vehicle data and
inflation. As a result of the adoption of SFAS No. 121, the Company recognized
a non-cash, pre-tax charge against earnings during the fourth quarter 1995 of
$47 million, which was reflected in discontinued operations.
In the fourth quarter of 1996, the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation." The adoption of SFAS No. 123 did not have a
material effect on the Company's financial statements.
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," SFAS
No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein.
In the First Quarter 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in financial statements.
The objective of SFAS No. 130 is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of
the period other than transactions with owners. Comprehensive income is the
total of net income and all other nonowner changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
common stock or an equivalent cash value subsequent to exercise of the options
held by certain former and current employees of Marriott International. For
the First Quarter 1998 and First Quarter 1997, the Company had no other
comprehensive income. As of June 19, 1998 and January 2, 1998, the Company's
accumulated other comprehensive income was approximately $11 million and $10
million, respectively.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS OF HOST REIT
The following table sets forth certain information with respect to persons
who will be Trustees immediately after the completion of the REIT Conversion,
and the executive officers of Host REIT (or the Operating Partnership), all of
whom are currently directors, executive officers or key employees of Host.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH HOST REIT (OR THE OPERATING PARTNERSHIP)
---- --- ------------------------------------------------------
<S> <C> <C>
Richard E. Marriott(1).. 59 Chairman of the Board of Trustees
J.W. Marriott, Jr.(1)... 66 Trustee
R. Theodore Ammon....... 48 Trustee
Robert M. Baylis........ 59 Trustee
Ann Dore McLaughlin..... 56 Trustee
Harry L. Vincent, Jr.... 78 Trustee
John G. Schreiber....... 51 Trustee
Terence C. Golden....... 53 Trustee, President and Chief Executive Officer
Robert E. Parsons,
Jr. ................... 42 Executive Vice President and Chief Financial Officer
Christopher J.
Nassetta............... 35 Executive Vice President and Chief Operating Officer
Christopher G.
Townsend............... 50 Senior Vice President, General Counsel and Corporate Secretary
Donald D. Olinger....... 39 Senior Vice President and Corporate Controller
</TABLE>
- --------
(1) Richard E. Marriott and J.W. Marriott, Jr. are brothers.
The following is a biographical summary of the experience of the Trustees
and officers of Host REIT:
Richard E. Marriott. Mr. Richard E. Marriott has been a Director of Host
since 1979 and is a Director of Marriott International, Inc., Host Marriott
Services Corporation, Potomac Electric Power Company and the Polynesian
Cultural Center, and he is Chairman of the Board of First Media Corporation.
He also serves as a Director of certain subsidiaries of Host and is a past
President of the National Restaurant Association. In addition, Mr. Marriott is
the President and a Trustee of the Marriott Foundation for People with
Disabilities. Mr. Marriott's term as a Director of Host expires at the 2001
annual meeting of shareholders. Mr. Marriott joined Host in 1965 and has
served in various executive capacities. In 1984, he was elected Executive Vice
President, and in 1986, he was elected Vice Chairman of the Board of
Directors. In 1993, Mr. Marriott was elected Chairman of the Board. Mr.
Marriott also has been responsible for management of Host's government affairs
functions.
J.W. Marriott, Jr. Mr. J.W. Marriott, Jr. has been a Director of Host since
1964 and is Chairman of the Board and Chief Executive Officer of Marriott
International, Inc., and a Director of Host Marriott Services Corporation,
General Motors Corporation and the U.S.-Russia Business Council. He also
serves on the Boards of Trustees of the Mayo Foundation, Georgetown University
and the National Geographic Society. He is on the President's Advisory
Committee of the American Red Cross, the Executive Committee of the World
Travel & Tourism Council and is a member of the Business Council and the
Business Roundtable. Mr. Marriott's term as a Director of Host expires at the
1999 annual meeting of shareholders.
R. Theodore Ammon. Mr. Ammon has been a Director of Host since 1992 and is a
private investor and Chairman of Big Flower Holdings, Inc. He was formerly a
General Partner of Kohlberg Kravis Roberts & Company (a New York and San
Francisco-based investment firm) from 1990 to 1992, and was an executive of
such firm prior to 1990. Mr. Ammon is also a member of the Board of Directors
of Samsonite Corporation and Culligan Water Technologies, Inc. In addition, he
serves on the Board of Directors of the New York YMCA, Jazz @ Lincoln Center
and the Institute of International Education and on the Board of Trustees of
Bucknell University. Mr. Ammon's term as a Director of Host expires at the
2001 annual meeting of shareholders.
Robert M. Baylis. Mr. Baylis has been a Director of Host since 1996 and is a
Director of The International Forum, an executive education program of the
Wharton School of the University of Pennsylvania. He was
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formerly Vice Chairman of CS First Boston. Mr. Baylis also serves as a
Director of New York Life Insurance Company, Covance, Inc. and Gryphon
Holdings, Inc. In addition, he is an overseer of the University of
Pennsylvania Museum of Archeology and Anthropology. Mr. Baylis's term as a
Director of Host expires at the 2000 annual meeting of shareholders.
Ann Dore McLaughlin. Ms. McLaughlin has been a Director of Host since 1993
and currently is Chairman of the Aspen Institute. She formerly served as
President of the Federal City Council from 1990 until 1995. Ms. McLaughlin has
served with distinction in several U.S. Administrations in such positions as
Secretary of Labor and Under Secretary of the Department of the Interior. She
also serves as a Director of AMR Corporation, Fannie Mae, General Motors
Corporation, Kellogg Company, Nordstrom, Potomac Electric Power Company, Union
Camp Corporation, Donna Karan International, Inc., Vulcan Materials Company,
Harman International Industries, Inc. and Sedgwick Group plc. Ms. McLaughlin's
term as a Director of Host expires at the 2000 annual meeting of shareholders.
Harry L. Vincent, Jr. Mr. Vincent has been a Director of Host since 1969 and
is a retired Vice Chairman of Booz-Allen & Hamilton, Inc. He also served as a
Director of Signet Banking Corporation from 1973 until 1989. Mr. Vincent's
term as a Director of Host expires at the 1999 annual meeting of shareholders.
John G. Schreiber. Mr. Schreiber has been a Director of Host since 1998 and
is President of Schreiber Investments, Inc. and a Senior Advisor and Partner
of Blackstone Real Estate Advisors, L.P. Mr. Schreiber serves as a Trustee of
AMLI Residential Properties Trust and as a Director of Urban Shopping Centers,
Inc., JMB Realty Corporation and a number of mutual funds advised by T. Rowe
Price Associates, Inc. Prior to his retirement as an officer of JMB Realty
Corporation in 1990, Mr. Schreiber was Chairman and CEO of JMB/Urban
Development Company and an Executive Vice President of JMB Realty Corporation.
Terence C. Golden. Mr. Golden has been a Director of Host since 1995 and
was named President and Chief Executive Officer of Host in 1995. Mr. Golden
also serves as a Director of certain subsidiaries of Host. He also serves as
Chairman of Bailey Realty Corporation and Bailey Capital Corporation and
various affiliated companies. In addition, Mr. Golden is Chairman of the
Washington Convention Center and a Director of Prime Retail, Inc., Cousins
Properties, Inc., The Morris and Gwendolyn Cafritz Foundation and the District
of Columbia Early Childhood Collaborative. He is also a member of the
Executive Committee of the Federal City Council. Mr. Golden's term as a
Director of Host expires at the 2000 annual meeting of shareholders. Prior to
joining Host, Mr. Golden was Chairman of Bailey Realty Corporation and prior
to that had served as Chief Financial Officer of The Oliver Carr Company.
Before joining The Oliver Carr Company, he served as Administrator of the
General Services Administration and as Assistant Secretary of Treasury, and he
was co-founder and national managing partner of Trammel Crow Residential
Companies.
Robert E. Parsons, Jr. Mr. Parsons joined Host's Corporate Financial
Planning staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr.
Parsons was elected Senior Vice President and Treasurer of Host, and in 1995,
he was elected Executive Vice President and Chief Financial Officer of Host.
Christopher J. Nassetta. Mr. Nassetta joined Host in October 1995 as
Executive Vice President and was elected Chief Operating Officer of Host in
1997. Prior to joining Host, Mr. Nassetta served as President of Bailey Realty
Corporation from 1991 until 1995. He had previously served as Chief
Development Officer and in various other positions with The Oliver Carr
Company from 1984 through 1991.
Christopher G. Townsend. Mr. Townsend joined Host's Law Department in 1982
as a Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of
Host, and in 1986, he was made Assistant General Counsel. In 1993, Mr.
Townsend was elected Senior Vice President, Corporate Secretary and Deputy
General Counsel. In January 1997, he was elected General Counsel.
Donald D. Olinger. Mr. Olinger joined Host in 1993 as Director--Corporate
Accounting. Later in 1993, Mr. Olinger was promoted to Senior Director and
Assistant Controller. He was promoted to Vice President--
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Corporate Accounting in 1995. In 1996, he was elected Senior Vice President
and Corporate Controller. Prior to joining Host, Mr. Olinger was with the
public accounting firm of Deloitte & Touche.
COMMITTEES OF THE BOARD OF TRUSTEES
Promptly following the consummation of the REIT Conversion, the Board of
Trustees of Host REIT will establish the following committees:
Audit Committee. The Audit Committee will be comprised of five Trustees who
are not employees of the Trust, namely, R. Theodore Ammon (Chair), Harry L.
Vincent, Jr., Ann Dore McLaughlin, John G. Schreiber and Robert M. Baylis. The
Audit Committee will meet at least three times a year with the independent
auditors, management representatives and internal auditors; recommend to the
Board of Trustees appointment of independent auditors; approve the scope of
audits and other services to be performed by the independent and internal
auditors; consider whether the performance of any professional service by the
auditors other than services provided in connection with the audit function
could impair the independence of the outside auditors; and review the results
of internal and external audits, the accounting principles applied in
financial reporting, and financial and operational controls. The independent
auditors and internal auditors will have unrestricted access to the Audit
Committee and vice versa.
Compensation Policy Committee. The Compensation Policy Committee will be
comprised of six Trustees who are not employees of the Trust, namely, Harry L.
Vincent, Jr. (Chair), R. Theodore Ammon, John G. Schreiber, Robert M. Baylis,
J.W. Marriott, Jr. and Ann Dore McLaughlin. The Compensation Policy
Committee's functions will include recommendations on policies and procedures
relating to senior officers' compensation and various employee stock plans,
and approval of individual salary adjustments and stock awards in those areas.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee will be comprised of six Trustees who are not employees
of the Trust, namely, Ann Dore McLaughlin (Chair), Harry L. Vincent, Jr., John
G. Schreiber, R. Theodore Ammon, J.W. Marriott, Jr. and Robert M. Baylis. It
will consider candidates for election as Trustees and will be responsible for
keeping abreast of and making recommendations with regard to corporate
governance in general. In addition, the Nominating and Corporate Governance
Committee will fulfill an advisory function with respect to a range of matters
affecting the Board of Trustees and its Committees, including the making of
recommendations with respect to qualifications of Trustee candidates,
compensation of Trustees, the selection of committee chairs, committee
assignments and related matters affecting the functioning of the Board.
Host REIT 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
Trustees who are also officers of Host REIT will receive no additional
compensation for their services as Trustees. Trustees elected by the holders
of Common Shares and who are not officers will receive an annual retainer fee
of $25,000 as well as an attendance fee of $1,250 for each shareholders'
meeting, meeting of the Board of Trustees or meeting of a committee of the
Board of Trustees, regardless of the number of meetings held on a given day.
The chair of each committee of the Board of Trustees will receive an
additional annual retainer fee of $1,000, except for the chair of the
Compensation Policy Committee, Mr. Vincent, who will receive an annual
retainer fee of $6,000. (The higher annual retainer fee paid to the chair of
the Compensation Policy Committee relates to his additional duties which
include, among other things, the annual performance appraisal of the chief
executive officer on behalf of the Board, although the final appraisal is
determined by the Board.) Any individual Trustee receiving these fees may
elect to defer payment of all such fees or any portion thereof pursuant to
Host REIT's Executive Deferred Compensation Plan and/or Host REIT's Non-
Employee Trustees' Deferred Stock Compensation Plan. Trustees will also be
reimbursed for travel expenses and other out-of-pocket
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costs incurred in attending meetings or in visiting hotels or other properties
controlled by Host REIT or by Marriott International.
In 1997, the following Trustees of the Company received special one-time
awards of Company common stock in the amounts indicated: Mr. Ammon, 4,000
shares; Mr. Baylis, 7,000 shares; Ms. McLaughlin, 7,000 shares and Mr.
Vincent, 7,000 shares. The special one-time awards of Company common stock
vest at the rate of 10% per year of a Trustees service on the Board, with
credit given for each year of service already completed, and will also become
fully vested upon the death or disability of the Trustees.
EXECUTIVE COMPENSATION
The table below sets forth a summary of the compensation paid by Host for
the last three fiscal years to the Chief Executive Officer and the four
additional most highly compensated executive officers of Host for Host's
fiscal year 1997 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------ -------
RESTRICTED
NAME AND FISCAL OTHER ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1)(2) BONUS(3) COMPENSATION AWARDS(4)(5) PAYOUTS COMPENSATION(6)
- ------------------ ------ ------------ -------- ------------ ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Marriott..... 1997 $271,449 $108,580 $110,789(7) $ 0 $ $ 22,668(8)
Chairman of the 1996 262,951 105,180 114,969(7) 0 21,439(8)
Board 1995 250,554 100,000 107,463(7) 0 12,634
Terence C. Golden(9).... 1997 619,045 557,141 58,783(10) 354,693 66,105
President and Chief 1996 600,017 480,013 0 10,476,603 560,827(11)
Executive Officer 1995 190,656 152,152 0 0 0
Robert E. Parsons, Jr... 1997 338,889 254,167 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,658,277 26,273
President and Chief 1995 213,767 123,649 0 0 10,951
Financial Officer
Christopher J.
Nassetta(9)............ 1997 338,889 254,167 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,647,513 119,168(11)
President and Chief 1995 78,000 50,700 0 0 0
Operating Officer
Christopher G.
Townsend............... 1997 202,962 111,629 0 1,015,800 18,405
Senior Vice President, 1996 186,232 102,428 0 0 15,891
General Counsel 1995 156,375 93,825 0 0 7,658
</TABLE>
- --------
(1) Fiscal year 1996 base salary earnings were for 53 weeks.
(2) Salary amounts include base salary earned and paid in cash during the
fiscal year, the amount of base salary deferred at the election of the
executive officer under the Host Marriott Corporation Executive Deferred
Compensation Plan (the "Deferred Compensation Plan") and the increase in
base salary for the period October 1, 1997 through the end of the fiscal
year which was paid in 1998.
(3) Bonus includes the amount of cash bonus earned pursuant to Host's
Performance-Based Annual Incentive Bonus Plan (which was approved by the
shareholders in 1996) and to the named individual's performance-based
bonus plan during the fiscal year, which is either paid subsequent to the
end of each fiscal year or deferred under the Deferred Compensation Plan.
(4) During 1997, the Compensation Policy Committee (the "Committee") of the
Board of Directors approved the grant of restricted stock to certain key
employees of Host, including Mr. Townsend. In 1996, the Committee approved
similar grants of restricted stock to certain key employees of Host,
including Messrs. Golden, Parsons and Nassetta. Mr. Golden also received
grants of restricted stock on November 6, 1997 and on August 1, 1996 which
were pursuant to the terms of his restricted stock agreement with Host.
Messrs. Golden, Parsons and Nassetta each received awards which vest over
a five-year period, and Mr. Townsend received an award which vests over a
three-year period. All such awards consist of shares subject to
restrictions relating primarily to continued employment ("General
Restrictions") and shares subject to annual performance objectives such as
financial performance of Host ("Performance Restrictions"). Performance
objectives are established by the Committee and are subject to annual
review and revision. Sixty percent
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of the shares awarded to each executive officer have annual Performance
Restrictions, and forty percent of the shares awarded have General
Restrictions conditioned upon continued employment. In addition, Messrs.
Parsons and Nassetta each received an award of restricted stock which
vests sixty percent on December 31, 1998 and forty percent on December 31,
2000, subject to the attainment of certain performance criteria and to the
named individual's continued employment ("Special Team Awards"). All
Special Team Awards are presented above as "Restricted Stock Awards," and
the value stated above is the fair market value on the date of the grant.
At Mr. Golden's request and in order to motivate the management team to
enhance shareholder value, the Committee issued these Special Team Awards
of the shares of restricted stock to key executives of Host in connection
with Mr. Golden's joining Host. The dollar value of those awards has been
reflected in the Restricted Stock Awards column of the table for the Named
Executive Officers. In the event that the executives to whom restricted
stock was granted do not continue in the employ of Host or do not meet the
performance criteria set by the Committee, those shares will be forfeited,
and the Committee has retained the right to grant any forfeited restricted
shares to Mr. Golden.
(5) The aggregate number and value of shares of deferred stock and restricted
stock subject to "General Restrictions" and "Performance Restrictions"
(see footnote 4 above) held by each Named Executive Officer as of the end
of fiscal year 1997 are as follows: Mr. R.E. Marriott, 264,000 shares
valued at $5,071,440; Mr. Golden, 655,231 shares valued at $12,586,987;
Mr. Nassetta, 240,267 shares valued at $4,615,529; Mr. Parsons, 261,531
shares valued at $5,073,335; and Mr. Townsend, 56,321 shares valued at
$1,078,485. During the period in which any restrictions apply, holders of
restricted stock are entitled to receive all dividends or other
distributions paid with respect to such stock. Under the terms of certain
restricted stock award agreements granted under the long-term incentive
plan, each share of restricted stock vests upon a change in control of
Host. The stock bonus awards granted by Host are generally derived based
on dividing 20% of each individual's annual cash bonus award by the
average of the high and low trading prices for a share of common stock on
the last trading day of the fiscal year. No voting rights or dividends are
attributed to award shares until such award shares are distributed. Stock
bonus awards may be denominated as current awards or deferred awards. A
current award is distributed in 10 annual installments commencing one year
after the award is granted. A deferred award is distributed in a lump sum
or in up to 10 annual installments following termination of employment.
Deferred award shares contingently vest pro rata in annual installments
commencing one year after the stock bonus award is granted to the
employee. Awards are not subject to forfeiture once the employee reaches
age 55 with 10 years of service with Host or upon (i) retirement after 20
years of service, (ii) disability or (iii) death.
(6) Amounts included in "All Other Compensation" represent total matching
Host contribution amounts received under the Retirement and Savings Plan
and the Deferred Compensation Plan. In 1997, the amounts attributable to
the Retirement and Savings Plan account for each Named Executive Officer
were as follows: Mr. R.E. Marriott, $9,024; Mr. Golden, $7,939; Mr.
Nassetta, $9,024; Mr. Parsons, $9,500; and Mr. Townsend, $8,448. The
amounts attributable to the Deferred Compensation Plan for each named
executive officer were as follows: Mr. R.E. Marriott, $13,644; Mr.
Golden, $58,166; Mr. Nassetta, $27,207; Mr. Parsons, $26,731; and Mr.
Townsend, $9,957.
(7) Amount includes $92,000 in 1997, $86,700 in 1996, and $86,200 in 1995 for
the allocation of Host personnel for non-Host business.
(8) Effective beginning in 1996, Mr. R.E. Marriott waived (i) payments due to
be made to him under the Deferred Compensation Plan following his
retirement and (ii) common stock due to be distributed to him under Host's
1993 Comprehensive Stock Incentive Plan (the "1993 Stock Incentive Plan")
following his retirement. In connection with this waiver, Host entered
into an arrangement to purchase life insurance policies for the benefit of
a trust established by Mr. R.E. Marriott. The cost of the life insurance
policies to Host has been actuarially determined and will not exceed the
projected after-tax cost Host expected to incur in connection with the
payments under the Deferred Compensation Plan and the stock distributions
under the 1993 Stock Incentive Plan that were waived by Mr. R.E. Marriott.
(9) Mr. Golden joined Host as President and Chief Executive Officer on
September 1, 1995. Mr. Nassetta joined Host as Executive Vice President
on October 1, 1995.
(10) Amount represents reimbursement of travel expenses of Mr. Golden's
spouse when she accompanies him on Host business trips.
(11) As part of their restricted stock agreements with Host, Messrs. Golden
and Nassetta were awarded 44,910 and 8,421 shares of Host common stock,
respectively, on February 1, 1996. The value of the shares was $516,465
for Mr. Golden and $96,842 for Mr. Nassetta.
For a comparison of the reimbursements and distributions currently payable
to the General Partners and their affiliates and the reimbursements and
distributions to be paid by Host REIT, on a pro forma basis, to the General
Partners following the Consolidation, see "Background and Reasons for the
Mergers and the REIT Conversion-- Reimbursements and Distributions to General
Partners."
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EMPLOYMENT AGREEMENTS
The Operating Partnership will have employment agreements with certain of
its executive officers. The terms of such agreements currently are under
negotiation and are not expected to be finalized until the Effective Date.
COMPREHENSIVE STOCK INCENTIVE PLAN
Host sponsors the Host Marriott Corporation 1997 Comprehensive Stock
Incentive Plan (the "Comprehensive Stock Incentive Plan") for purposes of
attracting and retaining highly qualified employees. Host has reserved
shares of Host common stock for issuance pursuant to the Comprehensive Stock
Incentive Plan. As part of the REIT Conversion, Host intends to exchange the
shares of Host common stock issued or reserved under the Comprehensive Stock
Incentive Plan for Host REIT Common Shares and SLC common stock, using the
applicable conversion ratio.
Under the terms of the Comprehensive Stock Incentive Plan, Host may award
eligible full-time employees (i) options to purchase Host common stock, (ii)
deferred shares of Host common stock, (iii) restricted shares of Host common
stock, (iv) stock appreciation rights, (v) special recognition awards or (vi)
other equity-based awards, including but not limited to, phantom shares of
Host common stock, performance shares of Host common stock, bonus shares of
Host common stock, dividend equivalent units or similar securities or rights.
After the REIT Conversion, all grants under the Comprehensive Stock Incentive
Plan will be for Host REIT Common Shares.
Host intends to continue to award options under the Comprehensive Stock
Incentive Plan after the REIT Conversion. Options granted to officers and key
employees of Host have an exercise price of not less than the fair market
value on the date of grant. Incentive stock options granted under the
Comprehensive Stock Incentive Plan expire no later than 10 years after the
date of grant and non-qualified stock options expire up to 15 years after the
date of grant.
Under the terms of the Comprehensive Stock Incentive Plan, Host may award
deferred shares of Host common stock to eligible full-time employees. Deferred
shares may be granted as part of a bonus award or deferred stock agreement.
After the REIT Conversion, Host intends to award deferred shares of Host REIT
Common Shares under the Comprehensive Stock Incentive Plan. Deferred shares
generally vest over ten years in annual installments commencing one year after
the date of grant.
The Comprehensive Stock Incentive Plan also provides for the issuance of
restricted shares of Host common stock to officers and key executives to be
distributed over the next three or five years in annual installments based on
continued employment and the attainment of certain performance criteria. Host
intends to issue restricted shares of Host REIT Common Shares after the REIT
Conversion.
Under the terms of the Comprehensive Stock Incentive Plan, Host may grant
bonus awards to eligible full-time employees. Bonus awards may be part of a
management incentive program which pays part of the annual performance bonus
awarded to managers and other key employees in shares of Host common stock. A
bonus award entitles the holder to receive a distribution of Host's common
stock in accordance with the underlying agreement. Holders of bonus awards
vest in the shares covered by their award over ten years in annual
installments commencing one year after grant. Unless the holder of a bonus
award elects otherwise, vested shares are distributed in 10 consecutive,
approximately equal, annual installments. After the REIT Conversion, Host
intends to award bonus awards for shares of Host REIT Common Shares.
The Comprehensive Stock Incentive Plan authorizes Host to grant stock
appreciation rights ("SAR") to eligible full-time employees. SARs awarded
under the Comprehensive Stock Incentive Plan give the holder the right to an
amount equal to the appreciation in the value of the Host common shares over
the fair a specified price. SARs may be paid in the Host common stock, cash or
other form or combination form of payout. After the REIT Conversion, Host
intends to award SARs on Host REIT Common Shares.
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Under the Comprehensive Stock Incentive Plan, Host may award an eligible
full-time employee or officer a Special Recognition Award. Special Recognition
Awards may be paid in the form of Host common stock or an option to purchase
Host common stock at an amount not less than fair market value on the date of
grant. After the REIT Conversion, Host intends to award Special Recognition
Awards or Host REIT Common Shares to eligible full-time employees or officers.
STOCK PURCHASE PLAN
Host sponsors the Host Marriott Corporation Employee Stock Purchase Plan
(the "Stock Purchase Plan"). Under the terms of the Stock Purchase Plan, an
individual who is: (i) an active eligible employee on the last day of the
prior plan year, (ii) working more than 20 hours per week, and (iii)
customarily employed more than five months in a calendar year may, on the
first day of the plan year, purchase Host common stock through contributions
or payroll deductions at the lower of the fair market value on the first or
last day of such plan year. Host intends to continue the Stock Purchase Plan
after the REIT Conversion.
401(K) PLAN
Host sponsors the Host Marriott Corporation Retirement and Saving Plan (the
"401(k) Plan"). The 401(k) Plan has received a favorable ruling from the IRS
as to its tax-qualified status. The 401(k) Plan is available to all eligible
employees immediately upon their date of hire. A participant may elect to
contribute from 1% to 15% of his compensation to the 401(k) Plan. Each year,
Host makes a fixed matching contribution equal to 50% of the first 6% of the
compensation contributed to the 401(k) Plan by employees. In addition, Host
may make a discretionary contribution, in an amount, if any, determined
annually by the Board, to the 401(k) Plan for the benefit of eligible
employees.
Under the terms of the 401(k) Plan, participants may elect to invest part or
all of their plan benefits in Host common stock. As part of the REIT
Conversion, all shares of Host common stock held under the 401(k) Plan will be
converted to Host REIT Common Shares and SLC Common Stock. After the REIT
Conversion, Host intends to allow the 401(k) Plan's participants to elect to
invest all or part of their plan benefits in Host REIT Common Shares and SLC
common stock.
DEFERRED COMPENSATION PLAN
Host sponsors the Host Marriott Corporation Executive Deferred Compensation
Plan for Non-Employee Trustees (the "Deferred Compensation Plan") for purposes
for attracting and retaining qualified non-employee Trustees. Under the terms
of the Deferred Compensation Plan, a non-employee Trustee may elect to defer
payment of part or all of his Trustees fees from Host until such individual is
no longer a member of the Board. Currently, fees that are deferred under the
Deferred Compensation Plan are converted into shares of Host common stock
using the fair market value of such shares on the date of deferral. After the
REIT Conversion, Host intends to invest Trustees fees deferred under the
Deferred Compensation Plan in Host REIT Common Shares.
Non-Employee Trustees may elect to receive payment of their benefits under
the Deferred Compensation Plan in cash or Host common stock. After the REIT
Conversion, Host intends to allow participation of the Deferred Compensation
Plan to elect to receive their benefits in cash or Host REIT Common Shares.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) acts committed in bad faith or
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. The Declaration of Trust of Host REIT
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
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The Declaration of Trust of Host REIT 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 (i) any present or former trustee or officer or (ii) any individual who,
while a trustee of Host REIT and at the request of Host REIT, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise from and against
any claim or liability to which such person may become subject or which such
person may incur by reason of his or her status as a present or former Trustee
or officer of Host REIT. The Bylaws of Host REIT 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 Host REIT and at the request of Host REIT, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity, against any claim or liability to which he may become
subject by reason of such status. The Declaration of Trust and Bylaws also
permit Host REIT to indemnify and advance expenses to any person who served as
a predecessor of Host REIT in any of the capacities described above and to any
employee or agent of Host REIT or a predecessor of Host REIT. The Bylaws
require Host REIT 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 Host REIT require it, as a condition to advancing
expenses, to obtain (1) a written affirmation by the trustee or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification by Host REIT as authorized by the Bylaws and (2) a written
statement by or on his behalf to repay the amount paid or reimbursed by Host
REIT if it shall ultimately be determined that the standard of conduct was not
met.
The Partnership Agreement also provides for indemnification of Host REIT and
its officers and trustees to the same extent that indemnification is provided
to officers and trustees of Host REIT in its Declaration of Trust, and limits
the liability of Host REIT and its officers and trustees to the Operating
Partnership and its respective partners to the same extent that the liability
of the officers and trustees of Host REIT to Host REIT and its shareholders is
limited under Host REIT's Declaration of Trust.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers or persons controlling the registrant
pursuant to the foregoing provisions, Host REIT has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN HOST AND MARRIOTT INTERNATIONAL
Host and Marriott International, prior to October 8, 1993, were operated as
a single consolidated company. On October 8, 1993 in connection with the
issuance of a special dividend (the "Marriott International Distribution"),
the consolidated company's businesses were split between Host and Marriott
International. Thereafter, Host retained the capital intensive lodging real
estate business (the "Ownership Business") and the airport/tollroad
concessions business (the "Host/Travel Plazas Business"), while Marriott
International took over the management of the lodging and service management
businesses (the "Management Business"). (On December 29, 1995, Host
distributed the Host/Travel Plazas Business to the shareholders of Host
Marriott Services Corporation; see "--Relationship between Host and Host
Marriott Services Corporation" below.) On the date of the Marriott
International Distribution, Host and its subsidiaries and Marriott
International and its subsidiaries entered into certain contractual
arrangements governing their relationship following the Marriott International
Distribution.
J.W. Marriott, Jr. and Richard E. Marriott beneficially own approximately
10.6%, and 10.2%, respectively, of the outstanding shares of common stock of
Marriott International. By reason of their ownership of such shares of common
stock of Marriott International and their positions as Chairman and a
Director, respectively, of Marriott International, J.W. Marriott, Jr. and
Richard E. Marriott, who will also be a Trustee and Chairman, respectively, of
Host REIT, could be deemed in control of Marriott International within the
meaning of the federal securities laws. Other members of the Marriott family
might also be deemed control persons of Marriott International by reason of
their ownership of shares of Marriott International and/or their relationship
to other family members.
Prior to the Marriott International Distribution, Host and Marriott
International entered into a Distribution Agreement (the "Marriott
International Distribution Agreement"), which provided for, among other
things, (i) the division between Host and Marriott International of certain
liabilities and (ii) certain other agreements governing the relationship
between Host and Marriott International following the Marriott International
Distribution.
Subject to certain exceptions, the Marriott International Distribution
Agreement provided for, among other things, assumptions of liabilities and
cross-indemnities designed to allocate, effective as of the Marriott
International Distribution, financial responsibility for the liabilities
arising out of or in connection with the Management Business to Marriott
International and its subsidiaries, and financial responsibility for the
liabilities arising out of or in connection with the Ownership Business and
Host/Travel Plazas Business, along with the consolidated company's liabilities
under a substantial portion of its pre-existing financing and long-term debt
obligations, to Host and its retained subsidiaries. The agreements executed in
connection with the Marriott International Distribution Agreement also set
forth certain specific allocations of liabilities between Host and Marriott
International.
Under the Marriott International Distribution Agreement, Marriott
International has a right, until June 2017, to purchase up to 20% of each
class of Host's voting stock (determined after assuming full exercise of the
right) at its then fair market value (based on an average of trading prices
during a specified period), upon the occurrence of certain specified events
generally involving a change in control of Host (the "Marriott International
Purchase Right"). The Marriott International Purchase Right may be exercised
for a 30-day period following the date a person or group of affiliated persons
has (i) become the beneficial owner of 20% or more of the total voting power
of the then outstanding shares of Host's voting stock or (ii) announced a
tender offer for 30% more of the total voting power of the then outstanding
shares of Host's common stock. The purchase price for the common stock to be
purchased upon the exercise of the Marriott International Purchase Right is
determined by taking the average of the closing sale price of the common stock
during the 30 consecutive trading days preceding the date the Marriott
International Purchase Right becomes exercisable.The Marriott International
Purchase Right will continue in effect with respect to Host REIT after the
Mergers, subject to certain limitations intended to protect the REIT status of
Host REIT.
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The Marriott International Purchase Right will have an antitakeover effect
to the extent that any person considering acquiring a substantial or
controlling block of Host REIT's Common Shares will face the possibility that
its ability to exercise control would be impaired by the exercise of Marriott
International's Purchase Right. In addition, the exercise price of the
Marriott International Purchase Right could be lower than the price at which a
potential acquiror might be willing to purchase a 20% block of Common Shares
because the purchase price for the Marriott International Purchase Right is
based on the average trading price during a 30-day period which may be prior
to the announcement of a takeover event. This potential price differential
might have a further antitakeover effect by discouraging potential acquirors
of Host REIT.
For the purpose of governing certain of the ongoing relationships between
Host and Marriott International after the Marriott International Distribution,
Host and Marriott International have entered into other agreements. Host
believes that the agreements are fair to both parties and contain terms which
are generally comparable to those which would have been reached in arm's-
length negotiations with unaffiliated parties. Among such other agreements
between Host and Marriott International are:
(i) Lodging Management and Franchise Agreements. Marriott International
and certain of its subsidiaries have entered into management agreements
with Host and certain of its subsidiaries to manage for fees the Marriott
Hotels, Resorts and Suites, Ritz-Carlton hotels, Courtyard hotels and
Residence Inns owned or leased by Host and its subsidiaries. Marriott
International has also entered into franchise agreements with Host and
certain of its subsidiaries to allow Host to use the Marriott brand,
associated trademarks, reservation systems and other related items in
connection with Host's operation of ten Marriott hotels not managed by
Marriott International.
Each of those management and franchise agreements reflects market terms
and conditions and is substantially similar to the terms of management and
franchise agreements with other third-party owners regarding lodging
facilities of a similar type. In 1997, Host paid to Marriott International
fees of $166 million from the managed and franchised lodging properties
owned or leased by Host.
In addition, Host or one of its subsidiaries is a partner in several
unconsolidated partnerships (some of which will be consolidated in
connection with the REIT Conversion) that, at the end of 1997, owned 241
lodging properties operated by Marriott International or certain of its
subsidiaries under long-term agreements. In such cases, Host or its
subsidiary typically serves as the general partner. In 1997, these
unconsolidated partnerships paid to Marriott International fees of $119
million pursuant to such agreements. The partnerships also paid $23 million
in rent to Marriott International in 1997 for land leased from Marriott
International upon which certain of the limited service partnerships'
hotels are located.
In connection with the REIT Conversion, these management and franchise
agreements will be assigned to the Lessees for the term of the applicable
Leases (but the Operating Partnership will remain obligated in the event
the Lessees fail to perform their obligations).
(ii) Credit Agreement. In 1995, Marriott International and a subsidiary
of Host entered into a Credit Agreement pursuant to which the subsidiary
had the right to borrow up to $225 million from Marriott International. In
1997, however, Host entered into a revolving line of credit agreement with
third parties, and as a result, Host terminated the revolving line of
credit under the Credit Agreement with Marriott International. Host remains
subject to various covenants and guaranty reimbursement obligations under
the Credit Agreement.
(iii) Tax Sharing Agreement. Host and Marriott International have entered
into a tax sharing agreement that defines the parties' rights and
obligations with respect to deficiencies and refunds of federal, state and
other income or franchise taxes relating to Host's businesses for tax years
prior to the Marriott International Distribution and with respect to
certain tax attributes of Host after the Marriott International
Distribution. Host and Marriott International have agreed to cooperate with
each other and to share information in preparing tax returns and in dealing
with other tax matters.
(iv) Noncompetition Agreements. Host and Marriott International entered
into a noncompetition agreement that defines the parties' rights and
obligations with respect to certain businesses operated by
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Marriott International and Host. In general, under the noncompetition
agreements, Host and its subsidiaries are prohibited from entering into or
acquiring any business that competes with the hotel management business as
conducted by Marriott International until October 8, 2000. See "--Senior
Living Communities Acquisitions."
(v) Administrative Services Agreements. Marriott International and Host
have entered into a number of agreements pursuant to which Marriott
International has agreed to provide certain continuing administrative
services to Host and its subsidiaries. Such services are provided on market
terms and conditions. In general, the administrative services agreements
can be kept in place at least through the end of 1998.
(vi) Marriott International Guarantees. In connection with the Marriott
International Distribution, Host and Marriott International entered into
agreements pursuant to which Marriott International has agreed to guarantee
Host's performance in connection with certain partnership, real estate and
project loans and other Host obligations. Such guarantees are limited in an
aggregate principal amount of up to $107 million at June 19, 1998. Marriott
International has not been required to make any payments pursuant to the
guarantees.
In addition to the foregoing agreements, Host and Marriott International
have had occasion to enter into other agreements in the ordinary course of
business. Host believes that such agreements are fair to both parties and
contain terms which are generally comparable to those which would have been
reached in arm's-length negotiations with unaffiliated parties. Among such
other agreements between Host and Marriott International are:
(a) Hotel Acquisitions. Marriott International has provided, and Host
expects that Marriott International in the future will provide, financing
to Host for a portion of the cost of acquiring properties to be operated or
franchised by Marriott International. In 1997, Marriott International did
not provide any new acquisition financing, although Host remained indebted
to Marriott International for acquisition financing from prior years.
Marriott International provided Host with $70 million of mortgage financing
in 1995 for the acquisition of three full-service hotels at an average
interest rate of 8.5%. Marriott International subsequently sold one of the
loans in 1996. In 1996, Marriott International and Host formed a joint
venture (which will be owned by a Non-Controlled Subsidiary) and Marriott
International provided Host with $29 million in debt financing at an
average interest rate of 12.7% and with $28 million in preferred equity,
for the acquisition of two full-service hotels in Mexico City.
(b) Senior Living Communities Acquisitions. On June 21, 1997, Host
acquired the outstanding common stock of Forum Group, Inc. (the "Forum
Group") from Marriott Senior Living Services, Inc., a subsidiary of
Marriott International. Host purchased the Forum Group portfolio of 29
premier senior living communities for approximately $460 million, including
approximately $270 million in debt ($59 million of which was provided by
Marriott International). In 1997, Host had completed $56 million of the
approximately $107 million expansion plan to add approximately 1,060 units
to these communities. As a result, an additional $33 million of debt
financing has been provided by Marriott International and Marriott
International may provide additional financing as the expansion plan is
completed. The properties will continue to be managed by Marriott
International. From the date of acquisition through the end of 1997, Host
paid to Marriott International management fees of $6 million from the
senior living properties owned by Host. In connection with the acquisition,
Host and Marriott International entered into a noncompetition agreement
that defines the parties' rights and obligations with respect to the
operation of senior living services by Marriott International and Host. In
general, under the noncompetition agreement, Host and its subsidiaries are
prohibited from entering into or acquiring any business that competes with
the senior living management business as conducted by Marriott
International until 2017. In 1997, Host also acquired all but 1% of the
remaining 50% interest in the joint venture which owned the 418-unit
Leisure Park senior living community from Marriott International for
approximately $23 million, including approximately $15 million of mortgage
debt assumed by Host. As part of the REIT Conversion, the senior living
communities business will be distributed to Host's shareholders; thus, the
Limited Partners whose Partnership participates in a Merger will not own an
interest in this business.
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RELATIONSHIP BETWEEN HOST AND HOST MARRIOTT SERVICES CORPORATION
On December 29, 1995, Host issued a special dividend (the "HMSC
Distribution") which split Host's businesses between Host and Host Marriott
Services Corporation ("HM Services"). Prior to December 29, 1995, HM Services
was a wholly owned subsidiary of Host. Thereafter, Host retained the capital
intensive lodging real estate business (the "Ownership Business"), while HM
Services took over the airport/tollroad concessions business (the "Host/Travel
Plazas Business"). Host and its subsidiaries and HM Services and its
subsidiaries have entered into certain relationships following the HMSC
Distribution.
Richard E. Marriott and J.W. Marriott, Jr. beneficially own approximately
6.75% and 6.88%, respectively, of the outstanding shares of common stock of HM
Services. By reason of their ownership of such shares of common stock of HM
Services and their positions as Directors of HM Services, Richard E. Marriott
and J.W. Marriott, Jr., who are also Chairman and a Director, respectively, of
Host, could be deemed in control of HM Services within the meaning of the
federal securities laws. Other members of the Marriott family might also be
deemed control persons of HM Services by reason of their ownership of shares
of HM Services and/or their relationship to other family members.
Prior to the HMSC Distribution, Host and HM Services entered into a
Distribution Agreement (the "HMSC Distribution Agreement"), which provided
for, among other things, (i) certain asset transfers to occur prior to the
HMSC Distribution, (ii) the HMSC Distribution, (iii) the division between Host
and HM Services of certain liabilities and (iv) certain other agreements
governing the relationship between Host and HM Services following the HMSC
Distribution.
Subject to certain exceptions, the HMSC Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate, effective as of the HMSC Distribution, financial responsibility
for the liabilities arising out of or in connection with the Host/Travel
Plazas Business to HM Services and its subsidiaries and financial
responsibility for the liabilities arising out of or in connection with the
Ownership Business to Host and its retained subsidiaries. The agreements
executed in connection with the HMSC Distribution Agreement also set forth
certain specific allocations of liabilities between Host and HM Services. The
HMSC Distribution Agreement also provides that HM Services will assume its
proportionate share of Host's current obligation for certain employee benefit
awards denominated in Host common stock currently held by employees of
Marriott International.
For the purpose of governing certain of the ongoing relationships between
Host and HM Services after the HMSC Distribution, Host and HM Services have
entered into other agreements. Host believes that the agreements are fair to
both parties and contain terms which are generally comparable to those which
would have been reached in arm's-length negotiations with unaffiliated
parties. Among such other agreements between Host and HM Services are:
(i) Tax Sharing Agreement. Host and HM Services have entered into a tax
sharing agreement that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Host's businesses for tax years prior to the
HMSC Distribution and with respect to certain tax attributes of Host after
the HMSC Distribution. Host and HM Services have agreed to cooperate with
each other and to share information in preparing tax returns and in dealing
with other tax matters.
(ii) Guarantees of Concession Agreements. Host and HM Services have
entered into agreements pursuant to which Host has agreed to guarantee HM
Services' performance in connection with certain tollroad concessions
operated by HM Services. Host has not been required to make any payment
pursuant to the guarantees and does not anticipate making any such payment
in 1998.
(iii) Employee Benefits Allocation Agreement. Host and HM Services have
entered into an Employee Benefits Allocation and Other Employment Matters
Agreement (the "Employee Benefits Allocation Agreement") that provides for
the allocation of certain responsibilities with respect to employee
compensation, benefits and labor matters. In general, the Employee Benefits
Allocation Agreement provides that Host retain all employee liabilities for
employees who on or after the HMSC Distribution were
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employees of Host, and that HM Services retain all employee liabilities for
employees who on or after the HMSC Distribution were employees of HM
Services. Pursuant to the Employee Benefits Allocation Agreement, and in
connection with the HMSC Distribution, Host also adjusted outstanding
awards under Host employee benefit plans.
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PRINCIPAL SECURITY HOLDERS
The following table sets forth, as of January 31, 1998, the beneficial
ownership of OP Units and Common Shares of (i) each person who is expected to
hold more than a 5% interest in the Operating Partnership or Host REIT, (ii)
trustees of Host REIT, (iii) the Chief Executive Officer and the four most
highly compensated executive officers of Host REIT and (iv) the trustees and
executive officers of Host REIT as a group. Unless otherwise indicated in the
footnotes, all of such interests are owned directly and the indicated person
or entity has sole voting and investment power.
The "Percent of All Common Shares and OP Units" represents the number of
Common Shares and OP Units the person is expected to hold immediately after
the REIT Conversion, as a percentage of the total number of Common Shares and
OP Units expected to be outstanding immediately after the REIT Conversion
(including OP Units held by Host REIT). The information in this table assumes
that all transactions comprising the REIT Conversion are consummated as
currently expected. The address of each beneficial owner is 10400 Fernwood
Road, Bethesda, Maryland 20817 unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT PERCENT OF
PERCENT OF NUMBER OF PERCENT OF OF ALL ALL COMMON
NUMBER OF ALL OP COMMON COMMON COMMON SHARES AND
NAME OP UNITS UNITS(1) SHARES(2) SHARES(3) SHARES(4) OP UNITS(5)
---- --------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Theodore Ammon....... 14,750 *
Robert M. Baylis........ 12,750 *
Terence C. Golden(6).... 828,085 *
J.W. Marriott,
Jr.(6)(7)(8)........... 13,276,630 6.51
Richard E.
Marriott(6)(8)(9)...... 13,212,326 6.48
Ann Dore McLaughlin..... 8,750 *
John G. Schreiber....... 0 0
Harry L. Vincent, Jr.... 21,850 *
Christopher J
Nassetta(6)............ 371,230 *
Robert E. Parsons,
Jr.(6)................. 428,413 *
Christopher G.
Townsend(6)............ 115,274 *
Blackstone
Entities(11)........... 0 0
Dresdner RCM Global
Investors LLC(12)...... 13,595,975 6.66
FMR Corp.(13)........... 22,532,574 11.04
Southeastern Asset
Management, Inc.(14)... 26,469,000 12.97
ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A
GROUP (11
PERSONS)(6)(10)........ 24,308,476 11.71
</TABLE>
- --------
(1) Represents the number of OP Units held by the person as a percentage of
the total number of OP Units issued to participants in the REIT
Conversion ( OP Units).
(2) Consists of Common Shares received in the REIT Conversion as a result of
ownership of Host.
(3) Represents the number of Common Shares held by the person as a percentage
of the total number of Common Shares expected to be outstanding
immediately following the REIT Conversion ( Common Shares). Ownership
of less than 1% is reflected as * in the table.
(4) Assumes that all OP Units held by the person are redeemed for Common
Shares. The total number of Common Shares outstanding used in calculating
this percentage ( Common Shares plus the number of OP Units
beneficially owned) assumes that none of the OP Units held by other
persons are redeemed for Common Shares.
(5) Assumes that all OP Units held by the person are redeemed for Common
Shares. The total number of Common Shares outstanding used in calculating
this percentage ( Common Shares) assumes that all of the OP Units
held by other persons are redeemed for Common Shares.
(6) Includes (i) the shares of unvested restricted stock granted under Host's
1993 and 1997 Comprehensive Stock Incentive Plans, which are voted by the
holder thereof, and (ii) the following number of shares which could be
acquired by the named persons through the exercise of stock options
within 60 days of January 31, 1998: for J.W. Marriott, Jr., 810,447
shares; for Richard E. Marriott, 55,700 shares; for Mr. Parsons, 20,225
shares; for Mr. Townsend, 6,975 shares; and for all directors and
executive officers as a group, 918,147 shares. Does not include any other
shares reserved, contingently vested or awarded under the above-named
Plan.
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(7) Includes: (i) 1,977,450 shares held in trust for which J.W. Marriott, Jr.
is the trustee or a co-trustee; (ii) 68,426 shares held by the wife of
J.W. Marriott, Jr.; (iii) 703,031 shares held in trust for which the wife
of J.W. Marriott, Jr. is the trustee or a co-trustee; (iv) 2,451,787
shares held by the J. Willard Marriott Foundation of which J.W. Marriott,
Jr. is a co-trustee; (v) 2,707,590 shares held by a limited partnership
whose general partner is a corporation of which J.W. Marriott, Jr. is the
controlling shareholder; and (vi) 80,000 shares held by a limited
partnership whose general partner is J.W. Marriott, Jr. Does not include
shares held by the adult children of J.W. Marriott, Jr.; J.W. Marriott,
Jr. disclaims beneficial ownership of all such shares.
(8) By virtue of their ownership of shares of Host common stock and their
positions as Chairman and Director, respectively, Richard E. Marriott and
J.W. Marriott, Jr. could be deemed in control of Host within the meaning
of the federal securities laws. Other members of the Marriott family
might also be deemed control persons by reason of their ownership of
shares and/or their relationship to other family members. J.W. Marriott,
Jr., Richard E. Marriott, their mother Alice S. Marriott and other
members of the Marriott family and various trusts established by members
of the Marriott family owned beneficially an aggregate of 25,446,833
shares, or 12.47% of the total shares outstanding of Host common stock as
of January 31, 1998.
(9) Includes: (i) 1,874,709 shares held in trust for which Richard E.
Marriott is the trustee or a co-trustee; (ii) 68,219 shares held by the
wife of Richard E. Marriott; (iii) 603,828 shares held in trust for which
the wife of Richard E. Marriott is the trustee or a co-trustee; (iv)
2,451,787 shares held by the J. Willard Marriott Foundation of which
Richard E. Marriott is a co-trustee; and (v) 2,302,729 shares held by a
corporation of which Richard E. Marriott is the controlling shareholder.
Does not include shares held by the adult children of Richard E.
Marriott; Richard E. Marriott disclaims beneficial ownership of all such
shares.
(10) Includes the total number of shares held by trusts for which both J.W.
Marriott, Jr. and Richard E. Marriott are co-trustees. Beneficial
ownership of such shares is attributable to each of J.W. Marriott, Jr.
and Richard E. Marriott in the table above under the Director subheading,
but such shares are included only once in reporting the total number of
shares owned by all directors and executive officers as a group. All
directors and executive officers as a group (other than members of the
Marriott family) owned beneficially an aggregate of 1,846,327 shares, or
0.90% of the total shares outstanding of Host common stock as of
January 31, 1998. In addition, Host's Retirement and Savings Plan owned
57,318 shares, or 0.03% of the total shares outstanding of Host common
stock as of January 31, 1998.
(11) The Blackstone Entities constitute a series of affiliated partnerships.
Initially, a majority of the OP Units received pursuant to the Blackstone
Acquisition will be held by such affiliated partnerships, but eventually
will be distributed by such affiliated partnerships to their partners.
(12) Represents shares of Host Common Stock held by Dresdner RCM Global
Investors LLC ("Dresdner RCM") and its affiliates, RCM Limited L.P. ("RCM
Limited") and RCM General Corporation ("RCM General"), and by Dresdner
Bank AG, of which Dresdner RCM is a wholly owned subsidiary. Dresdner RCM
has reported in a Schedule 13G under the Exchange Act, filed with the
Commission, sole dispositive power over 12,943,675 shares and shared
dispositive power over 282,000 shares. Of these shares, Dresdner RCM has
reported sole voting power over 8,854,200 shares and does not share
voting power with respect to any shares. In addition, Dresdner Bank AG
has reported in a separate Schedule 13G under the Exchange Act, filed
with the Commission, sole dispositive and voting power over 370,300
shares of Host common stock, and such shares are included in the number
reported in this table. The principal business address of Dresdner RCM,
RCM Limited and RCM General is Four Embarcadero Center, San Francisco,
California 94111. The principal business address of Dresdner Bank AG is
Jurgen Ponto-Platz 1, 60301 Frankfurt, Germany.
(13) Represents shares of Host common stock held by FMR Corp. ("FMR") and its
subsidiaries, Fidelity Management Trust Company ("FMT") and Fidelity
Management & Research Company ("FM&R"). FMR has reported in a Schedule
13G under the Exchange Act, filed with the Commission, that FMR, through
its control of FM&R and certain investment funds for which FM&R acts as
an investment adviser, has sole power to dispose of 22,474,835 shares of
Host common stock owned by such investment funds, including the
15,610,500 shares of Host common stock (or 7.65% of the total shares
outstanding of Host common stock as of January 31, 1998) held by the
Fidelity Magellan Fund. FMR has no power to vote or direct the voting of
the shares of Host Common Stock owned by the investment funds, which
power resides with the Board of Trustees of such investment funds. FMR,
through its control of FMT and certain institutional accounts for which
FMT serves as investment manager, has sole dispositive power over 57,739
shares, the sole power to vote or direct the voting of 44,301 shares, and
no power to vote or direct the voting of 13,438 shares of Host common
stock owned by the institutional accounts. The principal business address
for FMR, FMT and FM&R is 82 Devonshire Street, Boston, Massachusetts
02109.
(14) Represents shares of Host common stock held by Southeastern Asset
Management, Inc. ("SAM"). SAM has reported in a Schedule 13G under the
Exchange Act, filed with the Commission, sole dispositive power over
14,466,900 shares and shared dispositive power over 11,322,100 shares. Of
these shares, SAM has reported sole voting power over 12,191,900 shares
and shared voting power over 11,322,100 shares. The principal business
address of SAM is 6075 Poplar Avenue, Suite 900, Memphis, Tennessee
38119.
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DESCRIPTION OF OP UNITS
Limited Partners whose Partnership participates in a Merger will receive OP
Units in exchange for their Partnership Interests. Limited Partners who elect
to receive Notes will tender the OP Units they receive to the Operating
Partnership in exchange for Notes. See "The Mergers and the REIT Conversion--
The Mergers--Issuance of OP Units" and "--Exchange of OP Units for Notes."
Commencing one year after the Mergers, each limited partner in the Operating
Partnership (other than Host REIT) will be entitled to have each of his OP
Units redeemed by the Operating Partnership at any time for cash equal to the
fair market value at the time of redemption of one Common Share (subject to
adjustment to reflect any stock split, stock dividend or other transaction
affecting the number of Common Shares outstanding but not affecting the number
of OP Units outstanding), or, at the option of Host REIT, one Common Share
(subject to adjustment as described herein). The material terms of the Common
Shares, including a summary of certain provisions of Host REIT's Declaration
of Trust and Bylaws, are set forth in "Description of Shares of Beneficial
Interest." The material terms of the OP Units, including a summary of certain
provisions of the Partnership Agreement, are set forth below. The following
description of the terms and provisions of the OP Units and certain other
matters does not purport to be complete and is subject to, and qualified in
its entirety by, reference to applicable provisions of Delaware law and the
Partnership Agreement. A copy of the Partnership Agreement in substantially
the form in which it will be adopted (subject to such modifications as do not
materially and adversely affect the rights of the holders of OP Units to be
issued in the Mergers) is attached as Appendix A to this Consent Solicitation.
Each person acquiring OP Units in the Mergers or thereafter will be deemed
bound by the terms and conditions of the Partnership Agreement. For a
comparison of the voting and certain other rights of Limited Partners of the
Partnerships, holders of OP Units in the Operating Partnership and
shareholders of Host REIT, see "Comparison of Ownership of Partnership
Interests, OP Units and Common Shares."
GENERAL
Holders of OP Units (other than Host REIT in its capacity as general
partner) will hold a limited partnership interest in the Operating
Partnership, and all holders of OP Units (including Host REIT 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. Because Host REIT
will hold a number of OP Units equal to the number of Common Shares
outstanding, each OP Unit generally will receive distributions in the same
amount paid on each Common Share. See "Distribution and Other Policies--
Distribution Policy."
Holders of OP Units will have the rights to which limited partners are
entitled under the Partnership Agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act). The OP Units to be issued in the
Mergers will not be listed on any exchange or quoted on any national market
system. The Partnership Agreement imposes certain restrictions on the transfer
of OP Units, as described below.
FORMATION
The Operating Partnership was formed as a Delaware limited partnership under
the Delaware Act on April 15, 1998. Upon the consummation of the REIT
Conversion, Host REIT will be admitted to the Operating Partnership as the
sole general partner of the Operating Partnership. Following the REIT
Conversion, Host REIT will hold a substantial number of the OP Units. Of the
OP Units allocated to Host REIT, a 0.1% interest in the Operating Partnership
will be held by Host REIT as the general partner of the Operating Partnership,
and the remaining OP Units allocated to Host REIT will be held by Host REIT as
a limited partner in the Operating Partnership.
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 Delaware Act, except that the Partnership Agreement requires the business
of the Operating Partnership to be conducted in such a manner that will permit
Host REIT
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to qualify as a REIT under Section 856 of the Code, unless Host REIT 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.
Host REIT, as 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 OP Units.
In particular, the limited partners expressly acknowledge in the Partnership
Agreement that Host REIT is acting on behalf of the Operating Partnership's
limited partners and Host REIT's shareholders collectively, and is under no
obligation to consider the tax consequences to limited partners when making
decisions for the benefit of the Operating Partnership. Host REIT intends to
make decisions in its capacity as general partner of the Operating Partnership
so as to maximize the profitability of Host REIT and the Operating Partnership
as a whole, independent of the tax effects on the limited partners. See
"Federal Income Tax Consequences--Tax Treatment of Limited Partners Who Hold
OP Units Following the Mergers." Host REIT and the Operating Partnership will
have no liability to a limited partner as a result of any liabilities or
damages incurred or suffered by, or benefits not derived by, a limited partner
as a result of the act or omission of Host REIT as general partner of the
Operating Partnership unless Host REIT acted, or failed to act, in bad faith
and the act or omission was material to the loss, liability or benefit not
derived.
HOST REIT MAY NOT ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Host REIT, as general partner, may not conduct any business other than the
business of the Operating Partnership without the consent of limited partners
holding percentage interests in the Operating Partnership ("Percentage
Interests") that are more than 50% of the aggregate Percentage Interests of
the outstanding limited partnership interests entitled to vote thereon,
including any such interests held by Host REIT. the holders of a majority of
the limited partnership interests (not including the limited partnership
interests held by Host REIT in its capacity as a limited partner in the
Operating Partnership). Other persons (including officers, trustees,
employees, agents and other affiliates of Host REIT) will not be prohibited
under the Partnership Agreement from engaging in other business activities.
However, Host REIT, on behalf of the Operating Partnership, has adopted
certain policies regarding noncompetition provisions and avoidance of
conflicts of interest. See "Distribution and Other Policies--Conflicts of
Interest Policies." In addition, the Partnership Agreement does not prevent
another person or entity that acquires control of Host REIT in the future from
conducting other businesses or owning other assets, even though such
businesses or assets may be ones that it would be in the best interests of the
limited partners for the Operating Partnership to own.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for the quarterly distribution of
Available Cash (as determined in the manner provided in the Partnership
Agreement), to Host REIT and the limited partners as holders of OP Units in
proportion to their percentage interests in the Operating Partnership.
"Available Cash" is generally defined as net income plus depreciation and
amortization and any reduction in reserves and minus interest and principal
payments on debt, capital expenditures, any additions to reserves and other
adjustments. At the time of the REIT Conversion, neither Host REIT nor the
limited partners will be entitled to any preferential or disproportionate
distributions of Available Cash (except to the extent that Host REIT receives
preferred units in the Operating Partnership with economic rights that mirror
the economic rights of any preferred stock that Host has outstanding at the
time of the REIT Conversion). The Partnership Agreement provides for the
allocation to Host REIT, as general partner, and the limited partners of items
of Operating Partnership income and loss as described in "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Allocations of Operating Partnership Income, Gain, Loss and
Deductions."
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BORROWING BY THE OPERATING PARTNERSHIP
Host REIT 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, including financing and refinancing
the assets of the Operating Partnership. Such debt may be secured by
mortgages, deeds of trust, liens or encumbrances on properties of the
Operating Partnership. Host REIT also may cause the Operating Partnership to
borrow money to enable the Operating Partnership to make distributions,
including distributions to holders of OP Units, including Host REIT, in an
amount sufficient to permit Host REIT, as long as it qualifies as a REIT, to
avoid the payment of any federal income tax. See "Distribution and Other
Policies--Financing Policies."
REIMBURSEMENT OF HOST REIT; TRANSACTIONS WITH HOST REIT AND ITS AFFILIATES
Host REIT will not receive any compensation for its services as general
partner of the Operating Partnership. Host REIT, 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 pay all expenses relating to the Operating Partnership's
organization, the REIT Conversion, the acquisition and ownership of its assets
and its operations. The Operating Partnership will be responsible for and will
pay (or reimburse) all expenses and liabilities of any nature that Host REIT
may incur (including expenses and liabilities arising out of the REIT
Conversion and expenses related to the ongoing operations of Host REIT and to
the management and administration of any subsidiaries of Host REIT permitted
under the Partnership Agreement). The Operating Partnership also will be
responsible for paying any and all taxes incurred by Host REIT, except that
the Operating Partnership will not be responsible for any taxes that Host REIT
would not have been required to pay if it qualified as a REIT for federal
income tax purposes or any taxes imposed on Host REIT by reason of its failure
to distribute to its shareholders an amount equal to its taxable income. The
Operating Partnership, however, will not be responsible for expenses or
liabilities incurred by Host REIT that are excluded from the scope of the
indemnification provisions of the Partnership Agreement.
Except as expressly permitted by the Partnership Agreement, Host REIT and
its affiliates 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.
LIABILITY OF HOST REIT AND LIMITED PARTNERS
Host REIT, as general partner of the Operating Partnership, will be liable
for all general recourse obligations of the Operating Partnership to the
extent not paid by the Operating Partnership. Host REIT will not be liable for
the nonrecourse obligations of the Operating Partnership.
The limited partners of the Operating Partnership will not be required to
make additional capital contributions to 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, the liability of a limited partner for
obligations of the Operating Partnership under the Partnership Agreement and
the Delaware Act will be limited, subject to certain exceptions, generally to
the loss of such limited partner's investment in the Operating Partnership
represented by his OP Units. Under the Delaware Act, a limited partner may not
receive a distribution from the Operating Partnership if, at the time of the
distribution and after giving effect thereto, the liabilities of the Operating
Partnership, other than liabilities to parties on account of their interests
in the Operating Partnership and liabilities for which recourse is limited to
specified property of the Operating Partnership, exceed the fair value of the
Operating Partnership's assets, other than the fair value of any property
subject to nonrecourse liabilities of the Operating Partnership, but only to
the extent of such liabilities. The Delaware Act provides that a limited
partner who receives a distribution knowing at the time that it violates the
foregoing prohibition is liable to the Operating Partnership for the amount of
the distribution. Unless otherwise agreed, such a limited partner will not be
liable for the return of such distribution after the expiration of three years
from the date of such distribution.
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The Operating Partnership expects to qualify to conduct business in various
states in which the conduct of its business requires such qualification.
Maintenance of limited liability may require compliance with certain legal
requirements of those jurisdictions and certain other jurisdictions.
Limitations on the liability of a limited partner for the obligations of a
limited partnership have not been clearly established in many jurisdictions.
Accordingly, if it were determined that the right, or exercise of the right by
the limited partners, to make certain amendments to the Partnership Agreement
or to take other action pursuant to the Partnership Agreement constituted
"control" of the Operating Partnership's business for the purposes of the
statutes of any relevant jurisdiction, the limited partners might be held
personally liable for the Operating Partnership's obligations. The Operating
Partnership will operate in a manner Host REIT deems reasonable, necessary and
appropriate to preserve the limited liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF HOST REIT
The Partnership Agreement generally provides that Host REIT, 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, unless Host REIT acted, or failed to act, in
bad faith and the act or omission was material to the loss, liability or
benefit not derived. In addition, Host REIT is not responsible for any
misconduct or negligence on the part of its agents, provided Host REIT
appointed such agents in good faith. Host REIT may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisors, and any action it takes or omits to take in reliance
upon the opinion of such persons, as to matters that Host REIT reasonably
believes to be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
The Partnership Agreement also provides for indemnification of Host REIT,
the trustees and officers of Host REIT and such other persons as Host REIT may
from time to time designate against any judgments, penalties, fines,
settlements and reasonable expenses actually incurred by such person in
connection with the proceeding unless it is established that: (i) the act or
omission of the indemnified person was material to the matter giving rise to
the proceeding and either was committed in bad faith or was the result of
active and deliberate dishonesty; (ii) the indemnified person actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the indemnified person had reasonable
cause to believe that the act or omission was unlawful. The Operating
Partnership is obligated to advance to an indemnified person reasonable
expenses incurred or expected to be incurred by such indemnified person if
such indemnified person certifies to the Operating Partnership that his
conduct has met the standards for indemnification and that he will repay any
amounts received if it is determined subsequently that his conduct did not
meet such standards.
SALES OF ASSETS
Under the Partnership Agreement, Host REIT generally has the exclusive
authority to determine whether, when and on what terms the assets of the
Operating Partnership (including the Hotels) will be sold. In addition, Host
REIT is not required to take into account the tax consequences to the limited
partners in deciding whether to cause the Operating Partnership to undertake a
specific transaction. A sale of all or substantially all of the assets of the
Operating Partnership (or a merger of the Operating Partnership with another
entity) requires an affirmative vote of limited partners holding percentage
interests in the Operating Partnership ("Percentage Interests") that are more
than 50% of the aggregate Percentage Interests of the outstanding limited
partnership interests entitled to vote thereon (including OP Units held by
Host REIT).
REMOVAL OR WITHDRAWAL OF HOST REIT; TRANSFER OF HOST REIT'S INTERESTS
The Partnership Agreement provides that the limited partners may not remove
Host REIT as general partner of the Operating Partnership with or without
cause (unless neither Host REIT nor its parent entity is a "public company,"
in which case Host REIT may be removed with or without cause by limited
partners holding percentage interests in the Operating Partnership
("Percentage Interests") that are more than 50% of the
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aggregate Percentage Interests of the outstanding limited partnership
interests entitled to vote thereon, including any such interests held by the
general partner). In addition, Host REIT may not transfer any of its interests
as general or limited partner of the Operating Partnership or withdraw as a
general partner, except, in each case, in connection with a merger or sale of
all or substantially all of its assets, provided that (i) the limited partners
of the Operating Partnership either will receive, or will have the right to
receive, substantially the same consideration as holders of Common Shares,
(ii) following such merger or other consolidation, substantially all of the
assets of the surviving entity consist of OP Units and (iii) such transaction
has been approved by partners holding Percentage Interests that are more than
50% of the aggregate Percentage Interest of the outstanding interests in the
Operating Partnership entitled to vote thereon (including any such interests
held by Host REIT). Host REIT initially will hold a majority of the OP Units
and thus would control the outcome of this vote. See "--Sales of Assets."
Although Host REIT cannot transfer its partnership interests except in a
transaction in which substantially all of the assets of the surviving entity
consist of OP Units, the Partnership Agreement does not prevent a transaction
in which another entity acquires control (or all of the shares of beneficial
interest) of Host REIT and that other entity owns assets and conducts
businesses outside of the Operating Partnership.
CERTAIN VOTING RIGHTS OF HOLDERS OF OP UNITS DURING THE FIRST YEAR FOLLOWING
THE MERGERS
During the first year following the Mergers, if a vote of the shareholders
of Host REIT is required, then (i) a sale of all or substantially all of the
assets of the Operating Partnership, (ii) a merger involving the Operating
Partnership and (iii) any issuance of OP Units in connection with an issuance
of Common Shares representing 20% or more of the outstanding Common Shares
which would require shareholder approval under the rules of the NYSE, would
require the approval of a majority of all outstanding OP Units (or, in the
case of clause (iii), a majority of the OP Units that are voted, provided that
at least a majority of the OP Units are voted), including OP Units held by
Host REIT, voting as a single class with Host REIT voting its OP Units in the
same proportion as its shareholders vote. In addition, during the one-year
period following the Mergers, any taxable sale or sales of Hotels representing
more than 10% of the aggregate Appraised Value of the Hotels of any
Partnership would require, in addition to any other approval requirements, the
approval of a majority of all outstanding OP Units held by persons who
formerly were Limited Partners of such Partnership, voting as a separate
class.
RESTRICTIONS ON TRANSFERS OF INTERESTS BY LIMITED PARTNERS
The Partnership Agreement provides that no limited partner shall, without
the prior written consent of Host REIT (which consent may be withheld in Host
REIT's sole and absolute discretion), sell, assign, distribute or otherwise
transfer all or any portion of his interest in the Operating Partnership,
except that a limited partner may transfer, without the consent of Host REIT,
all or a portion of its limited partnership interest (i) in the case of a
limited partner who is an individual, to a member of his immediate family, any
trust formed for the benefit of himself and/or members of his immediate
family, or any partnership, limited liability company, joint venture,
corporation or other business entity comprised only of himself and/or members
of his immediate family and entities the ownership interests in which are
owned by or for the benefit of himself and/or members of his immediate family,
(ii) in the case of a limited partner which is a trust, to the beneficiaries
of such trust, (iii) in the case of a limited partner which is a partnership,
limited liability company, joint venture, corporation or other business entity
to which OP Units were transferred pursuant to (i) above, to its partners,
owners, or stockholders, as the case may be, who are members of the immediate
family of or are actually the person(s) who transferred OP Units to it
pursuant to (i) above, (iv) in the case of a limited partner which acquired OP
Units as of the closing of the Mergers and which is a partnership, limited
liability company, joint venture, corporation or other business entity, to its
partners, owners, stockholders or Affiliates thereof, as the case may be, or
the Persons owning the beneficial interests in any of its partners, owners or
stockholders or Affiliates thereof (it being understood that this clause (iv)
will apply to all of each Person's partnership interests whether the OP Units
relating thereto were acquired on the date hereof or hereafter), (v) in the
case of a limited partner which is a partnership, limited liability company,
joint venture, corporation or other business entity other than any of the
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foregoing described in clause (iii) or (iv), in accordance with the terms of
any agreement between such limited partner and the Operating Partnership
pursuant to which such partnership interest was issued, (vi) pursuant to a
gift or other transfer without consideration, (vii) pursuant to applicable
laws of descent or distribution, (viii) to another limited partner and (ix)
pursuant to a grant of security interest or other encumbrance effected in a
bona fide transaction or as a result of the exercise of remedies related
thereto. All of the foregoing transfers are subject to the provisions of the
Partnership Agreement which require compliance with securities laws, prohibit
transfers affecting the tax status of the Operating Partnership or the
qualification of Host REIT as a REIT for tax purposes, prohibit transfers to
holders of nonrecourse liabilities of the Operating Partnership and are also
subject to the rules on substitution of limited partners. In addition, Limited
Partners will be permitted to dispose of their OP Units following the first
anniversary of the Mergers by exercising their Unit Redemption Right. See "--
Unit Redemption Right" below.
The right of any permitted transferee of OP Units to become a substitute
limited partner is subject to the consent of Host REIT, which consent Host
REIT may withhold in its sole and absolute discretion. If Host REIT does not
consent to the admission of a transferee of OP Units as a substitute limited
partner, the transferee will succeed to all economic rights and benefits
attributable to such OP Units (including the Unit Redemption Right), but will
not become a limited partner or possess any other rights of limited partners
(including the right to vote).
Transfers of OP Units may be effected only by means of entries in the record
of the Operating Partnership, and Host REIT will require evidence satisfactory
to it of compliance with all transfer restrictions prior to recording any
transfer.
UNIT REDEMPTION RIGHT
Subject to certain limitations, holders of OP Units (other than Host REIT)
may exercise the Unit Redemption Right by providing notice to the Operating
Partnership at any time commencing one year after the Mergers. Unless Host
REIT elects to assume and perform the Operating Partnership's obligation with
respect to the Unit Redemption Right, as described below, the redeeming holder
of OP Units will receive cash from the Operating Partnership in an amount
equal to the market value of the OP Units to be redeemed. The market value of
an OP Unit for this purpose will be equal to the average of the daily market
price of a Common Share on the NYSE for the ten consecutive trading days
before the day on which the redemption notice was given. The market price for
each such trading day shall be the closing price, regular way, on such day, or
if no such sales take place on such day, the average of the closing bid and
asked prices on such day. In lieu of the Operating Partnership's acquiring the
OP Units for cash, Host REIT will have the right (except as described below,
if the Common Shares are not publicly traded) to elect to acquire the OP Units
directly from a holder of OP Units exercising the Unit Redemption Right, in
exchange for either cash or Common Shares, and, upon such acquisition, Host
REIT will become the owner of such OP Units. In either case, acquisition of
such OP Units by Host REIT will be treated as a sale of the OP Units to Host
REIT for federal income tax purposes. See "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Unit Redemption Right." Upon exercise of the
Unit Redemption Right, the right of the holder of OP Units to receive
distributions for the OP Units so redeemed or exchanged will cease. At least
1,000 OP Units (or all remaining OP Units owned by the holder of OP Units if
less than 1,000 OP Units) must be redeemed each time the Unit Redemption Right
is exercised. The redemption generally will occur on the tenth business day
after notice of the exercise of the Unit Redemption Right by a holder of OP
Units is given 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 Host REIT's Declaration of Trust relating to
restrictions on ownership and transfer of Common Shares or under applicable
federal or state securities laws as long as the Common Shares are publicly
traded. See "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
In the event that the Common Shares are not publicly traded but another
entity whose stock is publicly traded owns more than 50% of the beneficial
interests of Host REIT (referred to as the "Parent Entity"), the Unit
Redemption Right will be determined by reference to the publicly traded shares
of the Parent Entity and the
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general partner will have the right to elect to acquire the OP Units to be
redeemed for publicly traded stock of the Parent Entity. In the event that the
Common Shares are not publicly traded and there is no Parent Entity with
publicly traded stock, the Unit Redemption Right would be based upon the fair
market value of the Operating Partnership's assets at the time the Unit
Redemption Right is exercised (as determined in good faith by Host REIT), and,
unless otherwise agreed by the redeeming limited partner, Host REIT and the
Operating Partnership would be obligated to satisfy the Unit Redemption Right
in cash, payable on the thirtieth business day after notice to the Operating
Partnership of exercise of the Unit Redemption Right.
NO WITHDRAWAL BY LIMITED PARTNERS
No limited partner has the right to withdraw from or reduce his capital
contribution to the Operating Partnership, except as a result of the
redemption, exchange or transfer of OP Units pursuant to the terms of the
Partnership Agreement.
ISSUANCE OF LIMITED PARTNERSHIP INTERESTS
Host REIT is authorized, without the consent of the limited partners, to
cause the Operating Partnership to issue additional OP Units to Host REIT, to
the limited partners or to other persons for such consideration and upon such
terms and conditions as Host REIT deems appropriate. The Operating Partnership
also may issue to any of the foregoing persons or entities partnership
interests in different series or classes, which may be senior to the OP Units,
including with respect to distributions and upon liquidation. If additional OP
Units or partnership interests in different series or classes of equity
securities are issued to Host REIT, then Host REIT must issue additional
Common Shares or securities having substantially similar rights to such
partnership interests, and must contribute the proceeds received by Host REIT
from such issuance to the Operating Partnership. Consideration for additional
partnership interests may be cash or any property or other assets permitted by
the Delaware Act. No limited partner has preemptive, preferential or similar
rights with respect to capital contributions to the Operating Partnership or
the issuance or sale of any partnership interests therein.
MEETINGS; VOTING
Meetings of the limited partners may be called only by Host REIT, on its own
motion or upon written request of limited partners owning at least 25% of the
then outstanding OP Units (including those held by Host REIT). Limited
partners may vote either in person or by proxy at meetings. Any action that is
required or permitted to be taken by the limited partners may be taken either
at a meeting of the limited partners or without a meeting if consents in
writing setting forth the action so taken are signed by limited partners
holding Percentage Interests which are not less than the minimum Percentage
Interest that would be necessary to authorize or take such action at a meeting
of the limited partners at which all limited partners entitled to vote on such
action were present. On matters as to which limited partners are entitled to
vote, each limited partner (including Host REIT to the extent it holds limited
partnership interests) will have a vote equal to its Percentage Interest. A
transferee of OP Units who has not been admitted as a substituted limited
partner with respect to such OP Units will have no voting rights with respect
to such OP Units, even if such transferee holds other OP Units as to which it
has been admitted as a limited partner. The Partnership Agreement does not
provide for annual meetings of the limited partners, and Host REIT does not
anticipate calling such meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed by Host REIT or by
limited partners owning at least 25% of the then outstanding OP Units.
Generally, the Partnership Agreement may be amended with the approval of Host
REIT, as general partner, and limited partners (including Host REIT) holding
Percentage Interests that are more than 50% of the aggregate Percentage
Interests of the outstanding limited partnership interests entitled to vote
thereon. Certain provisions regarding, among other things, the rights and
duties of Host REIT as general partner (e.g., restrictions on Host REIT's
power to conduct businesses other than owning OP Units, the dissolution of the
Operating Partnership or the rights of limited partners), may not be amended
without
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the approval of limited partners (excluding Host REIT) holding Percentage
Interests that are more than 50% of the aggregate Percentage Interest of the
outstanding limited partnership interests entitled to vote thereon.
Notwithstanding the foregoing, Host REIT, as general partner, will have the
power, without the consent of the limited partners, to amend the Partnership
Agreement as may be required to (i) add to the obligations of Host REIT as
general partner or surrender any right or power granted to Host REIT as
general partner, (ii) reflect the admission, substitution, termination or
withdrawal of partners in accordance with the terms of the Partnership
Agreement, (iii) establish the rights, powers, duties and preferences of any
additional partnership interests issued in accordance with the terms of the
Partnership Agreement, (iv) reflect a change that does not materially
adversely affect any limited partner, or cure any ambiguity, correct or
supplement any provisions of the Partnership Agreement not inconsistent with
law or with other provisions of the Partnership Agreement, or make other
changes concerning matters under the Partnership Agreement that are not
otherwise inconsistent with the Partnership Agreement or applicable law or (v)
satisfy any requirements of federal, state or local law.
Certain amendments that would, among other things, (i) convert a limited
partner's interest into a general partner's interest, (ii) modify the limited
liability of a limited partner, (iii) alter the interest of a partner in
profits or losses, or the rights to receive any distributions (except as
permitted under the Partnership Agreement with respect to the admission of new
partners or the issuance of additional OP Units (including partnership
interests in a different class or series to the extent otherwise authorized
under the Partnership Agreement), which actions will have the effect of
changing the percentage interests of the partners and thus altering their
interests in profits, losses and distributions), (iv) amend the limited
partners' right to transfer or (v) alter the Unit Redemption Right, must be
approved by Host REIT and each limited partner that would be adversely
affected by such amendment.
BOOKS AND REPORTS
Host REIT is required to keep the Operating Partnership's books and records
at the principal office of the Operating Partnership. The books of the
Operating Partnership are required to be maintained for financial and tax
reporting purposes on an accrual basis. The limited partners will have the
right to receive copies of the most recent Commission filings by Host REIT and
the Operating Partnership, the Operating Partnership's federal, state and
local income tax returns, a list of limited partners, the Partnership
Agreement, the partnership certificate and all amendments thereto and certain
information about the capital contributions of the partners. Host REIT may
keep confidential from the limited partners any information that Host REIT
believes to be in the nature of trade secrets or other information the
disclosure of which Host REIT in good faith believes is not in the best
interests of the Operating Partnership or which the Operating Partnership is
required by law or by agreements with unaffiliated third parties to keep
confidential.
Host REIT will furnish to each limited partner, no later than the date on
which Host REIT mails its annual report to its shareholders, an annual report
containing financial statements of the Operating Partnership (or Host REIT, if
it prepares consolidated financial statements including the Operating
Partnership) for each fiscal year, including a balance sheet and statements of
operations, cash flow, partners' equity and changes in financial position. The
financial statements will be audited by a nationally recognized firm of
independent public accountants selected by Host REIT. In addition, if and to
the extent that Host REIT mails quarterly reports to its shareholders, Host
REIT will furnish to each limited partner, no later than the date on which
Host REIT mails such reports to its shareholders, a report containing
unaudited financial statements of the Operating Partnership (or Host REIT, if
it prepares consolidated financial statements including the Operating
Partnership) as of the last day of the calendar quarter and such other
information as may be required by applicable law or regulation or as Host REIT
deems appropriate.
Host REIT will use reasonable efforts to furnish to each limited partner,
within 90 days after the close of each taxable year, the tax information
reasonably required by the limited partners for federal and state income tax
reporting purposes.
POWER OF ATTORNEY
Pursuant to the terms of the Partnership Agreement, each limited partner and
each assignee appoints Host REIT, any liquidator and the authorized officers
and attorneys-in-fact of each, as such limited partner's or
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assignee's attorney-in-fact to do the following: execute, swear to,
acknowledge, deliver, file and record in the appropriate public offices
various certificates, documents and other instruments (including, among other
things, the Partnership Agreement and the certificate of limited partnership
and all amendments or restatements thereof) that Host REIT deems appropriate
or necessary to effectuate the terms or intent of the Partnership Agreement.
The Partnership Agreement provides that such power of attorney is irrevocable,
will survive the subsequent incapacity of any limited partner and the transfer
of all or any portion of such limited partner's or assignee's OP Units and
will extend to such limited partner's or assignee's heirs, successors, assigns
and personal representatives.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31, 2098, 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 Host REIT as general
partner without the permitted transfer of Host REIT's interest to a successor
general partner (except in certain limited circumstances); (ii) an election to
dissolve the Operating Partnership prior to December 31, 2058 made by Host
REIT with the consent of the limited partners who hold 90% of the OP Units
(including OP Units held by Host REIT), (iii) the sale of all or substantially
all of the Operating Partnership's assets and properties for cash or for
marketable securities; (iv) the entry of a decree of judicial dissolution of
the Operating Partnership pursuant to the provisions of the Delaware Act; (v)
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 Host REIT) may vote to continue the Operating Partnership and
substitute a new general partner in place of Host REIT); or (vi) an election
by Host REIT in its sole and absolute discretion on or after December 31,
2058. Upon dissolution, Host REIT, 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.
OWNERSHIP LIMITATION
In order to help the Operating Partnership avoid being treated as a
corporation for federal income tax purposes, the Partnership Agreement
expressly provides that no Person (other than Host REIT and the wholly owned
subsidiaries (direct and indirect) thereof) may own, actually or
constructively, more than 4.9% by value of any class of interests in the
Operating Partnership. The Partnership Agreement contains self-executing
mechanisms intended to enforce this prohibition. For a description of the
consequences of the Operating Partnership being treated as a corporation for
federal income tax purposes, see "Federal Income Tax Consequences--Tax Status
of the Operating Partnership." As general partner of the Operating
Partnership, Host REIT, in its sole and absolute discretion, may waive or
modify this ownership limitation if it is satisfied that ownership in excess
of this limit will not cause the Operating Partnership to be treated as a
corporation for federal income tax purposes. Host has agreed to grant The
Blackstone Group an exception to this prohibition subject to the condition
that neither The Blackstone Group, nor any person or entity that would be
considered to own OP Units owned by The Blackstone Group, may own, directly or
by attribution, 10% or more of the stock of SLC or the equity of any of the
Lessees.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of Host REIT
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 Host REIT, copies of which have been filed as Exhibits to the Registration
Statement of which this Consent Solicitation is a part.
GENERAL
The Declaration of Trust of Host REIT provides that Host REIT may issue up
to 751 million shares of beneficial interest, consisting of 750 million Common
Shares and one million preferred shares. As of 1998, Common Shares
were issued and outstanding.
As permitted by the Maryland REIT Law, the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of Host REIT, to amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of any class of shares of beneficial interest that Host REIT has
authority to issue.
Both the MGCL and Host REIT's Declaration of Trust provide that no
shareholder of Host REIT will be liable for any debt or obligation of Host
REIT solely as a result of his status as a shareholder of Host REIT. Host
REIT's Bylaws further provide that Host REIT shall indemnify each present or
former shareholder against any claim or liability to which the shareholder may
become subject by reason of his being or having been a shareholder and that
Host REIT shall reimburse each shareholder for all reasonable expenses
incurred by him in connection with any such claim or liability. However, with
respect to tort claims, contractual claims where shareholder liability is not
so negated, claims for taxes and certain statutory liability, the shareholders
may, in some jurisdictions, be personally liable to the extent that such
claims are not satisfied by Host REIT. Inasmuch as Host REIT carries public
liability insurance which it considers adequate, any risk of personal
liability to shareholders is limited to situations in which Host REIT's assets
plus its insurance coverage would be insufficient to satisfy the claims
against Host REIT and its shareholders.
COMMON SHARES
Subject to the preferential rights of any other shares of beneficial
interest and to the provisions of the Declaration of Trust regarding
restrictions on transfers of shares of beneficial interest, holders of Common
Shares are entitled to receive distributions if, as and when authorized and
declared by the Board of Trustees, out of assets legally available therefor
and to share ratably in the assets of Host REIT 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 Host REIT. Host REIT currently intends to pay regular quarterly
distributions.
Subject to the provisions of Host REIT'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 Host
REIT. Assuming, as expected, that the Common Shares are listed on the NYSE,
holders of the Common Shares will generally have no dissenters' appraisal
rights. Subject to the exchange provisions of Host REIT's Declaration of Trust
regarding restrictions on transfer, Common Shares have equal distribution,
liquidation and other rights.
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Pursuant to the Maryland REIT Law, a Maryland REIT generally cannot
dissolve, amend its declaration of trust or merge, unless approved by the
affirmative vote or written consent of shareholders holding at least two-
thirds of the shares entitled to vote on the matter unless a lesser percentage
(but not less than a majority of all of the votes entitled to be cast on the
matter) is set forth in the Maryland REIT's declaration of trust. Host REIT's
Declaration of Trust does not provide for a lesser percentage in such
situations. Under the Maryland REIT Law, a declaration of trust may permit the
trustees by a two-thirds vote to amend the declaration of trust from time to
time to qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. Host REIT'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 one
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 Maryland REIT Law and the
Declaration of Trust to set, subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series.
Thus, the Board of Trustees could authorize the issuance of preferred shares
with terms and conditions which could have the effect of delaying, deferring
or preventing a transaction or a change in control of Host REIT 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, but
Host REIT may issue preferred shares in the future, including as a result of
the issuance of perpetual preferred stock by Host prior to the REIT
Conversion.
POWER TO ISSUE ADDITIONAL COMMON SHARES AND PREFERRED SHARES
Host REIT believes that the power of the Board of Trustees to issue
additional authorized but unissued Common Shares or preferred shares and to
classify or reclassify unissued Common Shares or preferred shares and
thereafter to cause Host REIT to issue such classified or reclassified shares
of beneficial interest in one or more series will provide Host REIT with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Shares, will be available for
issuance without further action by Host REIT's shareholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which Host REIT's securities may be listed or
traded. Although the Board of Trustees has no intention at the present time of
doing so, it could authorize Host REIT to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of Host REIT that might involve a premium
price for holders of Common Shares or otherwise be in their best interest.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host REIT 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 Host
REIT, or one or more owners (actually or constructively) of 10% or more of
Host REIT, actually or constructively owns 10% or more of a tenant of Host
REIT (or a tenant of any partnership in which Host REIT is a partner), the
rent received by Host REIT (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).
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Because the Board of Trustees believes it is desirable for Host REIT to
qualify as a REIT, the Declaration of Trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (i) 9.8% of the lesser of the
number or value of Common Shares outstanding (subject to an exception for
Common Shares held prior to the REIT Conversion so long as the holder thereof
would not own more than 9.8% in value of the outstanding shares of beneficial
interest of Host REIT) or (ii) 9.8% of the lesser of the number or value of
the issued and outstanding preferred shares of any class or series of Host
REIT (the "Ownership Limit"). The Ownership Limitation prohibits Marriott
International and its subsidiaries and affiliates (including members of the
Marriott family) from collectively owning shares of beneficial interests in
excess of the Ownership Limit, but contains an exception that would permit
Marriott International to exercise its right to purchase up to 20% of each
class of Host REIT's voting stock in connection with a change in control of
Host REIT (but only in the event that Marriott International and its
subsidiaries and affiliates (including members of the Marriott family) do not
own at such time or thereafter, directly and by attribution, 10% or more of
SLC or any of the Lessees). See "Certain Relationships and Related
Transactions--Relationship Between Host and Marriott International." The
ownership attribution rules under the Code are complex and may cause Common
Shares owned actually or constructively by a group of related individuals
and/or entities to be owned constructively by one individual or entity. As a
result, the acquisition or ownership of less than 9.8% of the Common Shares
(or the acquisition or ownership 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 it is satisfied, based upon an opinion of counsel and such other
evidence as is satisfactory to the Board of Trustees in its sole discretion,
that such ownership will not cause a person who is an individual to be treated
as owning Common Shares in excess of the Ownership Limit, applying the
applicable constructive ownership rules, and will not otherwise jeopardize
Host REIT's status as a REIT (for example, by causing any tenant of the
Operating Partnership or the Partnerships (including but not limited to SLC
and the Lessees) to be considered a "related party tenant" for purposes of the
REIT qualification rules). As a condition of such waiver, the Board of
Trustees may require undertakings or representations from the applicant with
respect to preserving the REIT status of Host REIT.
The Board of Trustees of Host REIT will have the authority to increase the
Ownership Limit from time to time, but will not have the authority to do so to
the extent that after giving effect to such increase, five beneficial owners
of Common Shares could beneficially own in the aggregate more than 49.5% of
the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from actually or
constructively owning shares of beneficial interest of Host REIT that would
result in Host REIT being "closely held" under Section 856(h) of the Code or
otherwise cause Host REIT to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of Host REIT if such transfer would
result in shares of beneficial interest of Host REIT 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 Host REIT that will
or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to Host REIT and provide Host
REIT with such other information as Host REIT may request in order to
determine the effect of such transfer on Host REIT's status as a REIT.
If any purported transfer of shares of beneficial interest of Host REIT 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
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(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 Host REIT (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 Host REIT of the transfer of shares to the trust, the
trustee of the trust (who shall be designated by Host REIT and be unaffiliated
with Host REIT and any Prohibited Transferee or Prohibited Owner) will be
required to sell such excess shares to a person or entity who could own such
shares without violating the Ownership Limit, and distribute to the Prohibited
Transferee an amount equal to the lesser of the price paid by the Prohibited
Transferee for such excess shares or the sales proceeds received by the trust
for such excess shares. In the case of any excess shares resulting from any
event other than a transfer, or from a transfer for no consideration (such as
a gift), the trustee will be required to sell such excess shares to a
qualified person or entity and distribute to the Prohibited Owner an amount
equal to the lesser of the fair market value of such excess shares as of the
date of such event or the sales proceeds received by the trust for such excess
shares. In either case, any proceeds in excess of the amount distributable to
the Prohibited Transferee or Prohibited Owner, as applicable, will be
distributed to the Beneficiary. Prior to a sale of any such excess shares by
the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by Host REIT 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 Host REIT 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 Host REIT 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 Host REIT 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 Host REIT held in the trust
shall be deemed to have been offered for sale to Host REIT, 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 Host REIT, or its designee,
accepts such offer. Host REIT will have the right to accept such offer until
the trustee has sold the shares of beneficial interest held in the Trust. Upon
such a sale to Host REIT, the interest of the Beneficiary in the shares sold
will terminate and the trustee will distribute the net proceeds of the sale to
the Prohibited Owner.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Trustees determines that it is no longer in the best interests
of Host REIT to attempt to qualify, or to continue to qualify, as a REIT.
All certificates representing shares of beneficial interest shall bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 1/2 of 1% and 5% as
provided in the rules and regulations promulgated under the Code) of the
lesser of the number or value of the outstanding shares of beneficial interest
of Host REIT must give a written notice to the Operating Partnership within 30
days after the end of each taxable year. In addition, each shareholder will,
upon demand, be required to disclose to Host REIT 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.
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These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of Common Shares might receive a premium for their Common Shares
over the then prevailing market price or which such holders might believe to
be otherwise in their best interest.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Possible Limitations on Changes in Control Pursuant to Maryland Law. Under
the MGCL, as applicable to REITs, certain "business combinations" (including
certain issuances of equity securities) between a Maryland REIT and any
Interested Shareholder or an affiliate of the Interested Shareholder, are
prohibited for five years after the most recent date on which the Interested
Shareholder becomes an Interested Shareholder. Thereafter, any such business
combination must be approved by two super-majority shareholder votes unless,
among other conditions, the trust's common shareholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its common shares. The Board of Trustees of Host REIT has not
opted out of the business combination provisions of the MGCL. Consequently,
the five-year prohibition and the super-majority vote requirements will apply
to a business combination involving Host REIT; however, as permitted by the
MGCL, Host REIT's Board of Trustees may elect to opt out of these provisions
in the future.
In addition, also under the MGCL, as applicable to real estate investments,
"control shares" acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiror, by
officers or by trustees who are employees of the trust. "Control shares" are
voting shares which, if aggregated with all other such shares previously
acquired by the acquiror or in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing trustees within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third, (ii) one-third or more but less than a
majority or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result
of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the trust may redeem any
or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal 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 to (a) shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. The Board of Trustees of Host REIT has not opted
out of the control share provisions of the MGCL but, as permitted by the MGCL,
may elect to opt out of these provisions in the future.
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DESCRIPTION OF THE NOTES
The Notes will be issued under the Indenture between the Operating
Partnership and , as trustee (the "Indenture Trustee"). A copy of the
form of Indenture is filed as an exhibit to the Registration Statement of
which this Consent Solicitation is a part. The terms of the Notes include
those provisions contained in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders
of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to and qualified in
its entirety by reference to the Indenture. As used in this section, the term
"Operating Partnership" means Host Marriott, L.P. and not any of its
Subsidiaries, unless otherwise expressly stated or the context otherwise
requires.
GENERAL
A separate series of Notes will be issued to Limited Partners of each
Partnership who elect to receive Notes in exchange for the OP Units issued to
them in the Mergers. The terms of each series of Notes will be substantially
identical, except with respect to the provisions for mandatory prepayment of
principal, as described below (see "--Principal and Interest"). The Notes will
be direct, senior unsecured and unsubordinated obligations of the Operating
Partnership and will rank pari passu with each other and with all other
unsecured and unsubordinated indebtedness of the Operating Partnership from
time to time outstanding. The Notes will be recourse obligations of the
Operating Partnership, but the holders thereof will not have recourse against
any partner of the Operating Partnership (including Host REIT, as general
partner of the Operating Partnership). The Notes will be effectively
subordinated to mortgages and other secured indebtedness of the Operating
Partnership to the extent of the value of the property securing such
indebtedness. The Notes also will be effectively subordinated to all existing
and future third party indebtedness and other liabilities of the Operating
Partnership's Subsidiaries (including the Partnerships). As of June 19, 1998,
on a pro forma basis assuming the Full Participation Scenario, the Operating
Partnership and its Subsidiaries would have had aggregate consolidated debt of
approximately $5.1 billion to which the Notes were effectively subordinated or
which ranked equal with such Notes.
The Notes will mature on December 15, 2005 (the "Maturity Date") or
approximately seven years following the Effective Date. The Notes are not
subject to any sinking fund provisions, although the Operating Partnership is
required to make mandatory prepayments of principal in certain events. See "--
Principal and Interest."
Except as described under "--Limitations on Incurrence of Debt" and "--
Merger, Consolidation or Sale," the Indenture does not contain any other
provisions that would limit the ability of the Operating Partnership or any of
its Subsidiaries to incur indebtedness or that would afford Holders (as
defined below) of the Notes protection in the event of (i) a highly leveraged
or similar transaction involving the Operating Partnership, the management of
the Operating Partnership or Host REIT, or any subsidiary of any of them, (ii)
a change of control of the Operating Partnership or Host REIT or (iii) a
reorganization, restructuring, merger or similar transaction involving the
Operating Partnership that may adversely affect the holders of the Notes. In
addition, subject to the limitations set forth under "--Merger, Consolidation
or Sale," the Operating Partnership may, in the future, enter into certain
transactions such as the sale of all or substantially all of its assets or the
merger or consolidation of the Operating Partnership that would increase the
amount of the Operating Partnership's indebtedness or substantially reduce or
eliminate the Operating Partnership's assets, which may have an adverse effect
on the Operating Partnership's ability to service its indebtedness, including
the Notes. The Operating Partnership and its management have no present
intention of engaging in a highly leveraged or similar transaction involving
the Operating Partnership.
The Notes will be issued in fully registered form.
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PRINCIPAL AND INTEREST
The principal amount of the Notes with respect to each Partnership will be
equal to the Note Election Amount for such Partnership, which will be equal to
the Liquidation Value or, if greater, 60% of the Exchange Value for such
Partnership.
The Notes will bear interest at a fixed rate of interest equal to % per
annum, which was determined based on 120% of the applicable federal rate as of
the Record Date. Interest will accrue from the closing of the Mergers or from
the immediately preceding Interest Payment Date (as defined below) to which
interest has been paid, payable semi-annually in arrears on each June 15 and
December 15, commencing June 15, 1999 (each, an "Interest Payment Date"), and
on the Maturity Date, to the persons (the "Holders") in whose names the Notes
are registered in the security register for the Notes at the close of business
on the date 15 calendar days prior to such payment day regardless of whether
such day is a Business Day, as defined below (each, a "Regular Record Date").
Interest on the Notes will be computed on the basis of a 360 day year of
twelve 30- day months. As of August 7, 1998, the interest rate on the Notes
would have been 6.82% per annum.
The principal of each Note payable on the Maturity Date will be paid against
presentation and surrender of such Note at the corporate trust office of the
Trustee, located initially c/o , in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts.
If any Interest Payment Date or a Maturity Date falls on a day that is not a
Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue
on the amount so payable for the period from and after such Interest Payment
Date or such Maturity Date, as the case may be. "Business Day" means any day,
other than a Saturday or Sunday, on which banking institutions in The City of
New York are open for business.
In the event that, following the closing of the Mergers, any Partnership (i)
sells or otherwise disposes of any Hotel and realizes net cash proceeds in
excess of (a) the amount required to repay mortgage indebtedness (outstanding
immediately prior to the Mergers) secured by such Hotel or otherwise required
to be applied to the reduction of indebtedness of such Partnership and (b) the
costs incurred by the Partnership in connection with such sale or other
disposition or (ii) refinances (whether at maturity or otherwise) any
indebtedness secured by any Hotel and realizes net cash proceeds in excess of
(a) the amount of indebtedness secured by such Hotel at the time of the
Mergers, calculated prior to any repayment or other reduction in the amount of
such indebtedness in the Mergers and (b) the costs incurred by the Operating
Partnership or such Partnership in connection with such refinancing ("Net Cash
Proceeds"), the Operating Partnership will be required to prepay an aggregate
amount of principal of the series of Notes related to such Partnership equal
to 80% of such Net Cash Proceeds, together with interest accrued on the
principal being prepaid to the date of prepayment. Notice of any mandatory
principal prepayment will be given to Holders of the applicable series at
their addresses, as shown in the security register for the Notes, not more
than 60 nor less than 30 days prior to the date fixed for prepayment, which
date shall be not more than 60 days after the applicable sale or other
disposition of such Hotel. The notice of redemption will specify, among other
items, the principal amount of the Notes held by each Holder to be redeemed.
OPTIONAL REDEMPTION
The Notes of any series may be redeemed at any time at the option of the
Operating Partnership, in whole or from time to time in part, at a redemption
price equal to the sum of the principal amount of the Notes being redeemed
plus accrued interest thereon to the redemption date (collectively, the
"Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Notes called for redemption shall have been made available
on the redemption date referred to in such notice, such Notes will cease to
bear interest on the date fixed for such redemption specified in such notice
and the only right of the Holders of the Notes will be to receive payment of
the Redemption Price.
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Notice of any optional redemption of any Notes will be given to Holders at
their addresses, as shown in the security register for the Notes, not more
than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the Redemption Price and
the principal amount of the Notes held by such Holder to be redeemed.
If less than all the Notes of any series are to be redeemed at the option of
the Operating Partnership, the Operating Partnership will notify the Indenture
Trustee at least 45 days prior to giving notice of redemption (or such shorter
period as is satisfactory to the Indenture Trustee) of the aggregate principal
amount of Notes to be redeemed and their redemption date. The Indenture
Trustee shall select, in such manner as it shall deem fair and appropriate,
Notes to be redeemed in whole or in part.
LIMITATIONS ON INCURRENCE OF DEBT
The Operating Partnership will not, and will not permit a Subsidiary to,
incur any Debt (as defined below), other than intercompany Partnership Debt
(representing Debt to which the only parties are Host REIT, the Operating
Partnership and/or any of their Subsidiaries, but only so long as such Debt is
held solely by any of Host REIT, the Operating Partnership and any Subsidiary)
that is subordinate in right of payment to the Notes, if, immediately after
giving effect to the incurrence of such additional Debt, the aggregate
principal amount of all outstanding Debt of the Operating Partnership and its
Subsidiaries on a consolidated basis, determined in accordance with GAAP, is
(i) greater than 60% of the Total Market Capitalization (as defined below) of
the Operating Partnership on the date of such incurrence or (ii) greater than
75% of the Operating Partnership's undepreciated total assets on the date of
such incurrence.
As used in the Indenture and the description thereof herein:
"Debt" of the Operating Partnership or any Subsidiary means, without
duplication, any indebtedness of the Operating Partnership and its
Subsidiaries, whether or not contingent, in respect of (i) borrowed money
evidenced by bonds, notes, debentures or similar instruments, (ii)
indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or
any security interest existing on property owned by the Operating
Partnership and its Subsidiaries, (iii) the reimbursement obligations,
contingent or otherwise, in connection with any letters of credit actually
issued or amounts representing the balance deferred and unpaid of the
purchase price of any property except any such balance that constitutes an
accrued expense or trade payable or (iv) any lease of property by the
Operating Partnership and its Subsidiaries as lessee which is reflected in
the Operating Partnership's consolidated balance sheet as a capitalized
lease in accordance with GAAP, in the case of items of indebtedness under
(i) through (iii) above to the extent that any such items (other than
letters of credit) would appear as a liability on the Operating
Partnership's consolidated balance sheet in accordance with GAAP, and also
includes, to the extent not otherwise included, any obligation by the
Operating Partnership or any Subsidiary to be liable for, or to pay, as
obligor, guarantor or otherwise (other than for purposes of collection in
the ordinary course of business), indebtedness of another person (other
than the Operating Partnership or any Subsidiary) (it being understood that
"Debt" shall be deemed to be incurred by the Operating Partnership and its
Subsidiaries on a consolidated basis whenever the Operating Partnership and
its Subsidiaries on a consolidated basis shall create, assume, guarantee or
otherwise become liable in respect thereof; Debt of a Subsidiary of the
Operating Partnership existing prior to the time it became a Subsidiary of
the Operating Partnership shall be deemed to be incurred upon such
Subsidiary's becoming a Subsidiary of the Operating Partnership; and Debt
of a person existing prior to a merger or consolidation of such person with
the Operating Partnership or any Subsidiary of the Operating Partnership in
which such person is the successor to the Operating Partnership or such
Subsidiary shall be deemed to be incurred upon the consummation of such
merger or consolidation); provided, however, that the term Debt shall not
include any such indebtedness that has been the subject of an "in
substance" defeasance in accordance with GAAP.
"Total Market Capitalization" means, as of any date, the sum of (i) the
product of (x) the closing price of a Common Share on the NYSE on the
immediately preceding trading day times (y) the total number of OP Units
then outstanding (including OP Units held by Host REIT), plus (ii) the
aggregate liquidation
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preference of all outstanding preferred units of limited partnership
interest in the Operating Partnership, plus (iii) the aggregate principal
amount of all outstanding Debt of Host REIT and its subsidiaries on a
consolidated basis determined in accordance with GAAP (determined on a pro
forma basis after giving effect to the incurrence of any Debt on such date
and the application of the proceeds thereof).
"Subsidiary" means a corporation, partnership, limited liability company,
trust, real estate investment trust or other entity a majority of the
voting power of the voting equity securities of which are owned, directly
or indirectly, by the Operating Partnership or by one or more Subsidiaries
of the Operating Partnership, or a partnership or limited liability
company, of which the general partner or managing member is the Operating
Partnership or a Subsidiary of the Operating Partnership or one or more
corporations which, either individually or in the aggregate, would be
Significant Subsidiaries (as defined below, except that the investment,
asset and equity thresholds for purposes of this definition shall be 5%),
the majority of the value of the equity interests of which are owned,
directly or indirectly, by the Operating Partnership or by one or more
Subsidiaries.
MERGER, CONSOLIDATION OR SALE
The Operating Partnership may consolidate with, or sell, lease or convey all
or substantially all of its assets to, or merge with or into, any other
corporation, limited liability company, association, partnership, real estate
investment trust, company or business trust (any such entity, a
"Corporation"), provided that (i) the Operating Partnership shall be the
continuing Corporation, or the successor Corporation or its transferees or
assignees of such assets (if other than the Operating Partnership) formed by
or resulting from any such consolidation or merger or which shall have
received the transfer of such assets by lease (subject to the continuing
obligations of the Operating Partnership set forth in the Indenture) or
otherwise shall expressly assume payment of the principal of and interest on
all the Notes and the due and punctual performance and observance of all of
the covenants and conditions contained in the Indenture; (ii) the successor
Corporation formed by or resulting from any such consolidation or merger or
which shall have received the transfer of assets shall be a United States
Corporation; (iii) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Operating
Partnership or any Subsidiary of the Operating Partnership as a result thereof
as having been incurred by the Operating Partnership or such Subsidiary at the
time of such transaction, no Event of Default under the Indenture, and no
event which, after notice or the lapse of time, or both, would become such an
Event of Default, shall have occurred and be continuing; and (iv) an officer's
certificate and legal opinion covering such conditions shall be delivered to
the Indenture Trustee.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following events are "Events of Default" with respect to the Notes of
any series: (i) default for 30 days in the payment of any installment of
interest on any Note of such series; (ii) default in the payment of the
principal of any Note at its maturity; (iii) default in the payment of any
mandatory prepayment of principal on or before the date 90 days after the
applicable sale or other disposition of a Hotel giving rise to the obligation
to make such prepayment; (iv) default in the performance of any other covenant
or warranty of the Operating Partnership contained in the Indenture, such
default having continued for 60 days after written notice as provided in the
Indenture; (v) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Operating
Partnership or any Significant Subsidiary or any of their respective property;
(vi) any other Event of Default provided in the Indenture with respect to the
Notes. The term "Significant Subsidiary" means each significant subsidiary (as
defined in Regulation S-X promulgated under the Securities Act) of the
Operating Partnership.
If an Event of Default under the Indenture occurs and is continuing, then in
every such case the Indenture Trustee or the Holders of not less than 25% in
principal amount of the Outstanding Notes (as defined below) may declare the
principal amount of all of the Notes to be due and payable immediately by
written notice thereof to the Operating Partnership (and to the Indenture
Trustee if given by the Holders). However, at any time after such a
declaration of acceleration with respect to Notes has been made, but before a
judgment or decree for payment of the money due has been obtained by the
Indenture Trustee, the Holders of not less than a majority of
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<PAGE>
the principal amount of Outstanding Notes may rescind and annul such
declaration and its consequences if (i) the Operating Partnership shall have
paid or deposited with the Indenture Trustee all required payments of the
principal of and interest on the Notes, plus certain fees, expenses,
disbursements and advances of the Indenture Trustee and (ii) all Events of
Default, other than the nonpayment of accelerated principal of (or specified
portion thereof), or premium (if any) or interest on the Notes have been cured
or waived as provided in the Indenture. The Indenture also provides that the
Holders of not less than a majority of the principal amount of the Outstanding
Notes (as defined below) may waive any past default with respect to such
series and its consequences, except a default (x) in the payment of the
principal of or interest payable on any Note or (y) in respect of a covenant
or provision contained in the Indenture that cannot be modified or amended
without the consent of the Holder of each Outstanding Note (as defined below)
affected thereby.
The Indenture Trustee will be required to give notice to the Holders of
Notes within 90 days of a default under the Indenture unless such default has
been cured or waived; provided, however, that the Indenture Trustee may
withhold notice to the Holders of any default (except a default in the payment
of the principal of or interest on any Note or in the payment of any mandatory
prepayment installment in respect of any Note) if specified Responsible
Officers (as defined in the Indenture) of the Indenture Trustee consider such
withholding to be in the interest of such Holders.
The Indenture provides that no Holders of Notes may institute any
proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Indenture Trustee, for
60 days, to act after it has received a written request to institute
proceedings in respect of an Event of Default from the Holders of not less
than 25% in principal amount of the Outstanding Notes (as defined below), as
well as an offer of indemnity reasonably satisfactory to it. This provision
will not prevent, however, any Holder of Notes from instituting suit for the
enforcement of payment of the principal of (and premium, if any) interest on
such Notes at the respective due dates thereof.
Subject to provisions in the Indenture relating to its duties in case of
default, the Indenture Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any
Holders of any Outstanding Notes (as defined below) under the Indenture,
unless such Holders shall have offered to the Indenture Trustee thereunder
reasonable security or indemnity. The Holders of not less than a majority in
principal amount of the Outstanding Notes (as defined below) shall have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Indenture Trustee, or of exercising any trust or
power conferred upon the Indenture Trustee. However, the Indenture Trustee may
refuse to follow any direction which is in conflict with any law or the
Indenture, which may involve the Indenture Trustee in personal liability or
which may be unduly prejudicial to the Holders of Notes of such series not
joining therein.
Within days after the close of each fiscal year, the Operating
Partnership must deliver to the Indenture Trustee a certificate, signed by one
of several specified officers of Host REIT, stating whether or not such
officer has knowledge of any default under the Indenture and, if so,
specifying each such default and the nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Notes (as defined below) which are affected by such
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holders of each such Note affected
thereby, (i) change the Stated Maturity of the principal of or premium (if
any) or any installment of interest on, any such Note; (ii) reduce the
principal amount of, or the rate or amount of interest on, any such Note,
(iii) change the place of payment, or the coin or currency, for payment of
principal of, premium, if any, or interest on any such Note; (iv) impair the
right to institute suit for the enforcement of any payment on or with respect
to any such Note; (v) reduce the above stated percentage of outstanding Notes
of any series necessary to modify or amend the Indenture, to waive compliance
with certain
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<PAGE>
provisions thereof or certain defaults and consequences thereunder or to
reduce the quorum or voting requirements set forth in the Indenture; or (vi)
modify any of the foregoing provisions or any of the provisions relating to
the waiver of certain past defaults or certain covenants, except to increase
the required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the Holders of
each such Note affected thereby. A Note shall be deemed outstanding (an
"Outstanding Note") if it has been authenticated and delivered under the
Indenture unless, among other things, such Note has been canceled or redeemed.
The Indenture provides that the Holders of not less than a majority in
principal amount of Outstanding Notes have the right to waive compliance by
the Operating Partnership with certain covenants in the Indenture.
Modifications and amendments of the Indenture will be permitted to be made
by the Operating Partnership and the Indenture Trustee without the consent of
any Holder of Notes for any of the following purposes: (i) to evidence the
succession or addition of another Person to the Operating Partnership as
obligor under the Indenture; (ii) to add to the covenants of the Operating
Partnership for the benefit of the Holders of the Notes or to surrender any
right or power conferred upon the Operating Partnership in the Indenture;
(iii) to add Events of Default for the benefit of the Holders of the Notes;
(iv) to permit or facilitate the issuance of the Notes in uncertificated form,
provided, that such action shall not adversely affect the interests of the
Holders of Notes in any material respect; (v) to secure the Notes; (vi) to
establish the form or terms of additional notes of any series; (vii) to
provide for the acceptance of appointment by a successor Indenture Trustee or
facilitate the administration of the trusts under the Indenture by more than
one Indenture Trustee; (viii) to cure any ambiguity, defect or inconsistency
in the Indenture, provided that such action shall not adversely affect the
interests of Holders of Notes in any material respect; and (ix) to supplement
any of the provisions of the Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of Notes or additional notes
under the Indenture, provided that such action shall not adversely affect the
interests of the Holders of the Notes in any material respect.
The Indenture contains provisions for convening meetings of the Holders of
Notes. A meeting will be permitted to be called at any time by the Trustee,
and also, upon request, by the Operating Partnership or the Holders of at
least 10% in principal amount of the Outstanding Notes, in any such case upon
notice given as provided in the Indenture. Except for any consent that must be
given by the Holder of each Note affected by certain modifications and
amendments of the Indenture, any resolution presented at a meeting or
adjourned meeting duly reconvened at which a quorum is present will be
permitted to be adopted by the affirmative vote of the Holders of a majority
in principal amount of the Outstanding Notes of that series; provided,
however, that, except as referred to above, any resolution with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority, in principal amount of the
Outstanding Notes may be adopted at a meeting or adjourned meeting duly
reconvened at which a quorum is present by the affirmative vote of the Holders
of such specified percentage in principal amount of the Outstanding Notes. Any
resolution passed or decision taken at any meeting of Holders of Notes duly
held in accordance with the Indenture will be binding on all Holders of Notes.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal
amount of the Outstanding Notes; provided, however, that if any action is to
be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal
amount of the Outstanding Notes, the Persons holding or representing such
specified percentage in principal amount of the Outstanding Notes will
constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Notes of any series with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that the
Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Notes affected
thereby, or of the Holders of such series and one or more additional series:
(i) there shall be no minimum quorum requirement for such meeting and (ii) the
principal amount of the Outstanding Notes that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action
shall be taken into account in determining whether such request, demand,
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<PAGE>
authorization, direction, notice, consent, waiver or other action has been
made, given or taken under the Indenture.
SATISFACTION AND DISCHARGE
The Operating Partnership may discharge certain obligations to Holders of
Notes that have not already been delivered to the Indenture Trustee for
cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Indenture Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Notes are payable in an amount sufficient to pay the
entire indebtedness on such Notes in respect of principal and interest to the
date of such deposit (if such Notes have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be.
NO CONVERSION RIGHTS
The Notes will not be convertible into or exchangeable for any capital stock
of Host REIT or equity interest in the Operating Partnership.
GOVERNING LAW
The Indenture will be governed by and shall be construed in accordance with
the laws of the State of New York.
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COMPARISON OF OWNERSHIP OF PARTNERSHIP
INTERESTS, OP UNITS AND COMMON SHARES
The information below highlights a number of the significant differences
between the Partnerships, the Operating Partnership and Host REIT relating to,
among other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
compensation and fees and investor rights, and compares certain legal rights
associated with the ownership of Partnership Interests, OP Units and Common
Shares, respectively. These comparisons are intended to assist Limited
Partners in understanding how their investments will be changed if, as a
result of the Mergers and the REIT Conversion, their Partnership Interests are
exchanged for OP Units, which are redeemable at the option of the holder
thereof beginning one year after the Mergers, for either Common Shares or the
cash equivalent thereof, at the option of Host REIT. THIS DISCUSSION IS
SUMMARY IN NATURE AND DOES NOT CONSTITUTE A COMPLETE DISCUSSION OF THESE
MATTERS. LIMITED PARTNERS SHOULD CAREFULLY REVIEW THE BALANCE OF THIS CONSENT
SOLICITATION FOR ADDITIONAL IMPORTANT INFORMATION.
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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FORM OF ORGANIZATION AND PURPOSE
All of the Partnerships The Operating Partner- Host REIT is a Maryland
are Delaware limited ship is a Delaware lim- REIT and will be the
partnerships, except for ited partnership. Fol- sole general partner of
Chicago Suites, which is lowing the Mergers, the the Operating Partner-
a Rhode Island limited Operating Partnership ship. Host REIT will
partnership. The General will succeed to the own- make an election to be
Partner of each Partner- ership of the Partici- taxed as a REIT under
ship is Host or a direct pating Partnerships the Code and intends to
or indirect wholly owned through wholly owned maintain its qualifica-
subsidiary of Host. The subsidiaries. The sole tion as a REIT. Host
purpose of each Partner- general partner of the REIT's only significant
ship, other than Atlanta Operating Partnership asset will be its inter-
Marquis, generally in- will be Host REIT. The est in the Operating
cludes investing in, ac- Participating Partner- Partnership and conse-
quiring, developing, op- ships, as wholly owned quently an indirect in-
erating, selling or dis- subsidiaries of the Op- vestment in the Hotels
posing of hotel proper- erating Partnership, owned by subsidiaries of
ties or interests in ho- will own the Partnership the Operating Partner-
tel properties and en- Hotels and lease them to ship. See "Distribution
gaging in other activi- the Lessees. Following and Other Policies."
ties related or inciden- the REIT Conversion and
tal thereto. The purpose the Blackstone Acquisi-
of Atlanta Marquis is to tion, the Operating
acquire and own a gen- Partnership and its sub-
eral partner interest in sidiaries initially will
a hotel partnership and own approximately 120
to engage in other ac- full-service hotels op-
tivities related or in- erating primarily under
cidental thereto. the Marriott, Ritz-Carl-
ton, Four Seasons,
Swissotel and Hyatt
brand names. The Operat-
ing Partnership will
seek to invest in a real
estate portfolio primar-
ily consisting of
upscale and luxury full-
service hotels. The
business of the Operat-
ing Partnership will be
limited to and conducted
in such a manner as to
permit Host REIT at all
times to be qualified as
a REIT under the Code.
See "Distribution and
Other Policies."
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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LENGTH AND TYPE OF INVESTMENT
Each of the Partnerships The Operating Partner- Host REIT has a perpet-
is a finite-life entity ship has a stated term ual term and intends to
which expire as follows: of approximately 100 continue its operations
Atlanta Marquis, 2085; years. Events which may for an indefinite time
Chicago Suites, 2063; cause the dissolution of period. To the extent
Desert Springs, 2087; the Operating Partner- Host REIT sells or refi-
Hanover, 2086; MDAH, ship prior to the expi- nances its assets, the
2089; MHP, 2106; MHP2, ration of the stated net proceeds therefrom
2088 and PHLP, 2080. term include: (i) the will generally be re-
Other events which may withdrawal of Host REIT tained by Host REIT
cause the dissolution of as general partner with- (through the Operating
certain Partnerships in- out the permitted trans- Partnership) for working
clude: (i) the bank- fer of Host REIT's in- capital and other gen-
ruptcy of the Partner- terest to a successor eral purposes, except to
ship, (ii) the with- general partner (except the extent distributions
drawal or removal of the in certain limited cir- thereof must be made to
General Partner, unless cumstances), (ii) the permit Host REIT to
a substitute general entry of a decree of ju- qualify as a REIT for
partner is elected by dicial dissolution of tax purposes. See "Dis-
the Limited Partners, the Operating Partner- tribution and Other Pol-
(iii) the dissolution or ship pursuant to the icies--Investment Poli-
bankruptcy of the Gen- provisions of the Dela- cies."
eral Partner, unless a ware Act, (iii) the en-
substitute general part- try of a final non-ap-
ner is elected by the pealable order for re-
Limited Partners, (iv) lief in a bankruptcy
the sale or disposition proceeding of the gen-
of all or substantially eral partner, or the en-
all of the property of try of a final non-ap-
the Partnership or pealable judgment ruling
(v) any event that makes that the general partner
it unlawful for the is bankrupt or insolvent
business of the Partner- (except that, in either
ship to be carried on or such case, in certain
for the Partners to circumstances the lim-
carry it on in a limited ited partners (other
partnership. Partners than Host REIT) may vote
are entitled to receive to continue the Operat-
cash distributions out ing Partnership and sub-
of the Partnership's net stitute a new general
operating income, if partner in place of Host
any, and to receive cash REIT), or (iv) on or af-
distributions, if any, ter December 31, 2058,
upon refinancing of a on election by Host
Partnership's debt or REIT, in its sole and
liquidation of the Part- absolute discretion. The
nership's real estate Operating Partnership
investments. See "Back- has no specific plans
ground and Reasons for for disposition of the
the Mergers and the REIT assets acquired through
Conversion--Background the REIT Conversion or
of the Partnerships." that may be subsequently
acquired. To the extent
the Operating Partner-
ship sells or refinances
its assets, the net pro-
ceeds therefrom will
generally be retained by
the Operating Partner-
ship for working capital
and new investments
rather than being dis-
tributed to its partners
(including Host REIT),
except to the extent
distributions thereof
must be made to permit
Host REIT to qualify as
a REIT for tax purposes.
See "Background and Rea-
sons for the Mergers and
the REIT Conversion--
Reasons for the Mergers"
and "Distribution and
Other Policies--Invest-
ment Policies."
The Partnerships are structured to dissolve when the assets of the
Partnerships are liquidated (or after approximately 75-120 years, if no
liquidation occurs sooner). In contrast, the Operating Partnership and Host
REIT as an enterprise are intended to be infinite life entities which will
constitute an operating company and will reinvest the proceeds of asset
dispositions, if any, in new properties or other appropriate investments
consistent with the Operating Partnership's and Host REIT's investment
objectives.
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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LIQUIDITY
The Partnership Units in Each limited partner The Common Shares of
each of the Partnerships will have the right, Host REIT will be freely
represent relatively il- beginning one year after transferable upon regis-
liquid investments with the closing of the tration under the Secu-
a limited resale market Mergers, to exercise his rities Act. The Common
for such Partnership Unit Redemption Right. Shares will be listed on
Units. The trading vol- Upon redemption, such the NYSE. A public mar-
ume of such Partnership limited partner will ket currently exists for
Units in the resale mar- receive, at the election Host's common stock. The
ket is thin and the of Host REIT, either breadth and strength of
prices at which Partner- Common Shares of Host this market will depend
ship Units trade are REIT or the cash upon, among other
generally not equal to equivalent thereof in things, the number of
their net asset value. exchange for such OP Common Shares outstand-
No Limited Partner can Units. A limited partner ing, Host REIT's finan-
require a Partnership to may in certain cial results and pros-
dispose of the Partner- circumstances transfer pects and the general
ship's assets or redeem his OP Units. See interest in Host REIT's
the Limited Partner's "Description of OP dividend yield compared
interest in the Partner- Units--Restrictions on to that of other debt
ship. Transfers of Interests and equity securities.
by Limited Partners." See "Background and Rea-
sons for the Mergers and
the REIT Conversion--
Reasons for the Merg-
ers."
Partnership Units in the Partnerships have a relatively limited resale
market. Beginning one year after the Mergers, limited partners of the
Operating Partnership (other than Host REIT) will be able to exercise their
Unit Redemption Right and receive, at the option of Host REIT, either cash or
Common Shares on a one-for-one basis (subject to adjustment). The Common
Shares of Host REIT will be freely transferable upon registration under the
Securities Act. Shareholders of Host REIT are expected to achieve liquidity of
their investment by selling the Common Shares in the open market.
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
NATURE OF INVESTMENT
The Partnership Inter- The OP Units constitute The Common Shares con-
ests of each Partnership equity interests enti- stitute equity interests
constitute equity inter- tling each limited part- in Host REIT. Host REIT
ests entitling each ner to his pro rata is entitled to receive
partner to his pro rata share of cash distribu- its pro rata share of
share of cash distribu- tions made to the lim- distributions made by
tions made to the part- ited partners of the Op- the Operating Partner-
ners of the Partnership. erating Partnership. The ship with respect to the
The Partnerships gener- Operating Partnership OP Units it holds, and
ally maintain a policy generally intends to re- each shareholder will be
of long-term ownership tain and reinvest pro- entitled to his pro rata
for current cash flow ceeds of the sale of share of any dividends
and long-term apprecia- property or excess refi- or distributions paid
tion. The partnership nancing proceeds in its with respect to the Com-
agreement for each Part- business. See "Distribu- mon Shares. The divi-
nership specifies how tion and Other Poli- dends payable to the
the cash available for cies." shareholders are not
distribution, whether fixed in amount and are
arising from operation, only paid if, when and
sales or refinancing, is as declared by the Board
to be shared among the of Trustees. In order to
General Partner and the qualify as a REIT, Host
Limited Partners. The REIT must distribute at
distributions payable to least 95% of its taxable
the partners are not income (excluding capi-
fixed in amount and de- tal gains), and any tax-
pend upon the operating able income (including
results and net sale or capital gains) not dis-
refinancing proceeds tributed will be subject
available from the dis- to corporate income tax.
position of the Partner- See "Distribution and
ship's assets. Other Policies."
The limited partnership interests in the Partnerships and the Operating
Partnership, and the Common Shares in Host REIT, constitute equity interests
in each, respectively. Each limited partner is entitled to his pro rata share
of the cash distributions of his respective Partnership or the Operating
Partnership, and each shareholder is entitled to his pro rata share of any
dividends or distributions of Host REIT which are paid with respect to the
Common Shares.
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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PROPERTIES AND DIVERSIFICATION
The investment portfolio As a result of the REIT As a result of the REIT
of each of the Partner- Conversion, the Operat- Conversion, Host REIT
ships currently con- ing Partnership will will be the sole general
sists, directly or indi- initially own a portfo- partner and a substan-
rectly of one to eight lio of approximately 120 tial limited partner of
Hotels and certain re- Hotels. The ownership of the Operating Partner-
lated assets. The small these Hotels, along with ship, which will ini-
number of Hotels owned future hotel acquisi- tially own a portfolio
by each Partnership lim- tions by the Operating of approximately 120 Ho-
its each Partnership's Partnership, will diver- tels.
ability to diversify its sify the investment
investment risk over ge- risks to limited part-
ographic locations, mar- ners over a broader and
kets and economic condi- more varied group of ho-
tions. See "Background tels and geographic lo-
and Reasons for the cations and will reduce
Mergers and the REIT the dependence of an in-
Conversion--Background vestment upon the per-
of the Partnerships." formance of, and the ex-
posure to the risks as-
sociated with, any one
or more Hotels currently
owned by a Partnership.
The investment portfolio of each Partnership is currently limited to between
one and eight Hotels (and certain related assets) in limited geographic
locations. Through the REIT Conversion, and through additional investments
that may be made from time to time, Host REIT and the Operating Partnership
intend to create an investment portfolio substantially larger, more varied and
more geographically diversified than the assets of any of the Partnerships
individually. In addition, the larger portfolio will diversify the risks to
the limited partners and shareholders over a broader group of Hotels, thereby
reducing the dependence of an investment upon the performance of, and the
exposure to the risks associated with, any particular Hotel or group of Hotels
currently owned by an individual Partnership.
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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ADDITIONAL EQUITY/POTENTIAL DILUTION
The Operating Partner- Host REIT may issue ad-
Each Partnership was de- ship is authorized to ditional equity securi-
signed as a finite-life issue OP Units and other ties, including shares
investment vehicle. None partnership interests of beneficial interest
of the Partnerships are (including partnership which may be classified
authorized to raise ad- interests of different as one or more classes
ditional funds for (or series or classes that or series of common or
reinvest net sale or re- may be senior to OP preferred shares and
financing proceeds in) Units) as determined by contain certain prefer-
new investments, absent Host REIT, in its sole ences, in the discretion
amendments to their discretion, including in of the Board of Trust-
partnership agreements connection with acquisi- ees. Any proceeds from
or approval of a major- tions of properties. The the issuance of equity
ity of the outstanding Operating Partnership securities by Host REIT
limited partnership in- may issue OP Units and must be contributed to
terests. Since such other partnership inter- the Operating Partner-
Partnerships were not ests to Host REIT, as ship in exchange for OP
structured to issue ad- long as such interests Units. The issuance of
ditional equity securi- are issued in connection additional equity secu-
ties, there is little with a comparable issu- rities by Host REIT may
chance of dilution of ance of Common Shares of result in the dilution
the partners' share of Host REIT and proceeds of the interests of the
cash available for dis- raised in connection shareholders, as well as
tribution. with the issuance of interests of holders of
such shares are contrib- OP Units in the Operat-
uted to the Operating ing Partnership. See
Partnership. In addi- "Distribution and Other
tion, the Operating Policies--Investment
Partnership may issue Policies."
additional OP Units upon
exercise of the options
granted pursuant to op-
tion plans or restricted
shares issued under re-
stricted share plans or
other employee benefit
plans adopted by Host
REIT.
176
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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BORROWING POLICIES
The General Partner of The Operating Partner- Host REIT is not re-
each Partnership is gen- ship may incur debt or stricted under its Dec-
erally authorized to enter into similar cred- laration of Trust from
cause the Partnership to it, guarantee, financing incurring debt. However,
borrow money from the or refinancing arrange- under the Partnership
General Partner or oth- ments for any purpose Agreement, Host REIT, as
ers and issue evidence with any person upon general partner of the
of indebtedness neces- such terms that Host Operating Partnership,
sary, convenient or in- REIT, as sole general may not incur any debts
cidental to the accom- partner, determines ap- except those for which
plishment of the pur- propriate. See "Distri- it may be liable as gen-
poses of the Partnership bution and Other Poli- eral partner of the Op-
and to secure the same cies--Borrowing Poli- erating Partnership and
by mortgage, pledge or cies." certain other limited
other lien on the assets circumstances. There-
of the Partnership. fore, all indebtedness
incurred by Host REIT
will be through the Op-
erating Partnership.
Host REIT will have a
policy of incurring debt
only if immediately fol-
lowing such incurrence
the debt-to-total market
capitalization ratio
would be % or less. The
Board of Trustees could
alter or eliminate this
policy. See "Distribu-
tion and Other Poli-
cies--Borrowing Poli-
cies."
In conducting their business, each of the Partnerships, Host REIT and the
Operating Partnership may incur indebtedness to the extent deemed appropriate
by their general partner or Board of Trustees, as the case may be.
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<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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OTHER INVESTMENT
RESTRICTIONS
The partnership agree- There are no restric- Neither Host REIT's Dec-
ments of all of the tions upon the Operating laration of Trust nor
Partnerships contain re- Partnership's authority its Bylaws impose any
strictions upon the ac- to enter into certain restrictions upon the
quisition of interests transactions, including types of investments
in other partnerships or among others, making in- that may be made by Host
hotel properties in ad- vestments, lending Oper- REIT, except that under
dition to such Partner- ating Partnership funds the Declaration of
ship's current assets. or reinvesting the Oper- Trust, the Board of
None of the Partnerships ating Partnership's cash Trustees is prohibited
are authorized to raise flow and net sale or re- from taking any action
additional funds for (or financing proceeds ex- that would terminate
reinvest net sale or re- cept (i) restrictions Host REIT's status as a
financing proceeds in) precluding investments REIT, unless a majority
new investments, absent by the Operating Part- of the shareholders vote
amendments to their nership that would ad- to terminate such sta-
partnership agreements versely affect Host tus. Host REIT's Decla-
or approval of a major- REIT's status as a REIT, ration of Trust and By-
ity of the outstanding (ii) general restric- laws do not impose any
limited partnership in- tions on transactions restrictions upon deal-
terests. with Affiliates and ings between Host REIT
(iii) the noncompetition and trustees, officers
agreements. See "Busi- and affiliates thereof.
ness and Properties-- Maryland's REIT Law,
Noncompetition Agree- however, requires that
ments." the material facts of
the relationship, the
interest and the trans-
action must be (i) dis-
closed to the Board of
Trustees and approved by
the affirmative vote of
a majority of the disin-
terested trustees, (ii)
disclosed to the share-
holders and approved by
the affirmative vote of
a majority of the disin-
terested shareholders or
(iii) in fact fair and
reasonable. In addition,
Host REIT has adopted a
policy which requires
that all contracts and
transactions between
Host REIT and trustees,
officers or affiliates
thereof must be approved
by the affirmative vote
of a majority of the
disinterested trustees.
Lastly, Host REIT must
conduct its investment
activities through the
Operating Partnership
for so long as the Oper-
ating Partnership ex-
ists. See "Distribution
and Other Policies--
Policies with Respect to
Other Activities."
All of the partnership agreements of the Partnerships contain provisions
which hinder further investment by the Partnership. The Partnership Agreement
permits the Operating Partnership wide latitude in choosing the type of
investments to pursue. Host REIT has adopted a policy to conduct all
investment activities through the Operating Partnership.
178
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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MANAGEMENT CONTROL
Under each of the part- All management powers The Board of Trustees
nership agreements of over the business and will direct the manage-
the Partnerships, the affairs of the Operating ment of Host REIT's
General Partners are, Partnership are vested business and affairs
subject to certain limi- in Host REIT, as sole subject to restrictions
tations, vested with the general partner, and no contained in Host REIT's
exclusive right and limited partner of the Declaration of Trust and
power to conduct the Operating Partnership Bylaws, the Partnership
business and affairs of will have any right to Agreement and applicable
the Partnership and may participate in or exer- law. The Board of Trust-
appoint, contract or cise control or manage- ees will be classified
otherwise deal with any ment power over the into three classes of
person, including em- business and affairs of trustees, the majority
ployees of its affili- the Operating Partner- of which will be inde-
ates, to perform any ship except (i) Host pendent trustees. At
acts or services for the REIT, as sole general each annual meeting of
Partnership necessary or partner, may not, with- the shareholders, the
appropriate for the con- out written consent of successors of the class
duct of the business and all the limited partners of trustees whose terms
affairs of the Partner- or such lower percentage expire at that meeting
ship. A Limited Partner of OP Units as may be will be elected. The
has no right to partici- specifically provided policies adopted by the
pate in the management for in the Partnership Board of Trustees may be
and control of a Part- Agreement or the altered or eliminated
nership and has no voice Delaware Act, take any without a vote of the
in its affairs except on action in contravention shareholders. According-
certain limited matters of the Partnership ly, except for their
that may be submitted to Agreement; (ii) Host vote in the elections of
a vote of the Limited REIT, as sole general trustees and their vote
Partners under the terms partner, may not dispose in certain major trans-
of the partnership of all or substantially actions, shareholders
agreements of the Part- all of the Operating will have no control
nerships. Under each Partnership's assets over the ordinary busi-
partnership agreement, without the consent of ness policies of Host
Limited Partners have the holders of a major- REIT. The Board of
the right to remove ity of the outstanding Trustees cannot change
their General Partner by OP Units (including OP Host REIT's policy of
a majority vote (except Units held by Host maintaining its status
for Atlanta Marquis, REIT); and (iii) until as a REIT, however,
which requires a 66 2/3% December 31, 2058, Host without the approval of
vote of its Class A lim- REIT may not cause or a majority of the votes
ited partner interests), permit the Operating entitled to be cast
subject to certain con- Partnership to dissolve thereon.
ditions. Each of the if more than 10% of the
partnership agreements limited partners object
permits removal of the to such dissolution.
general partner only for Host REIT may not be re-
breach of certain provi- moved as general partner
sions of the partnership by the limited partners
agreement, fraud or un- with or without cause
remedied acts of bad unless Host REIT ceases
faith or gross negli- to be a "public compa-
gence or breach of fidu- ny," and then Host REIT
ciary duty. Furthermore, could be removed as gen-
the MDAH and MHP2 part- eral partner with or
nership agreements allow without cause by limited
removal of the General partners holding per-
Partner only if certain centage interests in the
favorable legal opinions Operating Partnership
concerning liability of ("Percentage Interests")
the Limited Partners and that are more than 50%
tax status of the Part- of the aggregate Per-
nership are obtained. In centage Interests of the
all cases of removal of outstanding limited
the General Partner, partnership interests
however, the Partnership entitled to vote there-
may continue only if the on, including any such
Limited Partners find a interests held by the
successor general part- general partner See
ner. "Risk Factors--Risks and
Effect of the REIT Con-
version--Reduced Control
Over Major Decisions,"
"Description of OP
Units--Purposes, Busi-
ness and Management" and
"--Dissolution, Winding
Up and Termination."
Under the partnership agreements of the Partnerships and the Partnership
Agreement of the Operating Partnership, the general partners are vested with
the exclusive right and power to conduct the business and affairs of the
partnerships. In both cases, limited partners have no voice in the affairs of
the partnership except on certain limited matters. All of the Partnerships
permit removal of the General Partner by the Limited Partners with cause. The
Partnership Agreement of the Operating Partnership does not permit removal of
Host REIT as general partner by the limited partners with or without cause
unless Host REIT ceases to be a "public company," and then Host REIT could be
removed as general partner with or without cause. Under the Declaration of
Trust and Bylaws, the Board of Trustees directs the management of Host REIT.
Except for their vote in the elections of trustees and their vote in certain
major transactions, shareholders have no control over the management of Host
REIT.
179
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
FIDUCIARY DUTIES
The Delaware Act and Under the Delaware Act, Under Maryland law, the
Rhode Island Act provide Host REIT, as general trustees must perform
that the General Part- partner of the Operating their duties in good
ners are accountable as Partnership, is account- faith, in a manner that
fiduciaries to the Part- able to the Operating they reasonably believe
nerships and are re- Partnership as a fidu- to be in the best inter-
quired to exercise good ciary and, consequently, ests of Host REIT and
faith, loyalty and in- is required to exercise with the care of an or-
tegrity in their deal- good faith and integrity dinary prudent person in
ings in conducting the in all of its dealings a like position. Trust-
affairs of the Partner- with respect to partner- ees of Host REIT who act
ships. The duty of good ship affairs. However, in such a manner gener-
faith requires that the under the Partnership ally will not be liable
General Partners deal Agreement, Host REIT, as to Host REIT for mone-
fairly and with complete general partner, is un- tary damages arising
candor toward the Lim- der no obligation to from their activities.
ited Partners. The duty consider the separate
of loyalty requires interests of the limited
that, without the Lim- partners in deciding
ited Partners' consent, whether to cause the Op-
the General Partners may erating Partnership to
not have business or take (or decline to
other interests that are take) any actions, and
adverse to the interests Host REIT, as general
of the Partnerships. The partner, is not liable
duty of fair dealing for monetary damages for
also requires that all losses sustained, lia-
transactions between the bilities incurred, or
General Partners and the benefits not derived by
Partnerships be fair in limited partners in con-
the manner in which the nection with such deci-
transactions are ef- sion, provided that Host
fected and in the amount REIT, as general part-
of the consideration re- ner, has acted in good
ceived by the General faith and pursuant to
Partners. its authority under the
Partnership Agreement.
The General Partners, Host REIT, as general partner of the Operating
Partnership, and the Board of Trustees of Host REIT, respectively, owe
fiduciary duties to their constituent parties. Although some courts have
interpreted the fiduciary duties of the Board of Trustees in the same way as
the duties of a general partner in a limited partnership, it is unclear
whether, or to what extent, there are differences in such fiduciary duties. It
is possible that the fiduciary duties of the trustees of Host REIT to the
shareholders may be less than those of the General Partners to the Limited
Partners and Host REIT, as general partner of the Operating Partnership, to
the limited partners of the Operating Partnership.
The Partnership Agreement contains a specific provision to the effect that
Host REIT, as general partner of the Operating Partnership, is under no
obligation to consider the separate interests of the limited partners of the
Operating Partnership in taking partnership action. Since the partnership
agreements of the Partnerships do not contain such a provision, the fiduciary
duties of Host REIT, as general partner of the Operating Partnership, to the
limited partners of the Operating Partnership may be less than those of the
General Partners to their Limited Partners.
180
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
MANAGEMENT LIABILITY AND INDEMNIFICATION
Under the Delaware Act Under the Delaware Act, Host REIT's Declaration
and the Rhode Island Host REIT, as general of Trust provides that
Act, each General Part- partner of the Operating the liability of Host
ner is liable for the Partnership, is liable REIT's trustees and of-
payment of partnership for the payment of the ficers to Host REIT and
obligations and debts, obligations and debts of its shareholders for
unless limitations upon the Operating Partner- money damages is limited
such liability are ex- ship unless limitations to the fullest extent
pressly stated in the upon such liability are permitted under Maryland
document or instrument stated in the document law. The Declaration of
evidencing the obliga- or instrument evidencing Trust and Maryland law
tion (e.g., a loan the obligation. Under provide broad indemnifi-
structured as a nonre- the Partnership Agree- cation to trustees and
course obligation). Each ment, the Operating officers, whether serv-
partnership agreement of Partnership agrees to ing Host REIT, or at its
the Partnerships gener- indemnify Host REIT or request, any other enti-
ally provides that the any trustee or officer ty, to the fullest ex-
General Partner will not of Host REIT from and tent permitted under
be held liable for any against all losses, Maryland law. Host REIT
costs arising out of its claims, damages, liabil- will indemnify its pres-
action or inaction ex- ities, joint or several, ent and former trustees
cept that the General expenses (including le- and officers, among oth-
Partner will be liable gal fees), fines, set- ers, against judgments,
for any costs which tlements and other penalties, fines, set-
arise from the General amounts incurred in con- tlements and reasonable
Partner's own fraud, nection with any actions expenses actually in-
negligence, misconduct relating to the opera- curred by them in con-
or other breach of fidu- tions of the Operating nection with any pro-
ciary duty. In cases in Partnership as set forth ceeding to which they
which the General Part- in the Partnership may be made a party by
ner is indemnified, any Agreement in which Host reason of their service
indemnity is payable REIT or any such trustee in those or other capac-
only from the assets of or officer is involved, ities unless it is es-
the Partnership. unless (i) the act or tablished that (a) the
omission of Host REIT act or omission of the
was material to the mat- trustee or officer was
ter giving rise to the material to the matter
proceeding and either giving rise to the pro-
was committed in bad ceeding and (i) was com-
faith or was the result mitted in bad faith or
of active and deliberate (ii) was the result of
dishonesty; (ii) Host active and deliberate
REIT or the other person dishonesty, (b) the
to be indemnified actu- trustee or officer actu-
ally received an im- ally received an im-
proper personal benefit proper personal benefit
in money, property or in money, property or
services or (iii) in the services or (c) in the
case of any criminal case of any criminal
proceeding, Host REIT or proceeding, the trustee
the other person to be or officer had reason-
indemnified had reason- able cause to believe
able cause to believe that the act or omission
the act or omission was was unlawful. However,
unlawful. The reasonable under Maryland law, Host
expenses incurred by REIT may not indemnify
Host REIT may be reim- for an adverse judgment
bursed by the Operating in a suit by or in the
Partnership in advance right of the trust. The
of the final disposition Bylaws of Host REIT re-
of the proceeding upon quire it, as a condition
receipt by the Operating to advancing expenses,
Partnership of an affir- to obtain (a) a written
mation by Host REIT or affirmation by the
the other person to be trustee or officer of
indemnified of its good his good faith belief
faith belief that the that he has met the
standard of conduct nec- standard of conduct nec-
essary for indemnifica- essary for indemnifica-
tion has been met and an tion by Host REIT as au-
undertaking by Host REIT thorized by the Bylaws
to repay the amount if and (b) a written state-
it is determined that ment by or on his behalf
such standard was not to repay the amount paid
met. or reimbursed by Host
REIT if it shall ulti-
mately be determined
that the standard of
conduct was not met.
In each of the Partnerships, the General Partners will only be held liable
for costs which arise from the General Partners' own fraud, negligence,
misconduct or other breach of fiduciary duty, and may be indemnified in
certain cases. While Host REIT, as general partner of the Operating
Partnership, is generally liable for the payment of the obligations and debts
of the Operating Partnership, the Operating Partnership generally agrees to
indemnify Host REIT, except regarding certain unauthorized acts of Host REIT.
The liability of Host REIT's trustees and officers is limited to the fullest
extent permitted under Maryland law and such trustees and officers are
indemnified by Host REIT to the fullest extent permitted by Maryland law.
181
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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LIABILITY OF INVESTORS
Under each of the part- Under the Partnership Under Maryland law,
nership agreements, the Agreement and the Dela- shareholders are not
Delaware Act and the ware Act, the liability personally liable for
Rhode Island Act, the of limited partners for the debts or obligations
liability of Limited the Operating Partner- of Host REIT.
Partners for the Part- ship's debts and obliga-
nership's debts and ob- tions is generally lim-
ligations is generally ited to the amount of
limited to the amount of their investment in the
their investment in the Operating Partnership,
Partnership, together together with an inter-
with an interest in un- est in undistributed in-
distributed income, if come, if any.
any.
In the Partnerships and the Operating Partnership, a limited partner's
liability is limited to the amount of his investment. Shareholders of Host
REIT generally have no liability for the debts and obligations of Host REIT.
182
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
ANTITAKEOVER PROVISIONS
For each of the Partner- Except in limited cir- The Declaration of Trust
ships, a change in man- cumstances (see "Voting and Bylaws of Host REIT
agement may be effected Rights" below) Host contain a number of pro-
only by removal of the REIT, in its capacity as visions that may have
General Partner. See general partner of the the effect of delaying
"Management Control" Operating Partnership, or discouraging a change
above for a discussion has exclusive management in control of Host REIT
of the ability to remove power over the business that might be in the
a General Partner. A and affairs of the Oper- best interests of share-
transfer of limited ating Partnership. Host holders. These provi-
partnership interests in REIT may not be removed sions include, among
a Partnership is gener- as general partner of others, (i) a Board of
ally restricted if (i) the Operating Partner- Trustees with three-year
it is on a day other ship by the limited staggered terms, (ii)
than the first day in an partners with or without authorized capital stock
accounting period, (ii) cause (unless Host REIT that may be classified
it would, when combined is no longer a "public and issued as a variety
with the total of other company," in which case of equity securities in
partnership interests the general partner may the discretion of the
transferred within past be removed with or with- Board of Trustees, in-
12 consecutive months, out cause by limited cluding securities hav-
in the opinion of coun- partners holding per- ing superior voting
sel, result in the Part- centage interests in the rights to the Common
nership being deemed to Operating Partnership Shares, (iii) restric-
have been terminated ("Percentage Interests") tions on business combi-
within the meaning of that are more than 50% nations with persons who
Section 708 of the Code of the aggregate Per- acquire more than a cer-
(except for MHP2), (iii) centage Interests of the tain percentage of Com-
it would, in the opinion outstanding limited mon Shares, (iv) a re-
of counsel for the as- partnership interests quirement that trustees
signee or assignor, re- entitled to vote there- be removed only for
quire the filing of a on, including any such cause and only by a vote
registration statement interests held by the of shareholders holding
under the Securities general partner. Under at least a majority of
Act, or would otherwise the Partnership Agree- all the shares entitled
be in violation of any ment, Host REIT may, in to be cast for the elec-
federal or state securi- its sole and absolute tion of trustees and (v)
ties or blue sky laws, discretion, prevent a certain ownership limi-
(iv) it would result in limited partner from tations which are de-
the assignor or assignee transferring his inter- signed to protect Host
holding a fraction of a est or any rights as a REIT's status as a REIT
partnership unit, (v) it limited partner except under the Code. See "De-
would, in the opinion of in certain limited cir- scription of Shares of
counsel, result in the cumstances. Host REIT Beneficial Interest."
Partnership being may exercise this right
treated as an associa- of approval to deter,
tion taxable as a corpo- delay or hamper attempts
ration, (vi) it would, by Persons to acquire a
in the opinion of coun- majority interest in the
sel, result in the Part- Operating Partnership.
nership failing to ob- In addition, Host REIT
tain or continue in ef- has the power to impose
fect any license permit- limits on transfers if,
ting the service or sale and to the extent, nec-
of alcoholic beverages essary to cause the Op-
at one or more hotels or erating Partnership not
(vii) it is an assign- to be a "publicly traded
ment to a tax-exempt en- partnership" that would
tity or non-U.S. person be taxed as a corpora-
within the meaning of tion, including the pro-
Section 7701(a)(30) of hibition contained in
the Code. In addition to the Partnership Agree-
such restrictions, the ment restricting the
General Partners of At- ownership, actually or
lanta Marquis, Chicago constructively, of more
Suites, Hanover, Desert than 4.9% by value of
Springs and MHP may, in any class of interests
their sole discretion, in the Operating Part-
restrict any transfer of nership. See "Descrip-
limited partnership in- tion of OP Units."
terests. In each of the
Partnerships, an as-
signee of a limited
partner interest may not
become a substitute lim-
ited partner, entitling
him to vote on matters
that may be submitted to
the Limited Partners for
approval, unless the
General Partner consents
to such substitution.
Certain provisions of the governing documents of the Partnerships, the
Operating Partnership and Host REIT could be used to deter attempts to obtain
control of the Partnerships, the Operating Partnership and Host REIT in
transactions not approved by the General Partners, the general partner of the
Operating Partnership or the Board of Trustees, respectively.
183
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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VOTING RIGHTS
Generally, the Limited Under the Partnership Host REIT will be man-
Partners of the Partner- Agreement, the limited aged and controlled by a
ships have voting rights partners have voting Board of Trustees con-
only as to major part- rights as to the sale of sisting of three classes
nership transactions to substantially all of the having staggered terms
the extent provided in assets of the Operating of office. Each class is
the partnership agree- Partnership, certain to be elected by the
ments of each Partner- consolidations and merg- shareholders at annual
ship. Such voting rights ers and amendments of meetings of Host REIT.
include: acquisition of the Partnership Agree- Maryland law requires
interests in other prop- ment. Otherwise, all de- that certain major
erties, incurrence of cisions relating to the transactions, including
certain debt, merger or operation and management most amendments to Host
consolidation with an- of the Operating Part- REIT's Declaration of
other entity, sale of nership will be made by Trust, may not be con-
all or substantially all Host REIT, in its capac- summated without the ap-
of the assets of a Part- ity as general partner proval of shareholders.
nership, certain amend- of the Operating Part- Each Common Share will
ments to the partnership nership. During the have one vote and Host
agreement, expansion of first year following the REIT's Declaration of
one or more hotels in Mergers, the limited Trust permits the Board
certain cases, dissolu- partners have voting of Trustees to classify
tion of the Partnership rights as to the sale of and issue shares of cap-
or removal of the Gen- all or substantially all ital stock in one or
eral Partner. of the assets of the Op- more series having vot-
erating Partnership, a ing power which may dif-
merger involving the Op- fer from that of the
erating Partnership, Common Shares. See "De-
certain issuances of OP scription of Shares of
Units and for certain Beneficial Interest."
limited partners, cer-
tain sales of hotels
that are held by the Op-
erating Partnership.
The limited partners of the Partnerships and the Operating Partnership have
only limited voting rights. The shareholders of Host REIT will have voting
rights that permit them to elect the Board of Trustees and to approve or
disapprove certain major transactions. See "Risk Factors--Reduced Control over
Major Decisions."
184
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Sale Other Than to an Affiliate
The Atlanta Marquis, Under the Partnership Under Maryland law, the
Desert Springs and Hano- Agreement, Host REIT Board of Trustees is re-
ver partnership agree- generally has the exclu- quired to obtain ap-
ments allow the sale of sive authority to deter- proval of the sharehold-
all or substantially all mine whether, when and ers by the affirmative
of the assets of the on what terms the assets vote of two-thirds of
partnership to a buyer of the Operating Part- all the votes entitled
without the consent of nership (including the to be cast on the matter
the Limited Partners. Hotels) will be sold. in order to sell all or
The Chicago Suites part- See "Description of OP substantially all of the
nership agreement allows Units-- Sales of As- assets of Host REIT. No
the sale of its Hotel or sets." However, Host approval of the share-
a material portion of REIT, as general partner holders is required for
its assets with the con- of the Operating Part- the sale of less than
sent of a majority of nership, generally may substantially all of
the outstanding limited not sell, exchange, Host REIT's assets.
partner interests and transfer or otherwise
the receipt of an ap- dispose of all or sub-
praisal from an MAI stantially all of the
qualified appraiser. The Operating Partnership's
MDAH partnership agree- assets in a single
ment allows the sale of transaction or a series
the Fairview Park Hotel, of related transactions
or more than two other (including by way of
MDAH Hotels, only with merger, consolidation or
the consent of a major- other combination with
ity of the outstanding any other Persons),
limited partner inter- without the consent of
ests including any lim- more than 50% of the
ited partner interests outstanding limited
held by the General partnership interests,
Partner. The MHP part- including any limited
nership agreement allows partnership interests
the General Partner to held by Host REIT. In
sell or dispose of any addition, during the
assets of MHP, including first year following the
its interest in the Har- Mergers, the holders of
bor Beach Partnership, OP Units of the Operat-
to any person. The MHP2 ing Partnership have
partnership agreement certain voting rights if
allows the sale of any a vote of shareholders
Hotel or the Partner- is required. In connec-
ship's interest in the tion with a sale of all
Santa Clara Partnership or substantially all of
with the consent of a the assets of the Oper-
majority of the out- ating Partnership, the
standing limited partner approval of a majority
interests, including any of all outstanding OP
limited partner inter- Units would be required,
ests held by the General including the OP Units
Partner. held by Host REIT, vot-
ing as single class with
The PHLP partnership Host REIT voting its OP
agreement allows the Units in the same pro-
sale of an asset which portion as its share-
has a cost basis at the holders vote, would be
time of sale in excess required. In addition,
of 5% of the aggregate during the first year
cost basis of all assets following the Mergers,
of PHLP only with the any taxable sale or
consent of a majority of sales of Hotels repre-
the outstanding limited senting more than 10% of
partner interests, in- the aggregate Appraised
cluding any limited Value of the Hotels of
partner interests held any Partnership would
by the General Partner. require, in addition to
any other approval re-
quirements, the approval
of a majority of all
outstanding OP Units
held by persons who for-
merly were Limited Part-
ners of such Partner-
ship, voting as a sepa-
rate class.
185
<PAGE>
Under Maryland law, the Board of Trustees is required to obtain approval of
the shareholders by the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter in order to sell all or substantially all of
the assets of Host REIT. No approval of the shareholders is required for the
sale of less than substantially all of Host REIT's assets.
Under each of the partnership agreements, the Partnership Agreement and Host
REIT's Declaration of Trust, the sale of assets may be effected with various
levels of limited partner or shareholder consent. Under most of the
partnership agreements and the Declaration of Trust, the sale of assets which
do not amount to all or substantially all of the assets of the Partnerships,
the Operating Partnership or Host REIT does not require any consent of the
limited partners or shareholders, respectively.
186
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- --------------------------------------------------------------------------------
Sale to the General Partner or
Its Affiliates
The General Partners of The Operating Partner- The Declaration of Trust
MDAH and MHP2 may cause ship shall not, directly has no specified addi-
those Partnerships to or indirectly, sell, tional requirements for
sell any of their assets transfer or convey any sales of assets to af-
to its General Partner property to any affili- filiates of Host REIT.
or an affiliate of the ate of Host REIT that is
General Partner (A) with not also a subsidiary of
the consent of the Lim- the Operating Partner-
ited Partners holding of ship, except as ex-
a majority of the out- pressly permitted in the
standing limited partner Partnership Agreement or
interests in the Part- except on terms that are
nership (with, in the fair and reasonable and
case of MDAH, the Gen- no less favorable to the
eral Partner being Operating Partnership
barred from voting any than would be obtained
limited partner inter- from an unaffiliated
ests it or its affiliate third party.
holds or, in the case of
MHP2, the General Part-
ner being required to
vote its or its affili-
ate's limited partner
interests in the same
manner as the majority
of "outside" limited
partner interests actu-
ally voted (so long as a
majority of the outside
limited partners are
present for purposes of
a vote by submitting
ballots or otherwise))
and (B) by complying
with certain notice and
independent appraisal
requirements as follows:
(i) the General Partner
must provide to its Lim-
ited Partners at least
30 days' notice of the
proposed sale, which no-
tice must set forth the
price and other material
terms and conditions of
the proposed transac-
tion, (ii) the Partner-
ship must obtain three
appraisals of the fair
market sales value of
the Hotel(s) to be sold,
which appraisals must be
prepared by independent,
nationally recognized
appraisers who have been
selected by the General
Partner and are experi-
enced in the valuation
of hotel properties (the
cost of all such ap-
praisals must be borne
by the General Partner
or its affiliate), (iii)
such appraisers may not
have, directly or indi-
rectly, any material in-
terest in or material
business or professional
relationship with the
General Partner or any
of its affiliates and
the compensation of each
such appraiser must be
determined in accordance
with a written contract
before such appraisal is
prepared, (iv) the price
at which the sale is ef-
fected must not be less
than the average of the
three amounts determined
by the three appraisers,
disregarding entirely
any appraisal that dif-
fers by more than 20%
from the amount deter-
mined by the appraiser
whose determination is
between the highest and
lowest of the amounts
determined by the three
appraisers, (v) the pur-
chase price must be pay-
able in cash, (vi) no
real estate commission
may be paid by the Part-
nership in connection
with such sale and
(vii) the General Part-
ner must include copies
of such appraisals with
the notice to its Lim-
ited Partners.
187
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
The General Partners of
Atlanta Marquis, Desert
Springs, Hanover and MHP
may cause those Partner-
ships to sell any hotels
to the General Partner
or any affiliate (A)
with the consent of Lim-
ited Partners holding of
a majority of the out-
standing limited partner
interests in the Part-
nership (with the Gen-
eral Partners or their
affiliates of Desert
Springs, Hanover and MHP
being required to vote
any limited partner in-
terests it holds in the
same manner as the ma-
jority of "outside" lim-
ited partner interests
actually voted (so long
as a majority of the
outside limited partners
are present for purposes
of a vote by submitting
ballots or otherwise)),
and (B) by complying
with certain notice and
independent appraisal
requirements as follows:
(i) the General Partner
must provide notice of
the proposed sale to its
Limited Partners, who
thereafter have 30 days
to elect a nationally
recognized appraiser
having the approval of
the holders of a major-
ity of the limited part-
ner interests, (ii) such
appraiser has 30 days
from the date of elec-
tion to prepare and sub-
mit to the General Part-
ner an appraisal of the
fair market value of the
Hotel in question, (iii)
the purchaser must sub-
mit to the General Part-
ner an appraisal of the
fair market value of the
Hotel, such appraisal to
be submitted within the
time limit provided by
clause (ii) above in the
case of the appraisal to
be submitted by the ap-
praiser elected by the
Limited Partners and
(iv) the General Partner
must thereafter seek the
required consent and in-
clude therewith copies
of the two appraisals.
If the Limited Partners
do not select an ap-
praiser as provided in
(i) above or such ap-
praiser does not supply
an appraisal within the
time frame in (ii)
above, then the General
Partner must submit
three appraisals with
its request for consent,
one such appraisal pre-
pared by an appraiser
selected by the pur-
chaser and the other two
appraisals prepared by
appraisers selected by
the first appraiser (all
of such appraisal costs
to be borne by the pur-
chaser).
The Chicago Suites and
PHLP partnership agree-
ments contain no special
provisions concerning a
sale of partnership as-
sets to the General
Partner or its
affiliates.
Under most of the partnership agreements and the Partnership Agreement, in
addition to the general restrictions on sale of assets, there are provisions
which must be met when partnership assets are sold to the general partner or
an affiliate of the general partner. Under the Declaration of Trust of Host
REIT, however, there are no specified additional requirements.
188
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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Merger
The partnership agree- Under the Partnership Under Maryland law, the
ment of MDAH allows a Agreement, Host REIT Board of Trustees is re-
merger of the Partner- generally may not cause quired to obtain ap-
ship with the consent of a merger or consolida- proval of the sharehold-
a majority of the out- tion of the Operating ers by the affirmative
standing limited partner Partnership without the vote of two-thirds of
interests, but the Gen- consent of a majority of all the votes entitled
eral Partner may not the outstanding partner- to be cast on the matter
vote any of its limited ship interests (includ- in order to merge or
partner interests. The ing the partnership in- consolidate Host REIT.
partnership agreement of terests held by Host
MHP2 allows a merger of REIT) and the general
the Partnership with the partner. In addition,
consent of a majority of during the one-year pe-
the outstanding limited riod following the Merg-
partner interests, in- ers, the holders of OP
cluding the limited Units of the Operating
partner interests held Partnership have certain
by the General Partner, voting rights if a vote
unless the General Part- of shareholders is re-
ner has an interest in quired in connection
the transaction, in with a merger. In such
which case it must vote case, approval of a ma-
all of its or its affil- jority of all outstand-
iates limited partner ing OP Units, including
interests in the same the OP Units held by
manner as the majority Host REIT, voting as a
of "outside" limited single class with Host
partner interests actu- REIT voting its OP Units
ally voted (so long as a in the same proportion
majority of the outside as its shareholders
limited partners are vote, would be required.
present for purposes of
a vote by submitting
ballots or otherwise).
Each of the Atlanta Mar-
quis, Chicago Suites,
Desert Springs, Hanover,
MHP and PHLP partnership
agreements contain no
merger provision. Under
the Delaware Act and the
Rhode Island Act, a
merger may be effected
upon approval by its
General Partner and the
holders of a majority of
the limited partnership
interests of each class
of limited partner. In
Atlanta Marquis, the
General Partner may vote
the limited partner in-
terests it holds. In
Chicago Suites and PHLP,
the General Partner
holds no limited partner
interests and a merger
may be effectuated by
the affirmative vote of
a majority of the out-
standing limited partner
interests. In Desert
Springs, Hanover and
MHP, the General Partner
may vote its limited
partner interests.
Under applicable law, the partnership agreements of the Partnerships, the
Partnership Agreement, and the Declaration of Trust of Host REIT, the merger
of the respective partnerships and Host REIT is permitted subject to a certain
level of limited partner or shareholder consent, respectively.
189
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Dissolution
Upon breach of certain The Operating Partner- Under Maryland law, the
provisions of its part- ship will continue until Board of Trustees must
nership agreement, December 31, 2098, un- obtain approval of hold-
breach of fiduciary du- less sooner dissolved ers of at least two-
ty, fraud or unremedied and terminated. The Op- thirds of the outstand-
acts of bad faith or erating Partnership will ing Common Shares in or-
gross negligence, each be dissolved prior to der to dissolve Host
of Chicago Suites, Des- the expiration of its REIT.
ert Springs, Hanover, term, and its affairs
MDAH, MHP, MHP2 and PHLP wound up, (i) until De-
may be dissolved with cember 31, 2058 with the
the consent of a major- consent of the limited
ity of the outstanding partners who hold 90% of
limited partner inter- the OP Units (including
ests and without the OP Units held by Host
consent of the General REIT) or (ii) a decision
Partner. In the case of to dissolve the Operat-
Desert Springs, Hanover ing Partnership made by
and MHP, the General Host REIT on or after
Partner must vote any December 31, 2058 in its
limited partner inter- sole and absolute dis-
ests it or its affili- cretion or (iii) with
ates hold in the same the consent of a major-
manner as the majority ity of the partners
of "outside" limited holding at least a ma-
partner interests actu- jority of the outstand-
ally voted (so long as a ing partnership inter-
majority of the outside ests to sell all or sub-
limited partners are stantially all of the
present for purposes of Operating Partnership's
a vote by submitting assets and properties.
ballots or otherwise). Upon dissolution, Host
The Atlanta Marquis REIT, as general part-
partnership agreement ner, or any liquidator
contains no provision will proceed to liqui-
concerning the ability date the assets of the
of the limited partners Operating Partnership
to dissolve the Partner- and apply the proceeds
ship. In the absence of therefrom in the order
such a provision, the of priority set forth in
Delaware Act provides the Partnership Agree-
that a limited partner- ment.
ship may be dissolved by
the affirmative vote of
the general partner and
66 2/3% of the limited
partnership interests.
The Rhode Island Act
provides that a limited
partnership may be dis-
solved by the written
consent of all partners
to such dissolution.
Under each of the partnership agreements, the Partnership Agreement and Host
REIT's Declaration of Trust, the respective entities may be dissolved with the
consent of a certain percentage of the outstanding interests.
190
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Amendments
The Chicago Suites and Amendments to the Part- Amendments to Host
PHLP partnership agree- nership Agreement may be REIT's Declaration of
ments allow the General proposed by Host REIT, Trust must be approved
Partner to amend the as general partner of by the Board of Trustees
partnership agreement the Operating Partner- and by the vote of at
with the consent of a ship, or any limited least two-thirds of the
majority of the out- partner holding 25% or votes entitled to be
standing limited partner more of the limited cast at a meeting of
interests. The Desert partnership interests. shareholders, except
Springs, Hanover, MHP Subject to certain ex- that an amendment of the
and MHP2 partnership ceptions, such proposed provisions relating to
agreements allow the amendment must be ap- the classified Board of
General Partner to amend proved by the vote of Trustees and the power
the partnership agree- Host REIT, as general to remove trustees must
ment with the consent of partner, and limited be approved by an 80%
a majority of outstand- partners holding Per- vote. An amendment re-
ing limited partner in- centage Interests that lating to termination of
terests, including any are more than 50% of the REIT status requires a
such interests held by aggregate Percentage In- majority of the votes
the General Partner, un- terests of the outstand- entitled to be cast
less the General Partner ing limited partnership thereon.
has an interest in the interests entitled to
vote, in which case, the vote thereon including
General Partner must any such limited part-
vote any limited partner nership interests held
interests it holds in by Host REIT (which ini-
the same manner as the tially will hold approx-
majority of "outside" imately 77% of the OP
limited partner inter- Units, following the
ests actually voted (so REIT Conversion, assum-
long as a majority of ing the full Participa-
the outside limited tion Scenario). In addi-
partners are present for tion, with certain ex-
purposes of a vote by ceptions, Host REIT, as
submitting ballots or general partner, has
otherwise). The MDAH broad discretion to
partnership agreement amend the Partnership
allows the General Part- Agreement without the
ner to amend the part- consent of the limited
nership agreement with partners.
the consent of a major-
ity of outstanding lim-
ited partner interests,
but the General Partner
is prohibited from vot-
ing its limited partner
interests. In the case
of Desert Springs, Hano-
ver, MDAH, MHP and MHP2,
amendments may be made
with the consent of a
majority in interest of
the Limited Partners,
except certain amend-
ments to the partnership
agreements generally re-
quire the unanimous con-
sent of the Limited
Partners, including:
(i) converting the in-
terest of a Limited
Partner into a general
partner's interest; (ii)
any act adversely af-
fecting the liability of
a Limited Partner; (iii)
altering the interest of
a Partner in net prof-
its, net losses, gain,
loss or distributions of
cash available for dis-
tribution, sale proceeds
or refinancing proceeds;
(iv) reducing the per-
centage of Partners
which is required to
consent to any action in
the partnership agree-
ment; (v) limiting in
any manner the liability
of the General Partner
(vi) permitting the Gen-
eral Partner to take
certain actions which
are prohibited by the
Partnership Agreement,
(vii) causing the Part-
nership to be taxed, for
federal income tax
191
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Amendments (cont'd)
purposes, as an associa-
tion taxable as a corpo-
ration or (viii) effect-
ing any amendment or
modification to clauses
(i) through (vii) above.
In the case of Atlanta
Marquis, amendments to
the partnership agree-
ment may be made by the
General Partner with the
consent of a majority of
interest of the Class A
Limited Partners, except
certain amendments gen-
erally require the unan-
imous consent of all the
Partners, including: (i)
converting the interest
of a Limited Partner
into a general partner's
interest; (ii) modifying
the limited liability of
a Limited Partner; (iii)
permitting the General
Partner to take certain
actions which are pro-
hibited by the Partner-
ship Agreement (i.e.,
take an action which re-
quires the consent of
the Limited Partners
without such consent);
(iv) causing the Part-
nership to be taxed for
federal income tax pur-
poses as an association
taxable as a corpora-
tion; or (v) affecting
any amendment or modifi-
cation to the require-
ments set forth in
clauses (i) through
(iv) above.
In the case of Chicago
Suites and PHLP, amend-
ments to the Partnership
Agreements may be made
by the General Partner
with the consent of the
majority of interest of
the Limited Partners,
except the unanimous
consent of all Partners
adversely affected is
required for certain
amendments, including
(i) converting the in-
terest of a Limited
Partner into a general
partner's interest; (ii)
modifying the limited
liability of a Limited
Partner; (iii) altering
the interest of a Part-
ner in net profits, net
losses, gain, loss or
distributions of cash
available for distribu-
tion, sale proceeds or
refinancing proceeds; or
(iv) reducing the per-
centage of Partners
which is required to
consent to any action in
the partnership agree-
ment.
Under both the partnership agreements and the Partnership Agreement,
amendments to the respective partnership agreement may be made with the
consent of the limited partners. Under the provisions of the Partnership
Agreement, Host REIT, as general partner of the Operating Partnership, has
broad discretion to make amendments without the consent of the limited
partners. Amendment of Host REIT's Declaration of Trust requires the consent
of both the Board of Trustees and a certain percentage of the votes entitled
to be cast at a meeting of shareholders.
192
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
COMPENSATION, FEES AND DISTRIBUTIONS
Under the partnership Host REIT will not The trustees of Host
agreements of the receive any compensation REIT will receive
Partnerships, the for its services as compensation for their
General Partners do not general partner of the services as described
receive any fees or Operating Partnership. herein under
other compensation from Host REIT, however, has "Management."
their Partnerships in the same right to
exchange for their allocations and
services as general distributions as other
partner. The General partners of the
Partner of each Operating Partnership.
Partnership is entitled, In addition, the
however, to Operating Partnership
reimbursement for the will pay (or reimburse
cost of providing any Host REIT for) all
administrative or other expenses that Host REIT
services rendered to its incurs (subject to
Partnership. The General several very limited
Partners are also exceptions), including
entitled to expenses incurred
distributions with relating to the REIT
respect to their Conversion, the ongoing
respective percentage operation of Host REIT
interests in the and any other offering
Partnerships, as well as of additional OP Units
certain additional back- or Common Shares,
end participations in including all expenses,
cash flow and excess damages and other
sale and refinancing payments resulting from
proceeds after the or arising in connection
Limited Partners have with litigation related
received certain to any of the foregoing,
investment returns. See and expenses for
"Background and Reasons federal, state and local
for the Mergers and the income taxes incurred by
REIT Conversion-- Host REIT.
Reimbursements and
Distributions to the
General Partners."
Neither the General Partners nor Host REIT, as general partner of the
Operating Partnership, receive compensation in exchange for their services as
general partner. The trustees of Host REIT, however, do receive compensation
for their services as trustees.
193
<PAGE>
ERISA CONSIDERATIONS
STATUS OF HOST REIT AND THE OPERATING PARTNERSHIP UNDER ERISA
This section discusses the extent to which the fiduciary requirements of
ERISA and the prohibited transaction provisions of ERISA and the Code would
apply to Host REIT or the Operating Partnership because one or more investors
in Host REIT or the Operating Partnership is an ERISA Plan or Other Plan.
If the underlying assets of Host REIT are deemed to be assets of an
investing ERISA Plan and Other Plan ("Plan Assets"), (i) the prudence
standards and other provisions of Part 4 of Title I of ERISA and the
prohibited transaction provisions of ERISA and the Code would be applicable to
any transactions involving Host REIT's assets, and (ii) persons who exercise
any authority or control over Host REIT's assets, or who provide investment
advice to Host REIT for a fee or other compensation, would be (for purposes of
ERISA and the Code) fiduciaries of ERISA Plans and Other Plans that acquire
Common Shares of Host REIT. Similarly, if the underlying assets of the
Operating Partnership are deemed to be Plan Assets, (i) the prudence standards
and other provisions of Part 4 of Title I of ERISA and the prohibited
transaction provisions of ERISA and the Code would be applicable to any
transactions involving the Operating Partnership's assets, and (ii) persons
who exercise any authority or control over the Operating Partnership's assets,
or who provide investment advice to the Operating Partnership for a fee or
other compensation, would be (for purposes of ERISA and the Code) fiduciaries
of ERISA Plans and Other Plans that acquire Common Shares of Host REIT.
The United States Department of Labor ("DOL"), which has certain
administrative responsibility over ERISA Plans and certain Other Plans, has
issued a regulation defining plan assets for certain purposes ("DOL
Regulation"). The DOL Regulation generally provides that when an ERISA Plan or
Other Plan acquires a security that is an equity interest in an entity and
that security is neither a "publicly offered security" nor a security issued
by an investment company registered under the 1940 Act, the assets of the
ERISA Plan or Other Plan include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an "operating company" (as defined in
the DOL Regulation) or that equity participation in the entity by "benefit
plan investors" is not "significant."
The DOL Regulation defines a "publicly offered security" as a security that
is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act (provided the securities are
registered under the Exchange Act within 120 days, or such later time as may
be allowed by the Commission (the "Registration Period"), after the end of the
fiscal year of the issuer during which the offering occurred). Host REIT
anticipates that the Common Shares will be considered "publicly offered
securities," and therefore the underlying assets of Host REIT would not be
deemed to be Plan Assets of any ERISA Plan or Other Plan that invests in the
Common Shares.
The DOL Regulation defines "benefit plan investors" to consist of any
employee benefit plan as defined in section 3(3) of ERISA, any Other Plan, or
any entity whose underlying assets include Plan Assets by reason of an
employee benefit plan's investment in the entity. Equity participation in an
entity by "benefit plan investors" is deemed "significant" if, immediately
after the most recent acquisition of any equity interest in the entity, 25% or
more of the value of any class of equity interest is held by "benefit plan
investors." Furthermore, for purposes of determining the percentage interest
in a class of equity held by "benefit plan investors," the value of interests
held by persons who either have discretionary authority or control over the
entity's assets, or who provide investment advice for a fee, or are affiliates
of such persons, is disregarded.
Based upon the value of the interests in the Partnerships owned by "benefit
plan investors" relative to the value of the interests in the Partnerships
owned by other Partnership investors, and the expected Exchange Value for each
of the Partnerships, the Operating Partnership believes that immediately
following the REIT Conversion "benefit plan investors" will not own a
"significant" percentage of OP Units, and, thus, the underlying assets of the
Operating Partnership will not constitute Plan Assets of any ERISA Plan or
Other Plan that owns OP Units. Furthermore, the Partnership Agreement will
restrict ownership of OP Units by benefit plan investors to less than 25%.
194
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION
The following discussion summarizes the federal income tax consequences
reasonably anticipated to be material to a Limited Partner in connection with
(i) the acquisition of the Partnerships by the Operating Partnership through
the mergers of the Merger Partnerships into the Partnerships and the resulting
distribution of OP Units to the Limited Partners; (ii) the ownership and
subsequent disposition by the Limited Partners of such OP Units; (iii) the
acquisition and ownership of Notes received by Limited Partners who elect to
tender the OP Units received in the Mergers to the Operating Partnership in
exchange for Notes (the "Note Election"); and (iv) the ownership and
disposition of Common Shares that could be issued to Limited Partners upon the
exercise of their Unit Redemption Right. The following discussion is intended
to address only those federal income tax consequences that are generally
relevant to all Limited Partners in the Partnerships. Accordingly, it does not
discuss all aspects of federal income taxation that might be relevant to a
specific Limited Partner in light of his particular investment or tax
circumstances. Therefore, it is imperative that a Limited Partner review the
following discussion and consult with his own tax advisors to determine the
interaction of his individual tax situation with the anticipated tax
consequences of the Mergers and the REIT Conversion and the subsequent
ownership and disposition of OP Units, Notes and/or Common Shares, as
applicable.
The following discussion provides general information only, is not
exhaustive of all possible tax considerations and is not intended to be (and
should not be construed as) tax advice. For example, this summary does not
give a detailed description of any state, local or foreign tax considerations.
In addition, the discussion does not purport to deal with all aspects of
taxation that may be relevant to Limited Partners subject to special treatment
under the federal income tax laws, including, without limitation, insurance
companies, financial institutions or broker-dealers, tax-exempt organizations
(except to the extent discussed under the heading "Taxation of Tax-Exempt
Shareholders of Host REIT") or foreign corporations and persons who are not
citizens or residents of the United States (except to the extent discussed
under the heading "Taxation of Non-U.S. Shareholders of Host REIT").
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations thereunder, the legislative history of the Code,
current administrative interpretations and practices of the IRS (including its
practices and policies as endorsed in private letter rulings, which are not
binding on the IRS), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and court decisions will not significantly
change the current law or adversely affect existing interpretations of current
law. Any such change could apply retroactively to transactions preceding the
date of the change. No assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged. With the one exception
described in the next sentence below, neither Host REIT, the Operating
Partnership nor the General Partners have requested or plan to request any
rulings from the IRS concerning the tax consequences of the Mergers or the
treatment of either the Operating Partnership or Host REIT subsequent to the
REIT Conversion. The Operating Partnership has requested from the IRS a ruling
to the effect that certain indebtedness that might be incurred by the
Operating Partnership that is not secured by any particular property of the
Operating Partnership, the proceeds of which may be used to repay indebtedness
of the Operating Partnership or one or more Hotel Partnerships after the REIT
Conversion, would qualify as "nonrecourse liabilities" for purposes of Code
Section 752 and as "qualified nonrecourse financing" for purposes of Code
Section 465. This ruling request is discussed below, in "Tax Consequences of
the Mergers--IRS Ruling Request Regarding Allocation of Partnership
Liabilities."
Host REIT, the Operating Partnership and the General Partners have obtained
an opinion of counsel to the effect that the discussion set forth in this
section, to the extent it contains descriptions of applicable federal income
tax law, is correct in all material respects. Such opinion, however, does not
purport to address the tax consequences of the Mergers and the REIT Conversion
to any particular Limited Partner in a Partnership in light of his particular
circumstances, nor does it purport to predict whether, and the extent to
which, future events and
195
<PAGE>
transactions, only some of which may be within the control of Host REIT and/or
the Operating Partnership, will have a material adverse impact on the income
tax positions of Limited Partners, either in particular Partnerships or as a
whole.
The following description does not address the income tax consequences of
the Mergers for Host or the General Partners.
The following discussion is not intended to be, and should not be construed
by a Limited Partner as, tax advice. THE SPECIFIC TAX ATTRIBUTES OF A
PARTICULAR LIMITED PARTNER COULD HAVE A MATERIAL IMPACT ON THE TAX
CONSEQUENCES OF THE MERGERS, THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF OP
UNITS OR NOTES AND/OR THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON
SHARES. THEREFORE, IT IS ESSENTIAL THAT EACH LIMITED PARTNER CONSULT WITH HIS
OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS
TO SUCH LIMITED PARTNER'S PERSONAL TAX SITUATION, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION. THE FOLLOWING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR
CAREFUL TAX PLANNING.
SUMMARY OF TAX OPINIONS
Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to Host REIT, Host and
the Operating Partnership, has provided to Host REIT and the Operating
Partnership an opinion letter (substantially in the form of Appendix C hereto)
as to certain federal income tax consequences to the Operating Partnership and
the Limited Partners resulting from the REIT Conversion and the Mergers. The
opinion letter is based upon certain assumptions and certain factual
representations provided by Host REIT, Host, the Operating Partnership and the
General Partners. These representations generally involve factual matters
relating to the organization, ownership and operations (including the income,
assets, businesses, liabilities and properties) of the Partnerships and the
Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the REIT Conversion and the Mergers and of Host REIT, the
Operating Partnership and the Partnerships following the REIT Conversion and
the Mergers.
The specific opinions that Hogan & Hartson has provided (as they relate to
the Limited Partners and the impact on them of the Mergers and the REIT
Conversion) are:
1. The proposed method of operation of the Operating Partnership is such
that it, each of the Partnerships and each of the Subsidiary Partnerships
will be treated as a partnership for federal income tax purposes and will
not be subject to tax as a corporation or an association taxable as a
corporation.
2. Except for any gain attributable to the sale of personal property to a
Non-Controlled Subsidiary in connection with the REIT Conversion, the
Mergers will not result in the recognition of taxable gain or loss at the
time of the Mergers to a Limited Partner (i) who does not exercise his Unit
Redemption Right on a date sooner than the date two years after the date of
the consummation of the Mergers; (ii) who does not receive a cash
distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of the prepayment of certain
indebtedness) in connection with the Mergers in excess of such Limited
Partner's aggregate adjusted basis in his Partnership Interest at the time
of the Mergers; (iii) who does not receive a Note upon the exercise of his
right to make the Note Election; (iv) who is not required to recognize gain
by reason of the exercise by another Limited Partner in the same
Partnership of his right to make the Note Election; and (v) whose "at risk"
amount does not fall below zero as a result of the Mergers.
3. The Unit Redemption Right will not be considered "other consideration"
such that its receipt in the Mergers would result in a Limited Partner
being treated under the "disguised sale" rules (as set forth in Section 707
of the Code and the Treasury Regulations thereunder) as having sold all or
a portion of his Partnership Interest to the Operating Partnership in the
Mergers.
196
<PAGE>
4. A Limited Partner's exercise of his Unit Redemption Right more than
two years after the date of consummation of the Mergers will not cause the
Mergers to constitute a taxable transaction for the Limited Partner (or for
the other Limited Partners in the same Partnership).
5. It is more likely than not that a Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of
the Mergers but less than two years after such date will not cause the
Mergers to constitute a taxable transaction for the Limited Partner (or for
the other Limited Partners in the same Partnership).
6. Although the matter is not free from doubt, a Limited Partner who does
not exercise his right to make the Note Election should not be required to
recognize gain by reason of the exercise of such right by another Limited
Partner in the same Partnership. In any event, such Limited Partner would
not recognize gain in excess of the amount of such Limited Partner's
allocable share of such gain (determined pursuant to his Partnership's
partnership agreement).
7. A Limited Partner's relief from Partnership liabilities allocable to
such Limited Partner in connection with the Mergers and the REIT Conversion
and/or any subsequent repayment of certain indebtedness encumbering the
Hotels will not cause such Limited Partner to recognize taxable gain at the
time of the Mergers unless (and only to the extent that) the amount thereof
exceeds such Limited Partner's adjusted basis in his Partnership Interest
at the time of the Mergers.
8. The discussion herein under the heading "Federal Income Tax
Consequences," and under such heading in each of the Partnership
Supplements to the Consent Solicitation, to the extent each such discussion
contains descriptions of applicable federal income tax law, is correct in
all material respects.
In addition, on the Effective Date, Hogan & Hartson expects to provide to
Host REIT and the Operating Partnership an opinion letter (substantially in
the form of Appendix D hereto) to the effect that (i) Host REIT, beginning
with its first taxable year commencing after the consummation of the REIT
Conversion, will be organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it
to meet the requirements for qualification and taxation as a REIT under the
Code; and (ii) the Leases will be respected as leases for federal income tax
purposes. The receipt of this opinion letter is a condition to the REIT
Conversion and each of the Mergers. This opinion letter will be based upon
certain assumptions and certain factual representations provided by Host REIT,
Host, the Operating Partnership and the General Partners. These
representations generally will involve factual matters relating to the
organization, ownership and operations (including the income, assets,
businesses, liabilities, properties and accumulated undistributed earnings and
profits) of Host REIT, the Operating Partnership, the Hotel Partnerships, the
Subsidiary Partnerships (as defined below), the Non-Controlled Subsidiaries,
the Incentive Compensation Trust, SLC and the Lessees following the REIT
Conversion.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions and the
opinions to be rendered by Hogan & Hartson on the Effective Date will be based
on the same authorities as of the Effective Date. No assurance can be given
that future legislation, Treasury Regulations, administrative interpretations
and court decisions will not significantly change the law or the above
conclusions reached by counsel. In addition, any such change could apply
retroactively to transactions preceding the date of change. Moreover, opinions
of counsel merely represent counsel's best judgment with respect to the
probable outcome on the merits and are not binding on the IRS or the courts.
Accordingly, even if there is no change in applicable law, no assurance can be
provided that such opinions (which do not bind the IRS or the courts) will not
be challenged by the IRS or will be sustained by a court if so challenged.
With the exception of the ruling request described below in "Tax Consequences
of the Mergers--IRS Ruling Request Regarding Allocation of Partnership
Liabilities," neither Host REIT, the Operating Partnership nor the General
Partners have requested or plan to request any rulings from the IRS concerning
the tax consequences of the Mergers or the treatment of either the Operating
Partnership or Host REIT subsequent to the REIT Conversion.
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TAX STATUS OF THE OPERATING PARTNERSHIP
An entity classified as a partnership for federal income tax purposes
generally is not itself a taxable entity and incurs no federal income tax
liability. Therefore, partners are required to take into account in computing
their federal income tax liability their allocable shares of income, gains,
losses, deductions and credits of the partnership, regardless of whether cash
distributions are made by the partnership to the partners. A distribution of
money by a partnership to a partner generally is not taxable unless the amount
of the distribution is in excess of the partner's adjusted basis in his
partnership interest.
Pursuant to Treasury Regulations under Section 7701 of the Code, a
partnership will be treated as a partnership for federal income tax purposes
unless it elects to be treated as a corporation or would be treated as a
corporation because it is a "publicly traded partnership." Neither the
Operating Partnership, any of the Hotel Partnerships, nor any of the
partnerships or limited liability companies in which either the Operating
Partnership or the Hotel Partnerships will have an interest following the REIT
Conversion (the "Subsidiary Partnerships") will elect to be treated as a
corporation, and therefore, subject to the disclosure below, each will be
treated as a partnership for federal income tax purposes (or if it has only
one partner or member, disregarded entirely for federal income tax purposes).
Pursuant to Section 7704 of the Code, however, a partnership that does not
elect to be treated as a corporation nevertheless will be treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership," unless at least ninety percent (90%) of its income consists of
"qualifying income" within the meaning of that section. A "publicly traded
partnership" is any partnership (i) the interests in which are traded on an
established securities market or (ii) the interests in which are readily
tradable on a "secondary market (or the substantial equivalent thereof)." OP
Units will not be traded on an established securities market. There is a
significant risk, however, that after the Unit Redemption Right becomes
exercisable, the OP Units would be considered readily tradable on the
substantial equivalent of a secondary market.
Hogan & Hartson is of the opinion that, based upon representations by Host
REIT and the Operating Partnership as to the expected ownership and operations
of the Operating Partnership, even if the Operating Partnership were
considered to be a publicly traded partnership because OP Units were
considered to be readily tradable on the substantial equivalent of a secondary
market, the proposed method of operation of the Operating Partnership is such
that it will qualify as a partnership for federal income tax purposes because
it will have sufficient "qualifying income." In this regard, the income
requirements generally applicable to REITs and the definition of "qualifying
income" under Section 7704 of the Code are similar in most key respects. There
is one significant difference, however, that is relevant to the Operating
Partnership. For a REIT, rent from a tenant does not qualify as "rents from
real property" if the REIT and/or one or more actual or constructive owners of
10% or more of the REIT actually or constructively own 10% or more of the
tenant; under Section 7704 of the Code, however, rent from a tenant is not
qualifying income if a partnership and/or one or more actual or constructive
owners of 5% or more of the partnership actually or constructively own 10% or
more of the tenant. A substantial majority of the Operating Partnership's
income will come from rent payments by the Lessees, which will be indirectly
controlled subsidiaries of SLC. Accordingly, because The Blackstone Group,
Host REIT and any owner of 10% or more of Host REIT will own (or be deemed to
own) 5% or more of the Operating Partnership, if The Blackstone Group, Host
REIT and/or any owner of 10% or more of Host REIT were to own (or be deemed to
own) 10% or more of SLC, none of the rent from the Lessees would be qualifying
income for purposes of determining whether the Operating Partnership should be
taxed as a corporation. In order to avoid this result, the SLC Articles of
Incorporation expressly provide that no person, including The Blackstone
Group, Host REIT and any owner of 10% or more of Host REIT, may own more than
9.8% by value of the interests in SLC and the SLC Articles of Incorporation
contain self-executing mechanisms intended to enforce this prohibition. In
addition, the Partnership Agreement prohibits any person or entity (other than
The Blackstone Group and Host REIT) from owning, actually and/or
constructively, more than 4.9% of the value of the Operating Partnership, and
Host REIT's Declaration of Trust prohibits any person or entity (including The
Blackstone Group and the Marriott family and their affiliated entities as a
group) from owning, actually and/or constructively, more than 9.8% of the
lesser of the number or value of the total outstanding shares of Host REIT.
Assuming that all of
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these prohibitions are enforced at all times, then so long as the Operating
Partnership's income is such that Host REIT could meet the gross income tests
applicable to REITs (see "Federal Income Taxation of Host REIT Following the
Mergers--Income Tests Applicable to REITs" and "--Ownership of Partnership
Interests by a REIT"), the Operating Partnership's "qualifying income" should
be sufficient for it to avoid being classified as a corporation even if it
were considered a publicly traded partnership.
If the Operating Partnership were considered a publicly traded partnership
(because the OP Units were considered readily tradable on the substantial
equivalent of a secondary market) but not treated as a corporation for federal
income tax purposes because it meets the "qualifying income" exception, a
Limited Partner still could be subject to certain special rules applicable to
publicly traded partnerships. In particular, if the Operating Partnership were
a publicly traded partnership, a Limited Partner would be unable to apply
unused passive activity losses arising in connection with his investment in
the Partnership or other investments to offset his allocable share of
Operating Partnership gain and income. Conversely, any Operating Partnership
losses allocable to a Limited Partner could be used only as an offset against
such Limited Partner's allocable share of Operating Partnership income and
gains and not against income and gains from other passive activities. The
Operating Partnership and the General Partners have estimated that each
Limited Partner in Atlanta Marquis, Chicago Suites, Desert Springs, MDAH and
MHP who purchased his Partnership Interest at the time of the original
offering of such Partnership Interests, has held such Partnership Interest
continuously since that time, and whose Partnership Interest has been his only
investment in a passive activity would have a passive activity loss
carryforward as of December 31, 1998.
The entire discussion of the federal income tax consequences of the Mergers
and the subsequent ownership of OP Units is based on the Operating Partnership
being classified as a partnership for federal income tax purposes. If the
Operating Partnership instead were taxable as a corporation, most, if not all,
of the tax consequences described below would be inapplicable. In particular,
the Operating Partnership itself would be subject to federal and state income
tax, thereby reducing the cash available for distribution to holders of OP
Units. Under such circumstances, the Mergers should be treated for federal
income tax purposes as contributions of the Partnership Interests to a
corporation under Section 351 of the Code, and, accordingly, a Limited Partner
would recognize gain or loss on the transaction to the extent that the
Partnership liabilities allocable to the Limited Partner at the time of the
Mergers (see "Tax Consequences of the Mergers--Relief from Liabilities/Deemed
Cash Distribution" below) exceeded the Limited Partner's adjusted basis in his
Partnership Interest (i.e., the Limited Partner had a "negative capital
account"). Finally, under such circumstances, Host REIT would not qualify as a
REIT because the value of Host REIT's ownership interest in the Operating
Partnership would exceed 5% of Host REIT's assets and Host REIT would be
considered to hold more than 10% of the voting securities of another
corporation (see "Federal Income Taxation of Host REIT Following the Mergers--
Asset Tests Applicable to REITs"), which would adversely affect the value of
the Common Shares (and, indirectly, the value of the OP Units) (see "Federal
Income Taxation of Host REIT Following the Mergers--Failure of Host REIT to
Qualify as a REIT"). However, as described above, Hogan & Hartson, counsel to
the Operating Partnership, is of the opinion that the proposed method of
operation of the Operating Partnership (as represented by the Operating
Partnership and Host) is such that it will be treated as a partnership for
federal income tax purposes and will not be subject to tax as a corporation or
an association taxable as a corporation. As noted previously, an opinion of
counsel does not bind the courts and no assurance can be provided that such
opinion will not be challenged by the IRS or will be sustained by a court if
so challenged.
TAX CONSEQUENCES OF THE MERGERS
Overview. As described in greater detail above (see "The Mergers and the
REIT Conversion"), the Operating Partnership will acquire the Partnerships
through the mergers of the Merger Partnerships into the Partnerships,
resulting in the receipt of OP Units by the partners of the Partnerships. The
Operating Partnership intends that the Mergers will be treated for federal
income tax purposes as the transfer by the partners of their interests in the
Partnerships to the Operating Partnership in exchange for OP Units (which OP
Units may be tendered for Notes, at the election of the Limited Partner) and
the discussion herein assumes that the Mergers will be so treated. There can
be no assurance, however, that the IRS will not seek to recharacterize each
Merger
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as either (i) the liquidation of a Partnership followed by the distribution by
the Partnership of its assets to its partners and the subsequent transfers by
such partners of such assets to the Operating Partnership in exchange for OP
Units (which OP Units may be tendered for Notes, at the election of each
Limited Partner) or (ii) the transfer by a Partnership of its assets to the
Operating Partnership in exchange for OP Units and/or Notes and the subsequent
distribution of such OP Units and/or Notes to its partners. For a discussion
of the tax consequences that would occur if the Mergers are recharacterized in
either of these two alternative manners, see "--Alternative
Recharacterizations of the Mergers."
Section 721 of the Code provides that no gain or loss is recognized in the
case of a contribution of property to the partnership in exchange for an
interest in the partnership. The nonrecognition rule of Section 721 ordinarily
applies even when the property transferred is subject to liabilities (so long
as the assumption of such liabilities does not result in a deemed distribution
of cash in excess of a transferor's basis in the property transferred to a
partnership). Accordingly, Section 721 generally would apply to prevent the
recognition of gain by a Limited Partner in the Mergers. However, there are
several potential exceptions to the availability of nonrecognition treatment
under Section 721, including the following:
1. Any decrease in a contributing partner's liabilities (including its
share of liabilities with respect to a partnership interest contributed to
another partnership), if not offset by a corresponding increase in the
partner's share of other partnership liabilities, could cause the partner
to recognize taxable gain as a result of the partner being deemed to have
received a cash distribution from the partnership. This recognition of gain
could occur even if the decrease arose in connection with a contribution
that would otherwise qualify for tax-free treatment under Section 721 of
the Code. A decrease in a partner's liabilities (and a resulting deemed
cash distribution) also might occur after a contribution upon a repayment
by the partnership of all or part of such liabilities. For example, a
Limited Partner would be deemed to receive a cash distribution upon the
prepayment or repayment of existing indebtedness of his Partnership, unless
such prepayment or repayment were accompanied by the incurrence of new debt
in an equal or greater amount that would be considered to be nonrecourse
liabilities properly attributable to the Hotels owned by the Partnership
whose existing debt was repaid.
2. A contribution of property that is treated in whole or in part as a
"disguised sale" of the contributed property under the Code.
3. A contribution of property to a partnership that is classified as an
"investment company" under the Code.
4. Recapture under Section 465(e) of the Code.
The Operating Partnership, the General Partners and Hogan & Hartson believe
that the foregoing exceptions, which are discussed in greater detail below,
should not result in the recognition of taxable gain or loss at the time of
the Mergers to a Limited Partner (i) who does not receive a distribution (or a
deemed distribution resulting from relief from liabilities) that exceeds such
Limited Partner's aggregate adjusted basis in his OP Units after the Mergers
and (ii) whose at risk amount does not go below zero as a result of the
Mergers. See, however, "--Taxable Income Attributable to Sales of Personal
Property in Connection with the REIT Conversion." The Operating Partnership
and the General Partners also believe that a Limited Partner who acquired his
Partnership Interests in the original offering of such interests and who has
held such interests at all times since (a) should not be considered to
receive, as a result of the Mergers, a distribution (or a deemed distribution
resulting from relief from liabilities) that exceeds such Limited Partner's
aggregate adjusted basis in his OP Units at the time of the Mergers and (b)
should not have his "at risk" amount fall below zero as a result of the
Mergers. See "--Assumptions Used in Determining Tax Consequences of the
Mergers" below. The adjusted tax basis of a Limited Partner who did not
acquire his Partnership Interest in the original offering of such interests,
however, could vary materially from that of a Limited Partner who did so, and,
thus, the Mergers could result in the receipt by such Limited Partner of a
distribution (or deemed distribution) of cash in excess of such Limited
Partner's adjusted tax basis in his Partnership Interest and/or a reduction in
his "at risk" amount below zero, either of which could result in the
recognition of income or gain by such Limited Partner.
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Even if a Limited Partner does not recognize gain at the time of the Mergers
as a result of the foregoing exceptions to nonrecognition treatment, a variety
of events and transactions subsequent to the Mergers (including a sale or
other disposition of one or more Hotels owned by the Partnerships or a
refinancing or repayment of indebtedness currently secured by one or more of
the Hotels owned by the Partnerships) could cause a Limited Partner to
recognize all or part of the gain that has been deferred through the Mergers.
See "--Effect of Subsequent Events" below. Certain Hotels (including all of
the Blackstone Hotels) will be covered by agreements with third parties that
will restrict the Operating Partnership's ability to dispose of those
properties or refinance their indebtedness. In addition, if Atlanta Marquis
chooses to participate in the Mergers, the Operating Partnership will succeed
to an existing agreement that will restrict its ability to dispose of the
Hotel owned by Atlanta Marquis or refinance the indebtedness secured by such
Hotel for approximately 11 1/2 years following the Mergers (without
compensating certain outside partners for the resulting adverse tax
consequences). As for the remaining properties (including the Hotels owned by
the Partnerships, the Partnership Agreement of the Operating Partnership does
not impose any restrictions on the Operating Partnership's ability to dispose
of the Hotels or to refinance indebtedness secured by the Hotels. In addition,
the Partnership Agreement provides that Host REIT, as general partner of the
Operating Partnership, is not required to take into account the tax
consequences for the Limited Partners in deciding whether to cause the
Operating Partnership to undertake specific transactions and the Limited
Partners, as holders of OP Units, have no right to approve or disapprove such
transactions owned by the Partnerships. See "Description of OP Units--Sales of
Assets."
Taxable Income Attributable to Sales of Personal Property in Connection with
the REIT Conversion. As discussed below in "Federal Income Taxation of Host
REIT Following the REIT Conversion--Income Tests Applicable to REITs," if the
rent attributable to personal property leased in connection with the lease of
each Hotel is greater than 15% of the total rent received under the lease of
such Hotel, the portion of the rent attributable to the personal property will
not constitute qualifying income to Host REIT (the "15% Personal Property
Test"). The Operating Partnership and the General Partners have determined
that the percentage of rent attributable to the personal property to be leased
in connection with the lease of certain of the Hotels owned by Atlanta
Marquis, Hanover, MHP and PHLP would not satisfy the 15% Personal Property
Test. Accordingly, immediately prior to the Mergers, the Operating Partnership
will require each of those Partnerships, if it chooses to participate in the
Mergers, to sell to a Non-Controlled Subsidiary a portion of the personal
property associated with some or all of its Hotels. This sale, which will be a
taxable transaction, would result in the recognition by each such Partnership
of taxable income to the extent that there is a difference between the fair
market value of the personal property at the time of the sale and the adjusted
tax basis of such property at that time. However, the Operating Partnership
and the General Partners for these Partnerships do not anticipate that, given
the value of this personal property relative to its tax basis, any of the
Partnerships actually will recognize taxable income as a result of these
sales. If any such taxable income is recognized by a Partnership, this taxable
income will be allocated to the partners of each such Partnership, except that
the Limited Partners of Hanover will not be allocated any portion of such
taxable income. The actual amount of any such income will be determinable only
at the time of the sale and will be affected by the specific personal property
selected to be sold and the fair market value and adjusted basis of that
personal property. Pursuant to the partnership agreement of each Partnership,
such taxable gain, if any, will be recharacterized as ordinary recapture
income and will be allocated to the partners in the same proportions and to
the same extent that such partners were allocated any deductions directly or
indirectly giving rise to the treatment of such gains as recapture income
prior to the Mergers.
Relief from Liabilities/Deemed Cash Distribution. A Limited Partner will be
deemed to receive a cash distribution in connection with the Mergers to the
extent that his share of Operating Partnership liabilities immediately after
the Mergers is less than his share of Partnership liabilities immediately
prior to the Mergers. A Limited Partner will recognize taxable gain as a
result of this deemed cash distribution, however, only to the extent that the
deemed cash distribution exceeds such Limited Partner's adjusted tax basis in
his Partnership Interest immediately prior to the Mergers. Whether the deemed
cash distribution results in taxable gain depends upon a number of
circumstances that can be determined only with full knowledge of the
circumstances of both the Operating Partnership and the particular Limited
Partner.
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Under the applicable provisions of the Code, partners in a partnership
include their share of the partnership's liabilities, as determined in
accordance with the Treasury Regulations under Section 752 of the Code, in
calculating the basis of their partnership interests. Partners also include in
the basis of their partnership interests the adjusted tax basis of any capital
contributions that they have actually made to the partnership and their
allocable share of all partnership income and gains; partners reduce the basis
in their partnership interests by the amount of all distributions that they
receive from the partnership and their allocable share of all partnership
losses. For purposes of these rules, if a partner's share of the partnership's
liabilities is reduced for any reason, the partner is deemed to have received
a cash distribution equal to the amount of such reduction.
In the case of the Mergers, these rules generally will be applied by
reference to a Limited Partner's share of liabilities in a Partnership
immediately before the Mergers and such Limited Partner's share of liabilities
in the Operating Partnership immediately after the Mergers. Any deemed cash
distribution resulting from a reduction in such Limited Partner's share of
liabilities will be considered to be a deemed cash distribution from the
Operating Partnership (rather than from the Partnership with respect to which
such Limited Partner's share of liabilities would be reduced). A Limited
Partner may offset his share of the liabilities of the Operating Partnership
against the elimination of the Limited Partner's share of liabilities of a
Partnership in determining the amount of the deemed cash distribution to the
Limited Partner from the Operating Partnership; however, if a Limited Partner
is deemed under these rules to receive a cash distribution from the Operating
Partnership in an amount in excess of the basis of the Partnership Interest
owned by that Limited Partner immediately prior to the Mergers, the Limited
Partner may recognize taxable gain. If a Limited Partner owns interests in
more than one Participating Partnership, then such Limited Partner should be
able to aggregate his bases in such Partnership Interests in determining
whether such Limited Partner is deemed to receive a taxable cash distribution
from the Operating Partnership so long as the intended characterization of the
Mergers is respected (i.e., the Mergers are treated as contributions by the
Limited Partners of their Partnership Interests in exchange for OP Units).
Section 752 of the Code and the Treasury Regulations thereunder provide that
a partner's share of partnership liabilities includes the partner's share of
partnership recourse liabilities plus the partner's share of partnership
nonrecourse liabilities. A partnership liability is a recourse liability to
the extent that any partner (or a person related to any partner) bears the
"economic risk of loss" for that liability within the meaning of the Treasury
Regulations; a partnership liability is nonrecourse to the extent that no
partner (or related person) bears the "economic risk of loss." No Limited
Partner (other than possibly Host REIT or an affiliate of Host REIT) will have
any share of any recourse liability of the Operating Partnership. The
following paragraphs describe the manner in which a Limited Partner's share of
the nonrecourse liabilities of the Operating Partnership will be determined.
Pursuant to Section 752 of the Code and the Treasury Regulations thereunder,
a partner's share of partnership nonrecourse liabilities is determined under a
three-tier approach. Under this approach, a partner's share of partnership
nonrecourse liabilities equals the sum of (i) the partner's share of
"partnership minimum gain," determined in accordance with the rules of Section
704(b) of the Code and the Treasury Regulations thereunder ("tier one"); (ii)
the amount of any taxable gain that would be allocated to the partner under
Section 704(c) of the Code (or in the same manner as Section 704(c) of the
Code in connection with a revaluation of partnership property) if the
partnership disposed of all partnership property (in a taxable transaction)
subject to one or more nonrecourse liabilities of the partnership in full
satisfaction of such liabilities and for no other consideration ("Section
704(c) Minimum Gain" or "tier two"); and (iii) the partner's share of "excess
nonrecourse liabilities" (i.e., those not allocated under (i) and (ii) above),
which are allocated in accordance with the partner's "share of partnership
profits" ("tier three"). A partner's "share of partnership profits" is
determined by taking into account all facts and circumstances of the economic
arrangement among the partners.
At the time of the Mergers, the Operating Partnership will not have any
"partnership minimum gain," determined in accordance with the rules of Section
704(b) of the Code and the Treasury Regulations thereunder. Therefore, each
nonrecourse liability of the Operating Partnership secured by a Hotel (or
considered allocable to such Hotel pursuant to Section 752 of the Code and the
Treasury Regulations thereunder) will be allocated to each Limited Partner in
accordance with "tiers" two and three described in the Treasury Regulations
under
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Section 752 of the Code. First, pursuant to "tier two," such liabilities will
be allocated to each Limited Partner in the amount of such Limited Partner's
share of any Section 704(c) Minimum Gain with respect to such Hotel, after
taking into account any reduction in the liabilities occurring in connection
with the Mergers. Next, pursuant to "tier three," any remaining nonrecourse
liabilities will be allocated to each Limited Partner in accordance with such
Limited Partner's share of Operating Partnership profits, taking into account
for such purposes Host REIT's share of Operating Partnership profits.
The nonrecourse liabilities, if any, allocable to a Limited Partner by
reason of Section 704(c) Minimum Gain will depend upon a number of factors,
including, for example, (i) the Limited Partner's share of existing Section
704(c) Minimum Gain of the Partnerships at the time of the Mergers; (ii) the
extent to which the Operating Partnership causes nonrecourse liabilities as to
which there exists Section 704(c) Minimum Gain immediately prior to the
Mergers to be repaid or refinanced in connection with the Mergers in a manner
that reduces or eliminates that Section 704(c) Minimum Gain; and (iii) the
method selected by the Operating Partnership to allocate gain under Section
704(c) of the Code. The Operating Partnership generally will elect to allocate
gain under Section 704(c) of the Code under the "traditional method," with a
provision for a curative allocation of gain on sale to the extent prior
allocations of depreciation with respect to a specific Hotel were limited by
the "ceiling rule" applicable under such method (although there may be certain
exceptions). In the case of the Limited Partners of a Participating
Partnership that owns a Hotel with Section 704(c) Minimum Gain, this method
may not result in as great an allocation of Operating Partnership nonrecourse
liabilities by reason of Section 704(c) Minimum Gain to the Limited Partners
as might be allocated pursuant to another method. However, the use of this
method will decrease the ordinary taxable income that will be allocated to
such Limited Partners (by reason of depreciation adjustments), as compared
with the amount that would be allocated had another method been selected. See
"Tax Treatment of Limited Partners Who Hold OP Units Following the Mergers--
Tax Allocations With Respect to Book-Tax Difference on Contributed Hotels."
The Operating Partnership will allocate any "excess nonrecourse liabilities"
in accordance with a Limited Partner's share of Operating Partnership profits
as represented by the Limited Partner's percentage ownership interest the
Operating Partnership.
Host REIT and the Operating Partnership believe that immediately after the
Mergers, and taking into account the election described above and the
assumptions set forth below (see "--Assumptions Used in Determining Tax
Consequences of the Mergers"), each Limited Partner who does not exercise his
right to make the Note Election and whose adjusted basis in his Partnership
Interest is equal to or greater than the Original Limited Partner's Adjusted
Basis (as defined below in "--Assumptions Used in Determining Tax Consequences
of the Mergers") for that Partnership will be allocated nonrecourse
liabilities in an amount such that such Limited Partner will not be deemed for
federal income tax purposes to have received a deemed cash distribution in
excess of such Limited Partner's basis in his Partnership Interest as a result
of the Mergers. However, although it is unlikely, a Limited Partner whose
adjusted basis in his Partnership Interest is less than the Original Limited
Partner's Adjusted Basis for that Partnership could be deemed for federal
income tax purposes to have received a deemed cash distribution in excess of
such Limited Partner's basis in his Partnership Interest as a result of the
Mergers.
IRS Ruling Request Regarding Allocation of Partnership Liabilities. Except
as described herein, the Operating Partnership has no current plan or
intention to cause the prepayment of the nonrecourse liabilities encumbering
the Hotels owned by the Partnerships. The Operating Partnership, however, will
have to repay mortgage indebtedness secured by a Hotel at the time such
indebtedness matures. There can be no assurance that at such time the
Operating Partnership will be able to obtain nonrecourse mortgage indebtedness
secured only by such Hotel in an amount sufficient to avoid a deemed cash
distribution to the former Limited Partners in the Partnership that owns the
Hotel. These considerations are particularly relevant with respect to the
Limited Partners in PHLP, where the existing mortgage indebtedness, which
matures in December 1999, will have to be refinanced within one year following
the Mergers. Moreover, the Operating Partnership's current longterm financing
strategy is to have as little debt as possible that is secured by individual
Hotels and to have as much debt as possible in the form of unsecured debt,
held either by the public or by institutional investors, which debt
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may or may not be recourse to Host REIT, as general partner of the Operating
Partnership. In view of these considerations and the potential adverse
consequences to Limited Partners in certain Partnerships, the Operating
Partnership has requested from the IRS a ruling to the effect that such
unsecured indebtedness of the Operating Partnership that is issued initially
to institutional investors and is not recourse to Host REIT (i) would qualify
as "nonrecourse liabilities" for purposes of Code Section 752, (ii) to the
extent the proceeds thereof are applied to repay existing nonrecourse mortgage
indebtedness secured by one or more Hotels, would be considered to be
"secured" by those Hotels for purposes of computing the Section 704(c) Minimum
Gain with respect to such Hotels (and thus would be allocable under "tier two"
to the former Limited Partners in the Partnership owning those Hotels) and
(iii) would constitute "qualified nonrecourse financing" secured by such
Hotels for purposes of Code Section 465. The IRS has recently issued a ruling
to that effect to another taxpayer, and has indicated to the Operating
Partnership's representatives that it is favorably inclined to issue that
ruling to the Operating Partnership.
Assumptions Used in Determining Tax Consequences of the Mergers. The
estimated adjusted tax basis in the OP Units used by the Operating Partnership
and the General Partners for purposes of this discussion has been computed
based on the assumption that each of the Limited Partners acquired his
Partnership Interest in the original offering of such Partnership Interests
(this basis is referred to as an "Original Limited Partner's Adjusted Basis").
The General Partners have set forth on Appendix E to this Consent Solicitation
for each Partnership (i) the Original Limited Partner's Adjusted Basis as of
December 31, 1997 and (ii) an estimate of the Original Limited Partner's
Adjusted Basis as of December 31, 1998 (computed without regard to the Mergers
and based upon the assumptions set forth in Appendix E to this Consent
Solicitation). The General Partners also have set forth on Appendix E to this
Consent Solicitation for each Limited Partner whose adjusted basis in his
Partnership Interest is the same as the Original Limited Partner's Adjusted
Basis (i) the Partnership liabilities allocable to such Limited Partner as of
December 31, 1997 and (ii) an estimate of the Partnership liabilities
allocable to such Limited Partner as of December 31, 1998 (computed without
regard to the Mergers and based upon the assumptions set forth in Appendix E
to this Consent Solicitation). The actual adjusted tax basis of a Limited
Partner in his Partnership Interest (and thus the Partnership liabilities
allocable, and the gain, if any, to such Limited Partner resulting from the
Mergers and the REIT Conversion) could vary materially from the amount set
forth in Appendix E to this Consent Solicitation, depending upon a number of
factors, including when, and the manner in which, such Limited Partner
acquired his Partnership Interest. See "Tax Treatment of Limited Partners Who
Hold OP Units Following the Mergers--Initial Basis of OP Units."
Also, the determination of the amount of the Operating Partnership's
nonrecourse liabilities that will be allocated to a Limited Partner following
the Mergers assumes that the method to be used by the Operating Partnership to
allocate the liabilities among the Hotels will be respected for federal income
tax purposes. Finally, the Operating Partnership and the General Partners
assumed that the Mergers will be treated for federal income tax purposes as
the transfer by the Partners of their interests in the Partnerships to the
Operating Partnership in exchange for OP Units. There can be no assurance,
however, that the IRS will not seek to recharacterize each Merger as either
(i) the liquidation of a Partnership followed by the distribution by the
Partnership of its assets to its Partners and the subsequent transfers by such
Partners of such assets to the Operating Partnership in exchange for OP Units
or (ii) the transfer by a Partnership of its assets to the Operating
Partnership in exchange for OP Units and/or Notes and the subsequent
distribution of such OP Units and/or Notes to its Partners. If the Mergers are
recharacterized in such a manner, the tax consequences of the Mergers to the
Limited Partners likely will be materially affected.
Disguised Sale Regulations. The Mergers also will not be tax free to a
Limited Partner to the extent that a Merger is treated as a "disguised sale"
of all or a portion of such Limited Partner's Partnership Interest under the
Code or Treasury Regulations. Section 707 of the Code and the Treasury
Regulations thereunder (the "Disguised Sale Regulations") generally provide
that, unless one of certain prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous transfer of money
or other consideration (other than an interest in the partnership) from the
partnership to the partner will be treated as a sale, in whole or in part, of
such property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that transfers of money or other consideration
between a partnership and a partner that are made within
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two years of each other are presumed to be a sale unless the facts and
circumstances clearly establish that either the transfers do not constitute a
sale or an exception to disguised sale treatment applies.
For purposes of these rules, certain reductions in a partner's share of
partnership liabilities are treated as a transfer of money or other property
from the partnership to the partner which may give rise to a disguised sale,
even if that reduction would not otherwise result in a taxable deemed cash
distribution in excess of the partner's basis in his partnership interest. The
method of computing the existence and amount of any such reduction under the
Disguised Sale Regulations is different from, and generally more onerous than,
that applied under the rules discussed at "--Relief From Liabilities/Deemed
Cash Distribution," above. However, if a transfer of property by a partner to
a partnership is not otherwise treated as part of a disguised sale, then any
reduction in the partner's share of "qualified liabilities" (discussed below)
also will not be treated as part of a disguised sale. Moreover, even if some
or all of the transfer does otherwise constitute a disguised sale, the amount
of the reduction in the partner's share of "qualified liabilities" may, in
some cases, be computed under a more favorable method than the amount of the
reduction in the partner's share of other liabilities.
1. Impact of Distributions of Cash Flow from the Operating Partnership. Cash
distributions from a partnership to a partner may be treated as a transfer of
property for purposes of the "disguised sale" rules. However, one exception to
"disguised sale" treatment in the Disguised Sale Regulations relates to
distributions of "operating cash flow," as such term is defined in the
Disguised Sale Regulations. Operating cash flow distributions are presumed not
to be a part of a sale of property to a partnership unless the facts and
circumstances clearly establish that the distribution of operating cash flow
is part of a sale. The Disguised Sale Regulations define operating cash flow
distributions as distributions which (i) are not presumed to be guaranteed
payments for capital under the Disguised Sale Regulations, (ii) are not
reasonable preferred returns under the Disguised Sale Regulations and (iii)
are not characterized by the parties as distributions to the partner acting in
a capacity other than as a partner, to the extent of the net cash flow of the
partnership from operations multiplied by the lesser of the percentage
interest of the partner receiving the distribution for that year or the
partner's percentage interest in overall partnership profits for the life of
the partnership. The Disguised Sale Regulations contain a safe harbor for
calculating a partner's interest in such operating cash flow.
Except with respect to Limited Partners who exercise the Note Election (see
"--Disguised Sale Regulations--Impact of Limited Partners Who Exercise the
Note Election" and "Tax Treatment of Limited Partners Who Exercise Their Right
to Make the Note Election"), no distribution of cash or other property will be
made by the Operating Partnership to the participating Limited Partners at the
time of the Mergers. Host REIT and the Operating Partnership believe that the
Operating Partnership's periodic distributions of cash to holders of OP Units
subsequent to the Mergers will qualify as distributions of "operating cash
flow" under the Disguised Sale Regulations, and that there will be no facts or
circumstances indicating that such distributions should be considered part of
a sale. Immediately prior to the Mergers, the Partnerships may distribute to
their partners any excess cash on hand and, following the Mergers, the
Partnerships will distribute to their former partners cash flow for the period
ending with the Mergers. However, because such distributions will be made by
the Partnerships, rather than the Operating Partnership, the distributions
should not give rise to a "disguised sale" issue so long as the distributions
were not financed with debt which was incurred in anticipation of the Mergers
or cash provided by the Operating Partnership.
2. Impact of Assumption of Liabilities by the Operating Partnership. As
described above, a second exception to the "disguised sale" presumption
relates to the assumption of "qualified liabilities" in connection with a
contribution of property to a partnership. For purposes of the Disguised Sale
Regulations, a "qualified liability" in connection with a transfer of property
to a partnership includes (i) any liability incurred more than two years prior
to the earlier of the transfer of the property or the date the partner agrees
in writing to the transfer, as long as the liability has encumbered the
transferred property throughout the two-year period; (ii) a liability that was
not incurred in anticipation of the transfer of the property to a partnership,
but that was incurred by the partner within the two-year period prior to the
earlier of the date the partner agrees in writing to transfer the property or
the date the partner transfers the property to a partnership and that has
encumbered the transferred property since it was incurred; (iii) a liability
that is traceable under the Treasury Regulations to capital expenditures with
respect to the property; and (iv) a liability that was incurred in the
ordinary course of the trade
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or business in which property transferred to the partnership was used or held,
but only if all the assets related to that trade or business are transferred,
other than assets that are not material to a continuation of the trade or
business. However, a recourse liability is not a "qualified liability" unless
the amount of the liability does not exceed the fair market value of the
transferred property (less any other liabilities that are senior in priority
and encumber such property or any allocable liabilities described in (iii) or
(iv) above) at the time of transfer. A liability incurred within two years of
the transfer is presumed to be incurred in anticipation of the transfer unless
the facts and circumstances clearly establish that the liability was not
incurred in anticipation of the transfer. However, to the extent that the
proceeds of a partner or partnership liability are allocable under the
Treasury Regulations to payments discharging all or part of any other
liability of that partner or of the partnership, as the case may be, the newer
liability is considered the same as the older liability for purposes of the
Disguised Sale Regulations. Finally, if a partner treats a liability described
in (ii) above as a "qualified liability" because the facts clearly establish
that it was not incurred in anticipation of the transfer, such treatment must
be disclosed to the IRS in the manner set forth in the Disguised Sale
Regulations.
The Operating Partnership and the General Partners believe, based upon their
review of the facts and circumstances surrounding each liability, that all
direct or indirect liabilities of the Partnerships fall into one of the four
categories of "qualified liabilities" described above. However, the Operating
Partnership and the General Partner estimate that approximately $19.3 million
of Desert Springs indebtedness ($22,200 per Desert Springs Partnership Unit)
and $8.8 million of MHP indebtedness ($8,800 per MHP Partnership Unit), as of
December 31, 1998, may be "qualified liabilities" solely by reason of
exception (ii) in the preceding paragraph (i.e., a liability incurred within
two years of the Mergers but not in anticipation of the Mergers), and thus
Desert Springs and its Limited Partners and MHP and its Limited Partners may
be required to make disclosure with respect to the indebtedness in their tax
returns for the year in which the Mergers occur. There can be no assurance,
however, that the IRS will not challenge the position of either Desert Springs
or MHP that this indebtedness is a "qualified liability."
3. Impact of Unit Redemption Right. For a discussion of the impact of the
receipt and exercise of the Unit Redemption Right upon the potential
characterization of the Mergers as disguised sales, see "--Unit Redemption
Right," below.
4. Impact of Limited Partners Who Exercise the Note Election. If the Mergers
are recharacterized as partnership level transfers of Partnership assets, as
described below in "--Alternative Recharacterizations of the Mergers--Transfer
of Partnership Assets," there can be no assurance that the IRS would not
assert that a Limited Partner who does not exercise his right to make the Note
Election in connection with the Mergers must nevertheless recognize gain under
the Disguised Sale Regulations if another Limited Partner in the Partnership
does exercise such right and receives Notes in exchange for OP Units in
connection with the Mergers. As described in such section below, however,
Hogan & Hartson is of the opinion that, although the matter is not free from
doubt, a Limited Partner who does not exercise his right to make the Note
Election should not be required to recognize gain by reason of another Limited
Partner's exercise of such right. As noted previously, an opinion of counsel
does not bind the courts, and no assurance can be provided that such opinion
will not be challenged by the IRS or will be sustained by a court if so
challenged.
5. Effect of Disguised Sale Characterization. If a transfer of property to a
partnership and one or more transfers of money or other consideration
(including the assumption of or taking subject to a liability) by the
partnership to that partner are treated as a disguised sale, then the
transfers will be treated as a sale of property, in whole or in part, to the
partnership by the partner acting in a capacity other than as a member of a
partnership, rather than as a contribution under Section 721 of the Code
followed by a partnership distribution. Accordingly, in any case in which a
Limited Partner's transfer of his Partnership Interest to the Operating
Partnership is found to be a "disguised sale," all or a substantial portion of
the gain represented by the excess of the fair market value of such
Partnership Interest (plus all liabilities attributable to such Partnership
Interest) over the Limited Partner's tax basis in the Partnership Interest
could be recognized by the Limited Partner.
A transfer that is treated as a sale is treated as a sale for all purposes
of the Code and the sale is considered to take place on the date that, under
general principles of federal income tax law, the partnership is considered to
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become the owner of the property. If the transfer of money or other
consideration from the partnership to the partner occurs after the transfer of
property to the partnership, the partner and the partnership are treated as
if, on the date of the transfer of the property, the partnership transferred
to the partner an obligation to transfer to the partner money or other
consideration. Moreover, if a transfer of property to a partnership is treated
as part of a sale without regard to the partnership's assumption of or taking
subject to a "qualified liability," as defined above, then the partnership's
assumption of or taking subject to that liability is treated as a transfer of
additional consideration to the transferring partner. The amount of such
"qualified liability" treated as additional consideration is generally the
lesser of (x) the amount of the "qualified liability" and (y) an amount
determined by multiplying the "qualified liability" by the partner's "net
equity percentage." The "net equity percentage" is generally the amount of
consideration received by such partner (other than relief from "qualified
liabilities") divided by the partner's net equity in the property sold, as
calculated under the Disguised Sale Regulations.
Investment Partnership Regulations. If a transfer of property to a
partnership (such as the transfer of the Partnership Interests to the
Operating Partnership, which will be deemed to occur when the Merger
Partnerships merge into the Partnerships) were considered to be a transfer to
an "investment company," as defined in the Treasury Regulations, gain would be
recognized on such transfer under Section 721 of the Code. In the case of a
transfer of property to a partnership, the Code and the Treasury Regulations
provide that such transfer would be treated as having been made to an
investment company if the transfer results in a diversification of the
interests of two or more transferors, and the transferee is a partnership more
than 80% of the value of whose assets are "stock and securities." For this
purpose, the Code defines "stock and securities" to include the following:
money; stocks and other equity investments in a corporation; evidences of
indebtedness, options, forward or futures contracts, notional principal
contracts and derivatives; foreign currency; certain interests in precious
metals; interests in a regulated investment company or another REIT, common
trust funds, and publicly traded partnerships; and other interests in
noncorporate entities that are convertible into or exchangeable for any of the
listed assets. The Treasury Regulations further provide that a transfer
ordinarily will result in diversification for this purpose if two or more
persons contribute non-identical assets. Although the transfers to the
Operating Partnership will result in the diversification of the interests of
the Partners, no significant portion of the Operating Partnership's assets
will constitute "stock and securities" as defined heretofore. Accordingly, the
transfers to the Operating Partnership will not constitute transfers to an
"investment company," as defined in the current Treasury Regulations.
The tax consequences of the Mergers described above are based in part on the
conclusion that the deemed contributions of the Partnership Interests to the
Operating Partnership will not be treated as transfers to an investment
company under Section 721 of the Code and the Treasury Regulations. The
Operating Partnership, however, might not meet the IRS's guidelines for
obtaining an advance ruling with respect to this issue. Revenue Procedure 98-3
states that the question of whether Section 721 of the Code applies to the
contribution of widely held developed or undeveloped real property to a
partnership in exchange for an interest in the partnership is an area under
"extensive study" with respect to which the IRS will not issue rulings or
determination letters when (i) the contribution is the result of solicitation
by promoters, brokers or investment houses or (ii) the interest in the
transferee partnership is issued in a form designed to render it readily
tradable. The key terms used in this Revenue Procedure have not been defined
and the IRS has not issued Treasury Regulations, proposed Treasury
Regulations, rulings or other pronouncements with respect to such
contributions. The IRS could take the position in the future that
contributions of the sort described in the Revenue Procedure do not qualify
for nonrecognition treatment under Section 721 of the Code, that such
contributions should include the contributions of Partnership Interests to the
Operating Partnership as part of the Mergers and that such conclusions should
apply retroactively. It is by no means clear, however, that even if the IRS
were to take such position, a court would sustain it.
If Section 721 of the Code were not to apply to the deemed contributions of
Partnership Interests to the Operating Partnership, then such contributions
would be treated as taxable exchanges for federal income tax purposes. Each
Limited Partner would be treated as if he had sold, in a fully taxable
transaction, his Partnership Interest to the Operating Partnership in exchange
for an amount equal to (x) the value of the OP Units received and (y) the
liabilities of the Partnership allocable to his Partnership Interest. Any gain
or loss on such a sale would generally be treated as capital gain or loss
under the Code. For a discussion of the treatment of capital
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gain and loss under the Code, see "Tax Treatment of Limited Partners Who Hold
OP Units Following the Mergers--Disposition of OP Units by Limited Partners,"
below.
Section 465(e) Recapture. In general, the "at risk" rules of Section 465 of
the Code limit the use of losses, see "--Tax Treatment of Limited Partners Who
Hold OP Units Following the Mergers--Limitations on Deductibility of Losses,"
below. Under Section 465(e) of the Code, a taxpayer may be required to include
in gross income (i.e., to "recapture") losses previously allowed to the
taxpayer with respect to an "activity," if the amount for which the taxpayer
is "at risk" in the activity is less than zero at the close of the taxable
year.
The identification of a taxpayer's activities for purposes of the "at risk"
rules and the determination of a taxpayer's amount at risk in an activity are
complex and uncertain. However, as a general matter, a taxpayer's amount at
risk in an activity is increased by the taxpayer's income, and reduced by the
taxpayer's losses, from the activity. Therefore, any income taken into account
by a Limited Partner as a result of a deemed cash distribution, disguised sale
treatment or investment company treatment is likely to reduce the extent to
which Section 465(e) of the Code would apply to that Limited Partner. In
addition to the foregoing, a Limited Partner's amount at risk includes such
Limited Partner's share of his Partnership's "qualified nonrecourse financing"
(as defined in Section 465(b)(6) of the Code and as discussed in the next
paragraph).
Nevertheless, it is possible that the consummation of the Mergers and the
REIT Conversion or the repayment of certain qualified nonrecourse financing of
the Operating Partnership or the Hotel Partnerships at the time of or
following the Mergers and the REIT Conversion could, singularly or in
combination, cause a Limited Partner's amount at risk in relation to the OP
Units received in the Mergers to be reduced below zero and could, therefore,
cause an income inclusion to the Limited Partner under Section 465(e) of the
Code. In this regard, the definition of "qualified nonrecourse financing" is
different from, and more restrictive than, the definition of "nonrecourse
liabilities" under Section 752 of the Code. Hence, it is possible that a
Limited Partner could incur a reduction in his share of "qualified nonrecourse
financing" that causes him to recognize income under Section 465(e) of the
Code even though he has a sufficient share of "nonrecourse liabilities" under
Section 752 of the Code so that he would not be deemed to have received a
taxable deemed cash distribution in connection with the Mergers. However, the
Operating Partnership and the General Partners expect that the majority of the
current indebtedness with respect to the Hotel Partnerships and the Hotels
contributed by the Blackstone Entities that will be assumed by the Operating
Partnership as part of the Mergers and the REIT Conversion should qualify as
"qualified nonrecourse financing." The Operating Partnership and the General
Partners believe, based upon and subject to the assumptions and other
limitations described above in "--Assumptions Used in Determining the Tax
Consequences of the Mergers," that a Limited Partner who acquired his
Partnership Interest in the original offering by his Partnership of such
Partnership Interests and has held the Partnership Interest at all times since
will have a positive at risk amount immediately following the Mergers and the
REIT Conversion. However, there can be no assurance that indebtedness incurred
by the Operating Partnership in the future to refinance existing debt would
qualify as "qualified nonrecourse financing" or that the repayment of
obligations assumed by the Operating Partnership in connection with a
refinancing of such obligations would not cause income inclusion to a Limited
Partner under Section 465(e) of the Code. If, however, the Operating
Partnership can obtain the requested ruling from the IRS described above (see
"--IRS Ruling Request Regarding Allocation of Partnership Liabilities"), the
Operating Partnership believes that most, if not all, of the indebtedness
incurred by the Operating Partnership to refinance existing mortgage
indebtedness of the Partnerships should constitute "qualified nonrecourse
financing" for purposes of the "at risk" rules.
The "at risk" provisions of the Code generally do not apply to losses
attributable to real property placed in service by the taxpayer prior to
January 1, 1987, or to losses attributable to a partnership in which the
taxpayer acquired its interests before that date. Pursuant to these
guidelines, the "at risk" rules have not been applicable to date to those
PHLP, MHP and Hanover Limited Partners who acquired their Partnership
Interests at the time of the original offerings of the Partnership Interests
in their Partnerships or at any time prior to January 1, 1987 and who have
held those Partnership Interests since that time. These Limited Partners,
however, will become subject to the "at risk" rules as a result of the Mergers
and their receipt of OP Units in connection therewith (since the OP Units do
not qualify for the "grandfather" rule).
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Unit Redemption Right. The Partnership Agreement provides that, subject to
certain limitations, a Limited Partner may, commencing one year after the
consummation of the Mergers, upon notice to the Operating Partnership, require
the Operating Partnership to redeem all or a portion of such Limited Partner's
OP Units for an amount of cash equal to the deemed fair market value of such
OP Units at the time of redemption (the "Redemption Amount"). See "Description
of OP Units Unit Redemption Right." The Redemption Amount shall equal the
value on a defined valuation date of a number of Common Shares per OP Unit
determined pursuant to a defined "conversion factor," which the Operating
Partnership expects will be one. Thus, it is intended that the Redemption
Amount will be determined by reference to a number of Common Shares equal to
the number of OP Units being redeemed. In addition, Host REIT may, in its sole
and absolute discretion, elect to assume and satisfy the Operating
Partnership's redemption obligation by purchasing from a redeeming Limited
Partner the OP Units that such Limited Partner wishes to redeem for an amount
equal to the Redemption Amount, payable at the option of Host REIT in either
Common Shares or cash. If Host REIT assumes the redemption obligation in the
manner just described, the Partnership Agreement provides that the redemption
will be treated by Host REIT, the Operating Partnership and the redeeming
Limited Partner as a sale of OP Units by such Limited Partner to Host REIT at
the time of such purchase. A Limited Partner's rights described in this
paragraph are referred to as the "Unit Redemption Right."
Based upon certain representations of the Operating Partnership and Host
REIT, Hogan & Hartson, counsel to Host REIT, has opined as follows with
respect to the Unit Redemption Right: (1) the Unit Redemption Right will not
be considered "other consideration" such that its receipt would result in a
Limited Partner being treated under the Disguised Sale Regulations as having
sold all or a portion of his Partnership Interest to the Operating Partnership
in the Mergers; (2) a Limited Partner's exercise of his Unit Redemption Right
more than two years after the date of consummation of the Mergers will not
cause the Mergers to constitute a taxable transaction for the Limited Partner
(or for the other Limited Partners in the same Partnership); and (3) it is
more likely than not that a Limited Partner's exercise of his Unit Redemption
Right more than one year after the date of consummation of the Mergers but
less than two years after such date will not cause the Mergers to constitute a
taxable transaction for the Limited Partner (or for the other Limited Partners
in the same Partnership). As noted previously, however, an opinion of counsel
does not bind the courts, and no assurance can be provided that such opinion
will not be challenged by the IRS or will be sustained by a court if so
challenged.
In the event the Disguised Sale Regulations were determined to apply to a
Limited Partner who exercises his Unit Redemption Right, such Limited Partner
would be treated as though he sold, in a fully taxable transaction, property
to the Operating Partnership on the date of the consummation of the Mergers
and received on such date an obligation of the Operating Partnership to
transfer money or other consideration to him. Such disguised sale treatment
might result in taxable gain being allocated only to the redeeming Limited
Partner. If, however, the Mergers were recharacterized as partnership level
transfers of Partnership assets as described below in "--Alternative
Recharacterizations of the Mergers--Transfer of Partnership Assets," there
could be no assurance that the IRS would not assert that any such gain is
allocable to all partners who were partners in a Partnership with such
redeeming Limited Partner on the date of consummation of the Mergers.
For a discussion of the expected federal income tax effects of a Limited
Partner's exercise of his Unit Redemption Right (other than the effects of
such exercise on the Mergers described in this section), see "Tax Treatment of
Limited Partners Who Hold OP Units Following the Mergers--Tax Treatment of
Exercise of Unit Redemption Right" below.
Impact of Partnership Anti-Abuse Regulations. The United States Treasury has
issued a final regulation (the "Anti-Abuse Rule") under the partnership
provisions of the Code (the "Partnership Provisions") that authorizes the IRS,
in certain "abusive" transactions involving partnerships, to disregard the
form of the transaction and recast it for federal tax purposes as the IRS
deems appropriate. The Anti-Abuse Rule applies where a partnership is formed
or utilized in connection with a transaction (or series of related
transactions) with a principal purpose of substantially reducing the present
value of the partners' aggregate federal tax liability in a manner
inconsistent with the intent of the Partnership Provisions. The Anti-Abuse
Rule states that the Partnership Provisions are intended to permit taxpayers
to conduct joint business (including investment) activities through a
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flexible economic arrangement that accurately reflects the partners' economic
agreement and clearly reflects the partners' income without incurring any
entity-level tax. The purposes for structuring a transaction involving a
partnership are determined based upon all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction. A reduction in the
present value of the partner's aggregate federal tax liability through the use
of a partnership does not, by itself, establish inconsistency with the intent
of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
IRS.
Based upon the foregoing, Hogan & Hartson and Host REIT believe that the
Anti-Abuse Rule will not have any adverse impact on either Host REIT's ability
to qualify as a REIT, or the federal income tax consequences of the Mergers
and the REIT Conversion with respect to the Limited Partners. However, the
Unit Redemption Right does not conform in all respects to the redemption
rights contained in the foregoing example. Moreover, the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based upon an analysis of all of
the facts and circumstances. As a result, there can be no assurance that the
IRS will not attempt to apply the Anti-Abuse Rule to the Operating Partnership
and Host REIT. If the conditions of the Anti-Abuse Rule are met, the IRS is
authorized to take appropriate enforcement action, including disregarding the
Operating Partnership for federal income tax purposes or treating one or more
of its partners as nonpartners (including, perhaps, as shareholders of Host
REIT). If the Operating Partnership were ignored for federal income tax
purposes, the Partnerships could be treated as receiving (and then
distributing to the Limited Partners) Common Shares in the mergers of the
Merger Partnerships into the Partnerships, instead of OP Units, which would be
a fully taxable exchange for the Limited Partners.
Withholding. If a Limited Partner is not considered a U.S. resident for tax
purposes, withholding (in an amount equal to 10% of the "amount realized" by
such Limited Partner, which would include both the value of the OP Units
received and such Limited Partner's share of the liabilities of his
Partnership, as determined for federal income tax purposes) under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA") may be required. As a
condition to the receipt of OP Units in the Mergers, each Limited Partner who
does not want to be subject to such withholding will have to provide to the
Operating Partnership either a certification, made under penalties of perjury,
that it is a United States citizen or resident (or if an entity, an entity
organized under the laws of the United States) or, alternatively, a
withholding certificate from the IRS providing that no withholding is required
with respect to such Limited Partner in connection with the Mergers. A Limited
Partner who is not a United States citizen or resident (or if an entity, not
an entity organized under the laws of the United States) should consult with
his U.S. tax advisor with respect to obtaining a withholding certificate from
the IRS.
Alternative Recharacterizations of the Mergers. As described above, the
Operating Partnership and the General Partners intend that the Mergers will be
treated for federal income tax purposes as the transfer by the partners of
their interests in the Partnerships to the Operating Partnership in exchange
for OP Units (which OP Units may be tendered for Notes, at the election of the
Limited Partner), and the discussion herein assumes that the Mergers will be
so treated. The IRS, however, may seek to recharacterize each Merger as either
(i) the liquidation of a Partnership, followed by the distribution by the
Partnership of its assets to its partners and the subsequent transfers by such
partners of such assets to the Operating Partnership in exchange for OP Units
(which OP Units may be tendered for Notes, at the election of the Limited
Partner), or (ii) the transfer by a Partnership of its assets to the Operating
Partnership in exchange for OP Units and/or Notes and the subsequent
distribution of such OP Units and/or Notes to its partners.
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1. Liquidation of Partnerships. If each of the Mergers were treated as the
liquidation of a Partnership followed by the distribution by the Partnership
of its assets to its partners and the subsequent transfers by such partners of
such assets to the Operating Partnership in exchange for OP Units, the
resulting tax consequences to a Limited Partner would be the same in all
material respects as those described in "--Overview," above. Section 731 of
the Code provides that a distribution by a partnership to a partner of
property, other than "money" (which would include a distribution of
"marketable securities" in certain circumstances), does not result in taxable
gain to the partner. A partner will recognize gain on a partnership
distribution of money only to the extent that the money exceeds the partner's
basis in his partnership interest. If the Partnerships are treated as having
distributed their assets to their partners, the General Partners believe that
any money (or marketable securities, where applicable) deemed distributed to a
Limited Partner whose adjusted basis in his Partnership Interest is equal to
or greater than the Original Limited Partner's Adjusted Basis for his
Partnership Interest would not exceed such Limited Partner's basis in his
Partnership Interest. Accordingly, Section 731 would generally apply to
prevent the recognition of gain by such a Limited Partner upon the
distribution to such Limited Partner of his share of the assets of the
Partnership. (If a Limited Partner's adjusted basis in his Partnership is
materially less than the Original Limited Partner's Adjusted Basis for his
Partnership, then such a Limited Partner might be required to recognize gain
under Section 731 by reason of such a recharacterization.)
Pursuant to Section 732 of the Code, upon receipt of the liquidating
distribution, the Limited Partner would take a basis in the assets received
equal to his basis in his Partnership Interest. The contribution of such
assets by such Limited Partner to the Operating Partnership would be treated
under Section 721 of the Code in the same manner as the contributions by the
Limited Partners of their Partnership Interests to the Operating Partnership
described above in "--Overview." Accordingly, subject to the exceptions
discussed above in "--Overview," Section 721 of the Code would generally apply
to prevent the recognition of gain by a Limited Partner in the Mergers (i) who
does not receive a cash distribution (or a deemed cash distribution resulting
from relief from liabilities) that exceeds such Limited Partner's aggregate
adjusted basis in his OP Units after the Mergers; (ii) whose "at risk" amount
does not go below zero as a result of the Mergers; and (iii) who does not make
the Note Election.
2. Transfer of Partnership Assets. The IRS also may seek to recharacterize
each of the Mergers as the transfer by the Partnership of its assets to the
Operating Partnership in exchange for OP Units (and possibly Notes, to the
extent the Limited Partners in such Partnership make the Note Election) and
the subsequent distribution of such OP Units (and possibly Notes) to its
partners. If the Mergers are treated for federal income tax purposes as
partnership level transfers of Partnership assets to the Operating
Partnership, Host REIT and the Operating Partnership intend to take the
position that, in exchange for such assets, each Partnership would receive
solely OP Units from the Operating Partnership, which the Partnership then
would distribute to its partners. A Limited Partner who exercised his right to
make the Note Election would then redeem the OP Units for a Note. For a
discussion of the treatment of such Limited Partners, see "Tax Treatment of
Limited Partners Who Exercise Their Right to Make the Note Election." If the
partnership level transfer of assets were so treated, the Partnerships would
not recognize gain on such transfers under Section 721 of the Code, and
accordingly, the Limited Partners, subject to the exception discussed in "--
Overview" above, would not recognize gain.
There can be no assurance, however, that the IRS would not assert that in
exchange for its assets, each Partnership should be deemed to have received
from the Operating Partnership a mixture of OP Units and Notes, to the extent
the Limited Partners in such Partnership make the Note Election. If so
treated, a Partnership would recognize gain equal to the difference between
(x) the initial issue price (i.e., the face amount) of the Notes that it would
be deemed to have received from the Operating Partnership and (y) the adjusted
basis of the portion of the assets considered transferred to the Operating
Partnership for the Notes. In that event, all Limited Partners in the
Partnership would recognize their share of such gain, regardless of whether or
not they exercised their right to make the Note Election. Hogan & Hartson is
of the opinion, however, that although the matter is not entirely free from
doubt, the Partnerships should not be treated as receiving from the Operating
Partnership the Notes that are ultimately issued to the Limited Partners who
exercise their right to make the Note Election. As noted previously, however,
an opinion of counsel does not bind the courts, and no assurance can be
provided that such opinion will not be challenged by the IRS or will be
sustained by a court if so challenged.
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Under Section 731 of the Code, the deemed subsequent distribution of OP
Units (and possibly Notes) by each Partnership to its partners would not
result in the recognition of gain by the Limited Partners, unless the
distribution of the OP Units is treated as a distribution of "marketable
securities" under Section 731(c) of the Code.
Section 731(c) of the Code provides that "money" includes marketable
(actively traded) securities, which would include publicly traded REIT shares
or equity interests in another entity that are readily convertible into or
exchangeable for money or marketable securities. The Common Shares that can be
issued to a Limited Partner upon exercise of the Unit Redemption Right (and
which in any event will determine the amount received by a Limited Partner
upon such exercise) will be marketable securities. Accordingly, the OP Units
might be considered "exchangeable for money or marketable securities" and
therefore treated as "money" under Section 731(c). Regulations under Section
731(c) provide, however, that a distribution of a marketable security will not
be treated as a distribution of "money" under Section 731(c) if (i) the
security was acquired by the partnership in a nonrecognition transaction; (ii)
the value of any marketable securities and money exchanged by the partnership
(that is, by a Partnership) in the nonrecognition transaction was less than 20
percent of the value of all the assets exchanged in such transaction; and
(iii) the partnership distributes the security within five years of the date
the security was acquired by the partnership. The Operating Partnership and
General Partners believe that, if the Mergers were characterized in this
manner, the distributions of OP Units by the Partnerships would not be treated
as distributions of "money" because the conditions described above will be
satisfied. Hence, even if the Mergers were recharacterized in this manner, the
Limited Partners should not be required to recognize gain under Section 731(c)
of the Code on the deemed distributions by the Partnerships of the OP Units.
Effect of Subsequent Events. In addition to any gain that might be
recognized by the Limited Partners at the time of the Mergers, a variety of
future events and transactions could cause some or all of the Limited Partners
holding OP Units to recognize part or all of the taxable gain that otherwise
has been deferred through the Mergers, including, but not limited to, the
following:
(i) the sale or other taxable disposition of one or more of the
individual Hotels (see "--Tax Treatment of Limited Partners Who Hold OP
Units Following the Mergers--Sale of Individual Hotels" below);
(ii) the reduction in the amount of existing nonrecourse liabilities
secured by one or more of the individual Hotels as a result of a
refinancing or repayment thereof, or any other refinancing or repayment of
nonrecourse liabilities with the proceeds of public or private debt
financing obtained by the Operating Partnership, which debt financing is
not secured by individual assets of the Operating Partnership or is secured
by assets of the Operating Partnership other than those that were owned by
a Partnership immediately prior to the Mergers (except to the extent
covered by the ruling from the IRS that the Operating Partnership is
seeking, as described in "IRS Ruling Request Regarding Allocation of
Partnership Liabilities" above) (see "--Tax Treatment of Limited Partners
Who Hold OP Units Following the Mergers--Refinancing of the Indebtedness
Secured by Individual Hotels" below);
(iii) the issuance of additional OP Units, including in connection with
either the issuance of Common Shares or other equity interests by Host REIT
or the acquisition of additional properties in exchange for OP Units or
other equity interests in the Operating Partnership;
(iv) an increase to the tax basis of the Hotels resulting from capital
expenditures; and
(v) the elimination over time of the disparity between the current tax
basis of the Hotels and the "book basis" of the Hotels based upon their
fair market values at the time of the Mergers (see "--Tax Treatment of
Limited Partners Who Hold OP Units Following the Mergers--Tax Allocations
with Respect to BookTax Difference on Contributed Hotels" below), which
could have the effect of reducing the amount of indebtedness allocable to
the Limited Partners for basis purposes and therefore can result in deemed
cash distributions.
In addition, Limited Partners can expect that the aggregate adjusted tax
basis in their OP Units following the Mergers will be substantially lower
following the Mergers than such Limited Partners' aggregate adjusted basis in
their Partnership Interests immediately before the Mergers. See "--Tax
Treatment of Limited Partners
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Who Hold OP Units Following the Mergers--Initial Tax Basis of OP Units" below.
The Limited Partners of Atlanta Marquis, Desert Springs, MHP and PHLP can
expect to receive taxable distributions of cash and taxable deemed cash
distributions resulting from the reduction of their share of Operating
Partnership and Partnership nonrecourse liabilities sooner than would have
been the case if the Mergers had not occurred. See "--Relief From
Liabilities/Deemed Cash Distributions" above.
Certain Hotels (including all of the Blackstone Hotels) will be covered by
agreements with third parties that will restrict the Operating Partnership's
ability to dispose of those properties or refinance their debt. In addition,
if Atlanta Marquis chooses to participate in the Mergers, the Operating
Partnership will succeed to an existing agreement that will restrict its
ability to dispose of the Hotel owned by Atlanta Marquis or refinance the
indebtedness secured by such Hotel for approximately 11 1/2 years following
the Mergers without compensating certain outside partners for the resulting
adverse tax consequences. As for the remaining properties (including all of
the Hotels owned by the Partnerships), the Partnership Agreement does not
impose any restrictions on the Operating Partnership's ability to dispose of
the Hotels or to refinance debt secured by the Hotels (or to direct that the
Partnerships engage in such transactions). In addition, Host REIT, as general
partner of the Operating Partnership, is not required to take into account the
tax consequences to the limited partners in deciding whether to cause the
Operating Partnership to undertake specific transactions, and such limited
partners have no right to approve or disapprove such transactions. See
"Description of OP Units-- Sales of Assets."
TAX TREATMENT OF LIMITED PARTNERS WHO EXERCISE THEIR RIGHT TO MAKE THE NOTE
ELECTION
A Limited Partner who exercises his right to make the Note Election and
receives a Note in exchange for OP Units in connection with the Mergers will
be treated as having made a taxable disposition of his Partnership Interest.
The amount realized in connection with such disposition will equal the sum of
the "issue price" of the Note (i.e., the face amount of the Note) plus the
portion of the Partnership's liabilities allocable to the Limited Partner for
federal income tax purposes immediately prior to the disposition of the
Partnership Interest. To the extent the amount realized exceeds the Limited
Partner's adjusted basis in his Partnership Interest, the Limited Partner will
recognize gain. For a discussion of the federal income tax rates applicable to
the net capital gain from the sale of a capital asset, see "--Tax Treatment of
Limited Partners Who Hold OP Units Following the Mergers--Disposition of OP
Units by Limited Partners."
A Limited Partner who exercises his right to make the Note Election may be
eligible to defer at least a portion of that gain under the "installment sale"
rules. Those rules, however, may not permit the Limited Partner to defer all
of the gain, and to the extent that the face amount of the Note outstanding at
the end of the taxable year (plus any other installment obligations received
by the Limited Partner during the year) exceeds $5,000,000, will require that
the Limited Partner who defers gain pay to the IRS interest on the resulting
tax that has been deferred. The Limited Partner, for instance, will not be
eligible to defer gain to the extent that such gain would be taxed as ordinary
income under the depreciation recapture provisions of the Code. In addition,
to the extent that the Limited Partner's share of Partnership liabilities
exceeds his adjusted tax basis in his Partnership Interest immediately prior
to the Mergers (that is, to the extent the Limited Partner has a "negative
capital account" for tax purposes), the Limited Partner will not be eligible
to defer that amount of gain recognized upon the receipt of the Note (and,
thus, a Limited Partner who has a "negative capital account" and makes the
Note Election will recognize "phantom income" to the extent of that "negative
capital account"). Lastly, if a Limited Partner disposes of his Note, any gain
that had been deferred would be recognized in the year of disposition.
The gain, if any, required to be recognized by a Limited Partner in
connection with the Note Election can be offset by unused passive activity
losses from his Partnership and other investments. For purposes of determining
the gain recognized by a Limited Partner as a result of making the Note
Election, an Original Limited Partner's Adjusted Basis will reflect such
Limited Partner's share of the syndication costs incurred by his Partnership
at formation.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR LIMITED PARTNER WHO EXERCISES
HIS RIGHT TO MAKE THE NOTE ELECTION COULD HAVE A MATERIAL IMPACT ON THE TAX
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CONSEQUENCES OF THE MERGERS AND THE SUBSEQUENT OWNERSHIP AND DISPOSITION OF
NOTES. THEREFORE, IT IS ESSENTIAL THAT EACH LIMITED PARTNER CONSIDERING MAKING
THE NOTE ELECTION CONSULT WITH HIS OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH PARTNER'S RESPECTIVE
PERSONAL TAX SITUATION, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS
OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
TAX TREATMENT OF LIMITED PARTNERS WHO HOLD OP UNITS FOLLOWING THE MERGERS
Income and Deductions in General. Each Limited Partner that holds OP Units
following the Mergers will be required to report on his income tax return his
allocable share of income, gains, losses, deductions and credits of the
Operating Partnership. Such items must be included on the Limited Partner's
federal income tax return without regard to whether the Operating Partnership
makes a distribution of cash or other assets to the Limited Partner. No
federal income tax will be payable by the Operating Partnership.
Treatment of Operating Partnership Distributions. Distributions of money
(including, for such purposes, deemed distributions resulting from decreases
in a Limited Partner's share of Operating Partnership liabilities) by the
Operating Partnership to a Limited Partner generally will not be taxable to
such Limited Partner for federal income tax purposes to the extent of the
Limited Partner's aggregate basis in his OP Units immediately before the
distribution. Distributions of money in excess of such basis generally will be
considered to be gain in the amount of such excess, a portion of which may be
ordinary income. As discussed above (see "Tax Consequences of the Mergers
Relief from Liabilities/Deemed Cash Distribution"), any reduction in a Limited
Partner's share of the Operating Partnership's nonrecourse liabilities, either
through repayment, refinancing with recourse liabilities, refinancing with
nonrecourse liabilities secured by the other Hotels or otherwise, will be
treated as a distribution of money to such Limited Partner. An issuance of
additional OP Units by the Operating Partnership without a corresponding
increase in debt, which causes a decline in the overall debt to market
capitalization ratio of the Operating Partnership, will also decrease the
existing Limited Partners' share of nonrecourse liabilities of the Operating
Partnership thus resulting in a corresponding deemed distribution of money.
A non-pro rata distribution of money or property may result in ordinary
income to a Limited Partner, regardless of his basis in his OP Units, if such
distribution reduces the Limited Partner's share of the Operating
Partnership's "unrealized receivables" (including depreciation recapture)
and/or "substantially appreciated inventory items" (both as defined in Section
751 of the Code) (collectively, "Section 751 Assets"). To that extent, the
Limited Partner will be treated as having received a distribution of his
proportionate share of the Section 751 Assets and having exchanged such assets
with the Operating Partnership in return for a portion of the actual
distribution made equal to the fair market value of his proportionate share of
the Section 751 Assets. This latter deemed exchange will generally result in
the Limited Partner's realization of ordinary income under Section 751(b) of
the Code. Such income will equal the excess of (i) the portion of such
distribution deemed received in exchange for his proportionate share of the
Section 751 Assets over (ii) the Limited Partner's basis in the share of such
Section 751 Assets deemed relinquished in the exchange. Although the Operating
Partnership does not currently expect to make an actual non-pro rata
distribution of money or property, a deemed distribution of money resulting in
connection with the Mergers and the REIT Conversion or upon the Operating
Partnership's subsequent issuance of additional OP Units (as a result of a
reduction in nonrecourse liabilities or the shifting of nonrecourse
liabilities from existing partners to new partners or Host REIT) would
constitute a non-pro rata distribution for purposes of Section 751(b).
The IRS has ruled that the change in an existing partner's share of Section
751 Assets that would normally occur upon such an issuance, when coupled with
such deemed distribution of money, will cause the application of Section
751(b) of the Code. The Partnership Agreement provides, however, that
recapture income will be allocated, to the extent possible, to the partners of
the Operating Partnership who were allocated the deductions giving rise to the
treatment of gain as recapture income (including by reason of any deductions
previously allocated to the Limited Partners as holders of Partnership
Interests). Such allocations, if respected, along with allocations in
accordance with Section 704(c) principles, should minimize the risk of
recognition of ordinary
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income under Section 751(b) of the Code upon an Operating Partnership offering
of additional interests. The IRS may contend, however, that such a deemed
exchange of Section 751 Assets has occurred and, therefore, that ordinary
income must be realized under Section 751(b) of the Code by partners whose
percentage interests in the Operating Partnership have decreased due to such
offering of additional interests.
Initial Tax Basis of OP Units. In general, a Limited Partner will have an
initial tax basis in his OP Units received in the Mergers ("Initial Basis")
equal to the aggregate basis in his Partnership Interest, adjusted as set
forth below to reflect the effects of the Mergers (that is, reduced to reflect
any deemed cash distribution resulting from a reduction in the Limited
Partner's share of Partnership liabilities and increased to reflect any income
or gain required to be recognized in connection with the Mergers (including
income attributable to the sale of personal property by certain Partnerships
in connection with the REIT Conversion)).
If a Limited Partner's share of nonrecourse liabilities decreases as a
result of the Mergers (see "--Tax Consequences of the Mergers--Relief from
Liabilities/Deemed Cash Distribution"), such Limited Partner may have an
Initial Basis in his OP Units that is significantly lower than the basis in
his Partnership Interest immediately before the Mergers. A Limited Partner
whose basis is so reduced can expect to receive taxable distributions of cash
and taxable deemed distributions of cash resulting from a reduction of such
Limited Partner's share of Operating Partnership nonrecourse liabilities
sooner than he would have if such basis reduction had not occurred. Such basis
reduction also will affect the Limited Partner's ability to deduct his share
of any Operating Partnership tax losses. For the effect on a Limited Partner
of a reduction in basis that may result from the Mergers, see "--Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash Distribution"
and "--Treatment of Operating Partnership Distributions" above and "--
Limitations on Deductibility of Losses" below.
A Limited Partner's Initial Basis in his OP Units generally will be
increased by any capital contributions made by the Limited Partner to the
Operating Partnership and by the Limited Partner's share of (a) Operating
Partnership taxable income and (b) subsequent increases in nonrecourse
liabilities incurred by the Operating Partnership, if any. Generally, a
Limited Partner's Initial Basis in his OP Units will be decreased (but not
below zero) by his share of (i) Operating Partnership distributions, (ii)
subsequent decreases in liabilities of the Operating Partnership, including
any decrease in his share of nonrecourse liabilities of the Operating
Partnership (see "--Tax Consequences of the Mergers--Relief from
Liabilities/Deemed Cash Distribution"), (iii) losses of the Operating
Partnership and (iv) nondeductible expenditures of the Operating Partnership
that are not chargeable to capital.
Allocations of Operating Partnership Income, Gain, Loss and Deduction. The
Partnership Agreement provides that if the Operating Partnership operates at a
net loss, net losses shall be allocated to Host REIT and the limited partners
in proportion to their respective percentage ownership interests in the
Operating Partnership, provided that net losses that would have the effect of
creating a deficit balance in a limited partner's capital account (as
specially adjusted for such purpose) ("Excess Losses") will be reallocated to
Host REIT, as general partner of the Operating Partnership. The Partnership
Agreement also provides that, if the Operating Partnership operates at a net
profit, net income shall be allocated first to Host REIT to the extent of
Excess Losses with respect to which Host REIT has not previously been
allocated net income and any remaining net income shall be allocated in
proportion to the respective percentage ownership interests of Host REIT and
the limited partners. Finally, the Partnership Agreement provides that if the
Operating Partnership has preferred units outstanding, income will first be
allocated to such preferred units to the extent necessary to reflect and
preserve the economic rights associated with such preferred units.
Under Section 704(b) of the Code, a partnership's allocation of any item of
income, gain, loss or deduction to a partner will be given effect for federal
income tax purposes so long as it has "substantial economic effect," or is
otherwise in accordance with the "partner's interest in the partnership." If
an allocation of an item does not satisfy this standard, it will be
reallocated among the partners on the basis of their respective interests in
the partnership, taking into account all facts and circumstances. The
Operating Partnership believes that the
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allocations of items of income, gain, loss and deduction under the Partnership
Agreement, as described above, will be considered to have substantial economic
effect under the applicable Treasury Regulations.
Tax Allocations with Respect to Book-Tax Difference on Contributed Hotels.
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property and the
adjusted tax basis of such property at the time of contribution (referred to
as "Book-Tax Difference"). It is anticipated that, at the time of the Mergers,
there will exist a substantial amount of Book-Tax Difference with respect to
each of the Hotels. Because of prior depreciation deductions, this will be the
case even if a particular Hotel has not appreciated in value in economic
terms.
The Partnership Agreement requires allocations of income, gain, loss and
deduction attributable to the Hotels with respect to which there is a Book-Tax
Difference be made in a manner that is consistent with Section 704(c) of the
Code. The Partnership Agreement provides Host REIT, as general partner, with
substantial latitude in determining how to apply the Section 704(c)
requirements to the Operating Partnership. Host REIT generally intends to use
the "traditional method" described in the Treasury Regulations under Section
704(c), with a provision for a curative allocation of gain on sale to the
extent prior allocations of depreciation with respect to a specific Hotel were
limited by the "ceiling rule" applicable under the traditional method
(although there may be certain exceptions). Under the traditional method, in
the case of a Hotel with respect to which there is a Book-Tax Difference, a
Limited Partner who was a Limited Partner in the Partnership that is deemed to
have contributed such Hotel will be allocated less depreciation (or perhaps no
depreciation) with respect to such Hotel (and thus more taxable income) than
would be the case if the Mergers had not occurred and the Limited Partner
continued to hold his Partnership Interest. For such Limited Partner, these
incremental allocations of income should be offset, at least in part, by
depreciation deductions allocable to such Limited Partner with respect to (i)
the Hotels held by the Operating Partnership through its ownership interests
in Hotel Partnerships in which the Limited Partner was not a limited partner
prior to the Mergers and (ii) the Hotels contributed by Host and the
Blackstone Entities in connection with the Mergers. Nevertheless, it is
possible that, as a result of these various allocations, the income allocable
to a Limited Partner from the Operating Partnership (and, possibly, in the
case of Limited Partners from some Partnerships, the resulting tax liability
attributable to such income) could equal or exceed, perhaps by a substantial
amount, the actual cash distributions to be received by the Limited Partner
from the Operating Partnership.
In light of the complexity of the governing rules affecting the calculation
and allocation of depreciation with respect to properties contributed to a
partnership, particularly when a number of those properties are subject to the
separate adjustments required in connection with a technical termination under
Section 708 of the Code, the number of Hotels that the Operating Partnership
will be acquiring in connection with the Mergers and the REIT Conversion and
the impact on these calculations of other outside events, including equity
offerings by Host or Host REIT and other acquisitions undertaken by Host, Host
REIT or the Operating Partnership prior to or in connection with the REIT
Conversion, the Operating Partnership and the General Partners believe that it
is impossible to predict with any degree of precision the impact that the
Mergers and the REIT Conversion will have on the future depreciation allocable
by the Operating Partnership to the Limited Partners who participate in the
Mergers.
If a Hotel with a Book-Tax Difference is sold, any Book-Tax Difference
remaining at the time the Hotel is sold would be required to be allocated
exclusively to the partners who were partners in the Partnership that owned
that Hotel, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Operating Partnership (and
likely would be retained by the Operating Partnership, rather than distributed
to holders of OP Units and Common Shares of Host REIT). Under the "traditional
method" of allocation that will be used by the Operating Partnership, however,
the gain required to be specially allocated under these rules would generally
not exceed the gain that is actually recognized by the Partnership on the sale
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and allocated to the Operating Partnership (although the Partnership Agreement
provides that the Operating Partnership may make a curative allocation of gain
on sale to the extent prior allocations of depreciation with respect to a
specific Partnership Hotel were limited by the "ceiling rule" applicable under
the traditional method, which may cause the gain allocated to the former
partners of a Partnership that sells a Hotel after the Mergers to exceed the
gain actually recognized by the Partnership and allocated to the Operating
Partnership). For a discussion of the impact to the Limited Partners of the
Book-Tax Difference from a sale of a Hotel, see "--Sale of Individual Hotels"
below.
The Partnership Agreement also requires that any gain allocated to the
Limited Partners (i) upon the sale or other taxable disposition of any
Operating Partnership asset or (ii) due to the allocation of gain to the
Operating Partnership from its interest in a Partnership, shall, to the extent
possible, and after taking into account other required allocations of gain
pursuant to the Partnership Agreement, be characterized as recapture income in
the same proportions and to the same extent that such Limited Partners have
been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as recapture income (including by reason of any
deductions previously allocated to them as holders of Partnership Interests).
Sale of Individual Hotels. The current value of each of the Hotels exceeds
its adjusted basis by a significant amount. Therefore, the Hotels owned by the
Partnerships have significant Book-Tax Differences. In the event Host REIT
were to cause a Partnership to sell a Hotel, the former Partners in that
Partnership who hold OP Units would be specially allocated by the Operating
Partnership an amount of taxable gain equal to the Hotel's Book-Tax Difference
at the time of the sale, which will equal the Book-Tax Difference at the time
of the Mergers, adjusted as described above in "Tax Allocations with Respect
to Book-Tax Difference on Contributed Hotels." This special allocation will be
made to the former Limited Partners in that Partnership in accordance with the
manner in which gain would have been allocated under the applicable
partnership agreement if the Partnership had sold all of its assets at the
time of the Mergers for an amount equal to the aggregate Appraised Value of
its Hotels. Such former Limited Partners would report the additional gain on
their individual federal income tax returns. In addition, such former Limited
Partners would not be entitled to any special distributions from the Operating
Partnership in connection with such a sale, and thus they would not
necessarily receive cash distributions from the Operating Partnership
sufficient to pay such additional taxes. Although certain Hotels (including
all of the Blackstone Hotels and the Hotel owned by Atlanta Marquis) will be
covered by agreements with third parties that will restrict the Operating
Partnership's ability to dispose of those properties, the Partnership
Agreement does not impose any restriction upon the Operating Partnership's
ability to cause a Partnership to sell any of the individual Hotels owned by
the Partnerships. If a former Limited Partner is required to recognize gain
from the sale of a Hotel, however, such a Limited Partner with passive losses
or passive loss carryforwards may be able to use such losses to offset such
gain, unless the Operating Partnership is treated as a publicly traded
partnership for federal income tax purposes. See "--Tax Status of the
Operating Partnership" above.
The estimated Book-Tax Difference per Partnership Unit with respect to the
Hotels owned by each of the Partnerships (computed assuming that the value of
the OP Units received in the Mergers equals, but does not exceed, the Exchange
Value of each Partnership) is set forth below. The amount of the Book-Tax
Difference could be substantially different for a Limited Partner in a
Partnership who acquired his Partnership Interest subsequent to the formation
of such Partnership.
<TABLE>
<CAPTION>
704(C)
BOOK-TAX DIFFERENCE
PARTNERSHIP (PER PARTNERSHIP UNIT)
- ----------- ----------------------
<S> <C>
Atlanta Marquis.......................................... $202,346
Chicago Suites........................................... 14,933
Desert Springs........................................... 57,753(1)
Hanover.................................................. 56,489(2)
MDAH..................................................... 71,013(3)
MHP...................................................... 221,883
MHP2..................................................... 183,556(4)
PHLP..................................................... 55,892
</TABLE>
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- --------
(1) For a Limited Partner who purchased his Partnership Unit for cash. $57,552
for a Limited Partner who purchased his Partnership Unit for an
installment note.
(2) For a Limited Partner who purchased his Partnership Unit for cash. $44,089
for a Limited Partner who purchased his Partnership Unit for an
installment note.
(3) For a Limited Partner who purchased his Partnership Unit for cash and did
not elect to reduce his basis in such Partnership Unit to defer the
recognition of "cancellation of debt income" in 1993 ($76,165 for a
Limited Partner who paid cash and did elect to reduce basis). $71,953 for
a Limited Partner who purchased his Partnership Unit for an installment
note and did not reduce basis ($77,105 for a Limited Partner who purchased
an installment note and did elect to reduce basis).
(4) For a Limited Partner who purchased his Partnership Unit for cash.
$182,646 for a Limited Partner who purchased his Partnership Unit for an
installment note.
Refinancing of the Indebtedness Secured by Individual Hotels. As described
above under "Tax Consequences of the Mergers--Relief from Liabilities/Deemed
Cash Distribution," Host REIT does not expect that a participating Limited
Partner whose adjusted basis in his Partnership Interest is equal to or
greater than the Original Limited Partner's Adjusted Basis for his Partnership
Interest would recognize taxable gain at the time of the Mergers as a result
of relief from liabilities resulting in a taxable deemed distribution in
connection with the Mergers (based upon the assumptions set forth under the
caption "--Assumptions Used in Determining Tax Consequences of the Mergers"
above). However, there can be no assurance that any future refinancing of the
indebtedness securing the Hotels would not result in a reduction of the
liabilities allocated to the Limited Partners, thus resulting in a taxable
deemed distribution. Although certain Hotels (including all of the Blackstone
Hotels and the Hotel owned by Atlanta Marquis) will be covered by agreements
with third parties which will restrict the Operating Partnership's ability to
refinance the indebtedness encumbering those Hotels, the Partnership Agreement
does not impose any restriction on the Operating Partnership's ability to
refinance (or cause a Partnership to refinance) the indebtedness secured by
any of the Hotels owned by the Partnership. Except as described herein, the
Operating Partnership has no present plan to prepay any of the indebtedness
secured by the Hotels owned by the Partnerships. The Operating Partnership,
however, will have to repay mortgage indebtedness securing the Hotels owned by
the Partnerships at the time such indebtedness matures. There can be no
assurance that, at such time, the Operating Partnership will be able to obtain
nonrecourse mortgage indebtedness secured only by those Hotels in an amount
sufficient to avoid a deemed cash distribution to the former Limited Partners
in that Partnership. (These considerations are particularly relevant with
respect to the PHLP Limited Partners, where the existing mortgage
indebtedness, which matures in December 1999, will need to be refinanced
within one year following the Mergers.) Moreover, it is important to note that
the Operating Partnership's current long-term financing strategy is to have as
little debt as possible that is secured by individual Hotels and to have as
much of its debt as is possible in the form of unsecured debt, held either by
the public or by institutional investors, which debt may or may not be
recourse to Host REIT, as general partner of the Operating Partnership.
Depending upon its terms, such debt may not qualify as either "nonrecourse
liabilities" for purposes of the rules under Section 752 of the Code (see "Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash
Distribution") or as "qualified nonrecourse financing" for purposes of the "at
risk" rules (see "Tax Consequences of the Mergers--Section 465(e) Recapture").
As described above (see "Tax Consequences of the Mergers IRS--Ruling Request
Regarding Allocation of Partnership Liabilities"), the Operating Partnership
has requested from the IRS a ruling to the effect that such unsecured
indebtedness of the Operating Partnership that is issued initially to
institutional investors and is not recourse to Host REIT (i) would qualify as
"nonrecourse liabilities" for purposes of Code Section 752, (ii) to the extent
the proceeds thereof are applied to repay existing nonrecourse mortgage
indebtedness secured by one or more Hotels, would be considered to be
"secured" by those Hotels for purposes of computing the Section 704(c) Minimum
Gain with respect to such Hotels (and thus would be allocable under "tier two"
to the former Limited Partners in the Partnership owning those Hotels), and
(iii) would constitute "qualified nonrecourse financing" secured by such
Hotels for purposes of Code Section 465.
Generally, the maximum amount of gain that a Limited Partner could recognize
as a result of a reduction in nonrecourse liabilities is (i) the amount by
which his share of the liabilities of his Partnership (determined as
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set forth in "Tax Consequences of the Mergers--Relief from Liabilities/Deemed
Cash Distribution") immediately prior to the Mergers exceeds his adjusted
basis in his Partnership Interest immediately prior to the Mergers (which
amount generally should be reflected as a "negative capital account" with
respect to the Partnership Interest held at the time of the Mergers), plus
(ii) actual cash distributions received with respect to OP Units subsequent to
the Mergers to the extent such cash distributions exceed the net taxable
income allocated to the Limited Partner with respect to the OP Units. The
table below sets forth the estimated "capital accounts" for the Limited
Partners in each of the Partnerships (per Partnership Unit) as of the time of
the Mergers (computed assuming that each Limited Partner's adjusted basis in
his Partnership Interest is the same as the Original Limited Partner's
Adjusted Basis for his Partnership, as described under "--Assumptions Used in
Determining Tax Consequences of the Mergers" above).
<TABLE>
<CAPTION>
ESTIMATED
CAPITAL ACCOUNT
PARTNERSHIP (PER PARTNERSHIP UNIT)
- ----------- ----------------------
<S> <C>
Atlanta Marquis.......................................... $(156,921)
Chicago Suites........................................... $ 18,538
Desert Springs........................................... $ (16,873)(1)
Hanover.................................................. $ 66,713(2)
MDAH..................................................... $ 38,203(3)
MHP...................................................... $ (80,458)
MHP2..................................................... $ 53,778(4)
PHLP..................................................... $ (50,852)
</TABLE>
- --------
(1) For a Limited Partner who purchased his Partnership Unit for cash.
($16,672) for a Limited Partner who purchased his Partnership Unit for an
installment note.
(2) For a Limited Partner who purchased his Partnership Unit for cash. $79,113
for a Limited Partner who purchased his Partnership Unit for an
installment note.
(3) For a Limited Partner who purchased his Partnership Unit for cash and did
not elect to reduce his basis in such Partnership Unit to defer the
recognition of "cancellation of debt income" in 1993 ($33,051 for a
Limited Partner who paid cash and did elect to reduce basis). $37,263 for
a Limited Partner who purchased his Partnership Unit for an installment
note and did not reduce basis ($32,111 for a Limited Partner who purchased
an installment note and did elect to reduce basis).
(4) For a Limited Partner who purchased his Partnership Unit for cash. $54,688
for a Limited Partner who purchased his Partnership Unit for an
installment note.
Dissolution of the Operating Partnership. In the event of the dissolution of
the Operating Partnership, see "Description of OP Units--Dissolution, Winding
Up and Termination" above, a distribution of Operating Partnership property
(other than money) will not result in taxable gain to a holder of OP Units
(except to the extent provided in Sections 737, 704(c)(1)(B) and 731(c) of the
Code), and a Limited Partner that holds OP Units at the time of the
dissolution will hold such distributed property with a basis equal to the
adjusted basis of his OP Units, reduced by any money distributed in
liquidation. The liquidation of the Operating Partnership, however, will be
taxable to a Limited Partner that holds OP Units to the extent that any money
distributed in liquidation (including any money deemed distributed as a result
of relief from liabilities) exceeds such Limited Partner's adjusted tax basis
in his OP Units. If Host REIT were to issue to Limited Partners Common Shares
of Host REIT upon dissolution of the Operating Partnership, a Limited Partner
likely would be treated as if it had exchanged his OP Units for such Common
Shares and would recognize gain or loss as if such OP Units were sold in a
fully taxable exchange. See " --Tax Treatment of Exercise of Unit Redemption
Right" below.
Limitations on Deductibility of Losses; Treatment of Passive Activities and
Portfolio Income. The passive loss limitations generally provide that
individuals, estates, trusts and certain closely held corporations and
personal service corporations can only deduct losses from passive activities
(generally activities in which the taxpayer does not materially participate,
which would include the investment in the Operating Partnership for Limited
Partners) to the extent that such losses are not in excess of the taxpayer's
income from passive activities
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or investments. A Limited Partner will be able to offset losses from other
passive activities (including the Partnerships) against income from the
Operating Partnership that is considered passive income (but not portfolio
income) so long as the Operating Partnership is not treated as a publicly
traded partnership. The Operating Partnership and the General Partners
believe, however, that there is a substantial risk that the Operating
Partnership will be treated as a publicly traded partnership for purposes of
the passive loss rules. See " --Tax Status of the Operating Partnership"
above. In the event that the Operating Partnership is classified as a publicly
traded partnership, any losses or deductions of the Operating Partnership
allocable to a Limited Partner could not be used to offset passive income from
other passive activities. Similarly, losses from other passive activities
(including losses attributable to the Partnerships for periods prior to the
Mergers) could not be applied to offset income of the Operating Partnership
allocated to a Limited Partner. It is estimated that each Limited Partner in
Atlanta Marquis, Chicago Suites, Desert Springs, MDAH and MHP who purchased
his Partnership Interest at the time of the original offering of such
Interests, has held such Partnership Interest continuously since that time and
whose Partnership Interest has been his only investment in a passive activity
would have a passive activity loss carryforward as of December 31, 1998.
In addition to the foregoing limitations, a Limited Partner who holds OP
Units may not deduct from taxable income his share of Operating Partnership
losses, if any, to the extent that such losses exceed the lesser of (i) the
adjusted tax basis of his OP Units at the end of the Operating Partnership's
taxable year in which the loss occurs and (ii) the amount for which such
holder is considered "at risk" at the end of that year. In general, a Limited
Partner will initially be "at risk" to the extent of the basis in his OP Units
(unless he borrowed amounts on a nonrecourse basis to acquire or carry his
Partnership Interest), including for such purpose only such Limited Partner's
share of the Operating Partnership's liabilities, as determined under Section
752 of the Code, that are considered "qualified nonrecourse financing" for
purposes of the "at risk" rules. The Operating Partnership believes that the
existing debt secured by the Hotels (to the extent not guaranteed by or loaned
by Host or one of the General Partners) will constitute qualified nonrecourse
financing for this purpose, but there can be no assurance that the IRS might
not contend otherwise. There can be no assurance that debt incurred by the
Operating Partnership in the future to refinance existing debt would be
considered qualified nonrecourse financing. After consummation of the Mergers,
in general, a Limited Partner's "at risk" amount will increase or decrease as
the adjusted basis in his OP Units increases or decreases. Losses disallowed
to a holder of OP Units as a result of these rules can be carried forward and
may be allowable to such holder to the extent that his adjusted basis or "at
risk" amount (whichever was the limiting factor) is increased in a subsequent
year. The "at risk" rules apply to an individual partner, an individual
shareholder of a corporate partner that is an S corporation and a corporate
partner if fifty percent (50%) or more of the value of stock of such corporate
partner is owned directly or indirectly by five or fewer individuals at any
time during the last half of the taxable year.
The "at risk" provisions of the Code generally do not apply to losses
attributable to real property placed in service prior to January 1, 1987, by
the taxpayer or to losses attributable to a partnership in which the taxpayer
acquired its interests before that date. Pursuant to these rules, the "at
risk" rules have not been applicable to date to those Hanover, MHP and PHLP
Limited Partners who acquired their Partnership Interests at the time of the
original offerings of the Interests in their Partnerships and who have held
those Partnership Interests since that time. These Limited Partners, however,
will become subject to the "at risk" rules as a result of the Mergers and
their receipt of OP Units in connection therewith (since the OP Units do not
qualify for the "grandfather" rule).
Section 754 Election. The Operating Partnership will make the election
permitted by Section 754 of the Code effective for its first taxable year
commencing immediately after the REIT Conversion. It is irrevocable unless the
consent of the IRS is obtained. The election will generally permit a purchaser
of OP Units in 1999 or thereafter, such as Host REIT when it acquires OP Units
from Limited Partners upon a redemption of OP Units, to adjust its share of
the basis in the Operating Partnership's properties ("inside basis") pursuant
to Section 743(b) of the Code to fair market value (as reflected by the value
of consideration paid for the OP Units), as if such purchaser had acquired a
direct interest in the Operating Partnership's assets. The Section 743(b)
adjustment is attributed solely to a purchaser of OP Units and is not added to
the bases of the Operating Partnership's assets
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<PAGE>
associated with all of the holders of OP Units in the Operating Partnership.
An acquirer of OP Units (such as Host REIT when it acquires OP Units from
Limited Partners upon a redemption of OP Units) that obtains a Section 743(b)
adjustment by reason of such acquisition will be allowed depreciation with
respect to such adjustment beginning as of the date of the exchange as if the
adjustment were new property placed in service as of that date. A similar
basis adjustment would be permitted for the Operating Partnership when there
is a distribution or a deemed distribution to a holder of OP Units that
results in the recognition of gain to such holder of OP Units.
Effect of the Mergers on Depreciation. Under Section 708(b)(1)(B) of the
Code, a partnership will be considered to have been terminated if, within a
twelve-month period, there is a sale or exchange of 50% or more of the
interests in partnership capital and profits. As a result of the Mergers, each
of the Partnerships will terminate under Section 708(b)(1)(B) of the Code.
Section 168(i)(7) of the Code provides, in effect, that when a partnership
terminates under Section 708(b)(1)(B) of the Code, the partnership must begin
new depreciation periods for its property. As a result, the remaining bases of
the Hotels owned by the Partnerships acquired by the Operating Partnership in
the Mergers will be depreciated over 39 years, rather than over the remaining
current life of the Hotels (which range from less than one year to 39 years).
The Partnerships are presently depreciating such remaining bases over shorter,
in some cases significantly shorter, periods of time. Thus, the Mergers will
adversely affect the computation of depreciation deductions with respect to
the Hotels owned by the Participating Partnerships (as well as certain other
Private Partnerships in which the Operating Partnership will acquire an
interest in connection with the REIT Conversion), as compared to the
computation of depreciation deductions with respect to the Hotels owned by
such Partnerships prior to the Mergers. The effect upon the depreciation
deductions to be taken with respect to the Hotels held by each such
Partnership will (in a majority, but not in all, of the cases) be significant.
Disposition of OP Units by Limited Partners. If OP Units are sold or
otherwise disposed of, the determination of gain or loss from the sale or
other disposition will be based upon the difference between the amount
realized and the tax basis for such OP Units. See "--Initial Tax Basis of OP
Units" above. Upon the sale of OP Units, the "amount realized" will be
measured by (i) the sum of the cash and fair market value of other property
received for the OP Units plus (ii) the portion of the Operating Partnership's
liabilities considered allocable to the OP Units sold. Similarly, upon a gift
of OP Units, a Limited Partner will be deemed to have received cash equal to
the portion of the Operating Partnership's nonrecourse liabilities considered
allocable to such OP Units. To the extent that the amount of cash or property
received plus the allocable share of the Operating Partnership's nonrecourse
liabilities exceeds the Limited Partner's basis for the OP Units, such Limited
Partner will recognize gain. The tax liability resulting from such gain could
exceed the amount of cash received upon such disposition.
Such gain will be capital gain if the OP Units have been held by the Limited
Partner as a capital asset. However, to the extent that the amount realized
upon the sale of OP Units attributable to a partner's share of the Operating
Partnership's inventory items and/or "unrealized receivables" (as defined in
Section 751 of the Code) exceeds the basis attributable to those assets, such
excess will be treated as ordinary income. Unrealized receivables include, to
the extent not previously includible in Operating Partnership income, any
rights to payment for services rendered or to be rendered. Unrealized
receivables also include amounts that would be subject to recapture as
ordinary income if the Operating Partnership had sold its assets at their fair
market value at the time of the transfer of the OP Units, such as
"depreciation recapture" under Sections 1245 and 1250 of the Code.
For corporations, the maximum rate of tax on the net capital gain from a
sale or exchange of a capital asset held for more than twelve months is
currently 35%. The Taxpayer Relief Act of 1997 (the "1997 Act") altered the
taxation of capital gain income for non-corporate taxpayers. Pursuant to the
1997 Act, for individuals, trusts and estates, the maximum rate of tax on the
net capital gain from a sale or exchange of a capital asset held for more than
18 months is currently 20% and the maximum rate for capital assets held for
more than one year but not more than 18 months is currently 28%. In addition,
the maximum rate for net capital gains attributable to the sale of depreciable
real property held for more than 18 months is currently 25% (rather than 20%)
to the extent of the prior deductions for "unrecaptured Section 1250 gain"
(that is, previously claimed depreciation
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deductions that would not be recaptured as ordinary income). The 1997 Act also
provides special rules for "qualified 5-year gain" and other changes to prior
law. The recently enacted Internal Revenue Service Restructuring and Reform
Act of 1998 (the "IRS Restructuring Act"), however, reduced the holding period
requirement established by the 1997 Act for the application of the 20% and 25%
capital gain tax rates to 12 months from 18 months for sales of capital gain
assets after December 31, 1997.
The 1997 Act provides the IRS with authority to issue regulations that
could, among other things, apply these rates on a look-through basis in the
case of "pass-through" entities such as the Operating Partnership. The IRS has
not yet issued such regulations, and if it does not issue such regulations in
the future, the rate of tax that would apply to the disposition of OP Units by
an individual, trust or estate likely would be determined based upon the
period of time over the which such individual, trust or estate held such OP
Units. No assurance, however, can be provided that the IRS will not issue
regulations that would provide that the rate of tax that would apply to the
disposition of OP Units by an individual, trust or estate would be determined
based upon the nature of the assets of the Operating Partnership and the
periods of time over which the Operating Partnership held such assets.
Moreover, no assurance can be provided that such regulations would not be
applied retroactively. If such regulations were to apply to the disposition of
OP Units, any gain on such sale possibly could be treated partly as gain from
the sale of a capital asset held for more than one year, partly as gain from
the sale of a capital asset held for one year or less and partly as gain that
is considered "unrecognized Section 1250 gain." Limited Partners are urged to
consult with their own tax advisors with respect to the new rules contained in
the 1997 Act and in the IRS Restructuring Act.
Tax Treatment of Exercise of Unit Redemption Right. In the event that a
Limited Partner exercises his Unit Redemption Right (see "Description of OP
Units--Unit Redemption Right"), it is generally anticipated that Host REIT
will elect to exercise its right under the Partnership Agreement to acquire
the redeeming Limited Partner's OP Units in exchange for cash or Common
Shares; however, Host REIT will be under no obligation to exercise such right.
In the event that Host REIT does so elect, such transaction will be a fully
taxable sale to the redeeming Limited Partner, and such redeeming Limited
Partner will be treated as realizing in connection with such sale an amount
equal to the amount of the cash or the value of the Common Shares received in
the exchange plus the amount of Operating Partnership liabilities allocable to
the redeemed OP Units at the time of the redemption.
If Host REIT does not elect to assume the obligation to redeem a Limited
Partner's OP Units, the Operating Partnership generally will be required to
redeem such OP Units for cash. If the Operating Partnership redeems OP Units
for cash that Host REIT contributes to the Operating Partnership to effect
such redemption, the redemption likely will be treated as a sale of such OP
Units to Host REIT in a fully taxable transaction, although the matter is not
free from doubt. In that event, the redeeming Limited Partner will recognize
taxable gain or loss to the extent that the amount he is treated as realizing
(the amount of the cash received in the exchange plus the amount of Operating
Partnership liabilities allocable to the redeemed OP Units at the time of the
redemption) exceeds or is less than, respectively, his adjusted tax basis in
his OP Units redeemed. If, instead, the Operating Partnership chooses to
redeem a Limited Partner's OP Units for cash that is not contributed by Host
REIT to effect the redemption, the tax consequences will be the same as
described in the previous sentence, except that if the Limited Partner redeems
less than all of his OP Units, the Limited Partner will not be permitted to
recognize any taxable loss in connection with the redemption and will
recognize taxable gain on the redemption only to the extent that the sum of
cash and the share of Operating Partnership liabilities allocable to the
redeemed OP Units exceeds the Limited Partner's adjusted tax basis in all of
his OP Units held immediately before the redemption (rather than just the
basis of the OP Units redeemed).
For a discussion of the impact of the receipt and exercise of a Limited
Partner's Unit Redemption Right upon the tax consequences of the Mergers, see
"Tax Consequences of the Mergers--Unit Redemption Right" above.
Tax Shelter Registration. Under Section 6111 of the Code, the person
principally responsible for organizing certain "tax shelters" must register
the "tax shelter" with the IRS. Host REIT may be required to
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<PAGE>
register the Operating Partnership with the IRS as a "tax shelter" pursuant to
this provision. The following rules will apply if such registration is
required. Host REIT will be required to provide each Limited Partner with the
tax shelter registration number assigned to the Operating Partnership by the
IRS. Each Limited Partner will then be required to include this tax shelter
registration number on any tax return on which the Limited Partner claims any
deduction, credit, loss or other tax benefit, or reports any income, from the
Operating Partnership. Each Limited Partner must report the tax shelter
registration number by preparing a Form 8271 ("Investor Reporting of Tax
Shelter Registration Number") with respect to the Operating Partnership and
attaching it to his return. The penalty for failure to include the tax shelter
registration number in a return is $250 per failure per return.
In addition, if a Limited Partner transfers any OP Units, he is required to
provide the transferee with the Operating Partnership's tax shelter
registration number generally in the same manner and form in which such
registration number is originally provided to the Limited Partner by Host
REIT. The penalty for failure to provide the tax shelter registration number
to a transferee of OP Units is $100 per occurrence.
In connection with the registration of the Operating Partnership as a tax
shelter, Host REIT would be required, under Section 6112 of the Code, to
maintain a list of all investors purchasing OP Units. Such list must include
the name, address and taxpayer identification number of each purchaser, the
number of OP Units acquired and the date of acquisition. Section 6112 requires
that such list be maintained and made available for inspection upon the
request of the IRS for a period of seven years.
In addition, Section 6112 requires that any Limited Partner who transfers
any OP Units maintain and make available to the IRS, for seven years, a list
specifying the name, address and taxpayer identification number of the
transferee of such OP Units, as well as the date of transfer. As an
alternative to maintaining such list for seven years, a Limited Partner may
satisfy its obligation under Section 6112 by sending the information required
to be included on such list to Host REIT at the time the OP Units are
transferred. The penalty for failure either to maintain such a list or to send
the required information to Host REIT is $50.
REGISTRATION OF THE OPERATING PARTNERSHIP WITH THE INTERNAL REVENUE SERVICE
AND THE ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS
INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE INTERNAL REVENUE SERVICE.
Operating Partnership Income Tax Information Returns and Operating
Partnership Audit Procedures. The Operating Partnership plans to furnish the
holders of OP Units with the tax information reasonably required by the
holders of OP Units for federal and state income tax reporting purposes within
90 days of the close of each of the Operating Partnership's taxable years.
The federal income tax information returns filed by the Operating
Partnership may be audited by the IRS. The Code contains partnership audit
procedures governing the manner in which IRS audit adjustments of partnership
items are resolved. The Operating Partnership will be able to elect (i) to
participate in the simplified pass-through system for audits that was enacted
as part of the 1997 Act, which election is available to partnerships that have
100 or more partners and meet certain other requirements set forth in the 1997
Act; or (ii) to have its audits governed under the audit rules which were
enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). The Operating Partnership has not yet made this determination, but
in making the determination, Host REIT, as general partner of the Operating
Partnership, will not be required (but will be expressly permitted) to take
into account the tax consequences of the determination to any holder of OP
Units and the holders of OP Units will have no right to approve or disapprove
of such determination.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit is determined at the partnership
level in a unified partnership proceeding, rather than in separate proceedings
with each partner. The Code provides for one person to be designated as the
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"Tax Matters Partner" for these purposes. The Partnership Agreement appoints
Host REIT as the Tax Matters Partner for the Operating Partnership.
Under TEFRA, the Tax Matters Partner is authorized, but not required, to
take certain actions on behalf of the Operating Partnership and the Limited
Partners and can extend the statute of limitations for assessment of tax
deficiencies against Limited Partners with respect to Operating Partnership
items. The Tax Matters Partner will make a reasonable effort to keep each
Limited Partner informed of administrative and judicial tax proceedings with
respect to Operating Partnership items in accordance with Treasury Regulations
issued under Section 6223 of the Code. In connection with adjustments to
Operating Partnership tax returns proposed by the IRS, the Tax Matters Partner
may bind any Limited Partner with less than a one percent (1%) profits
interest in the Operating Partnership to a settlement with the IRS unless the
Limited Partner elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek
judicial review (to which all the Limited Partners are bound) of a final
Operating Partnership administrative adjustment and, if the Tax Matters
Partner fails to seek judicial review, such review may be sought by any
Limited Partner having at least a one percent (1%) interest in the profits of
the Operating Partnership and by partners in the Operating Partnership having,
in the aggregate, at least a five percent (5%) profits interest. Only one
judicial proceeding will go forward, however, and each Limited Partner with an
interest in the outcome may participate.
The Limited Partners will generally be required to treat Operating
Partnership items on their federal income tax returns in a manner consistent
with the treatment of the items on the Operating Partnership information
return. In general, that consistency requirement is waived if the Limited
Partner files a statement with the IRS identifying the inconsistency. Failure
to satisfy the consistency requirement, if not waived, will result in an
adjustment to conform the treatment of the item by the Limited Partner to the
treatment on the Operating Partnership return. Even if the consistency
requirement is waived, adjustments to the Limited Partner's tax liability with
respect to Operating Partnership items may result from an audit of the
Operating Partnership's information return or the Limited Partner's tax
return. Intentional or negligent disregard of the consistency requirement may
subject a Limited Partner to substantial penalties. In addition, an audit of
the Operating Partnership's information return may also lead to an audit of an
individual Limited Partner's tax return and such audit could result in the
adjustment of nonpartnership items.
If a partnership makes an election to have the simplified audit procedure
for large partnerships enacted as part of the 1997 Act apply, there would be
differences in the rights of Limited Partners. For example, as under the TEFRA
rules, the IRS would challenge a reporting position taken by the Operating
Partnership by conducting a single administrative proceeding, the outcome
under which would bind all partners. Unlike partners in a TEFRA partnership,
however, partners in an electing large partnership under the 1997 Act have no
individual right to notice of the adjustment proceedings and no individual
right to participate in the proceedings. Like other partnerships, an electing
partnership under the 1997 Act may request judicial review of a partnership
adjustment. However, unlike partnerships governed by TEFRA, the individual
partners in an electing large partnership have no right to file petitions for
readjustment of the partnership items. Finally, a partner in an electing
partnership must report all partnership items consistently with their
treatment on the partnership return. Unlike the comparable TEFRA audit rule,
an inconsistency cannot be excused by notifying the IRS of the differing
treatment. Limited Partners who fail to report partnership items consistently
with their treatment on the partnership return are subject to accuracy-related
and fraud penalties.
Alternative Minimum Tax on Items of Tax Preference. The Code contains
different sets of minimum tax rules applicable to corporate and non-corporate
taxpayers. The discussion below relates only to the alternative minimum tax
applicable to non-corporate taxpayers. LIMITED PARTNERS THAT ARE CORPORATIONS
SHOULD CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE EFFECT OF THE
CORPORATE MINIMUM TAX PROVISIONS FOLLOWING CONSUMMATION OF THE MERGERS.
Non-corporate taxpayers are subject to an alternative minimum tax to the
extent the tentative minimum tax ("TMT") exceeds the regular income tax
otherwise payable. The rate of tax imposed on alternative minimum
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taxable income ("AMTI") in computing TMT is 26% for AMTI under $175,000 and
28% for AMTI over $175,000. AMTI consists of the taxpayer's taxable income, as
adjusted under Sections 56 and 58 of the Code, plus his items of tax
preference; certain taxpayers are entitled to an exemption amount equal to
$45,000 for a joint return or a return filed as a surviving spouse, $33,750
for a single return and $22,500 for married persons filing separate returns,
estates and trusts. These exemption amounts will be phased out if the AMTI of
a taxpayer exceeds certain thresholds.
In computing alternative minimum taxable income, for all depreciable
property placed in service after May 13, 1993, an alternative cost recovery
(depreciation) system is substituted for the regular tax cost recovery
(depreciation) system. For example, cost recovery for real property is
computed on the straight-line basis over a 40-year life, rather than the 27.5-
or 39-year lives used under the regular tax system. The 1997 Act eliminates
this requirement for any property placed in service after December 31, 1998.
The limitation on deduction of passive activity losses (as recomputed for AMTI
purposes) applies to the calculation of AMTI. The utilization of itemized
deductions is also limited.
The Operating Partnership will not be subject to the alternative minimum
tax, but the Limited Partners are required to take into account on their own
tax returns their respective shares of the Operating Partnership's tax
preference items and adjustments (and their shares of tax preference items and
adjustments of the Partnerships and other Subsidiaries which are allocated to
the Operating Partnership) in order to compute alternative minimum taxable
income. Since the impact of this tax depends on each Limited Partner's
particular situation, the Limited Partners are urged to consult their own tax
advisors as to the applicability of the alternative minimum tax following
consummation of the Mergers.
State and Local Taxes. In addition to the federal income tax aspects
described above, a Limited Partner should consider the potential state and
local tax consequences of owning OP Units. Tax returns may be required and tax
liability may be imposed both in the state or local jurisdictions where a
Limited Partner resides and in each state or local jurisdiction in which the
Operating Partnership has assets or otherwise does business. Thus, Limited
Partners holding OP Units may be subject to state and local taxation in a
number of jurisdictions in which the Operating Partnership directly or
indirectly holds real property and would be required to file periodic tax
returns in those jurisdictions. In this regard, immediately following the
Mergers, the Operating Partnership expects that it will own properties in
approximately 28 states across the United States as well as the District of
Columbia. The Operating Partnership anticipates providing the Limited Partners
with any information reasonably necessary to permit them to satisfy state and
local return filing requirements. Furthermore, the Operating Partnership will
be subject to a wide range of different state filing requirements; for
example, in certain states, the Operating Partnership may elect to file
composite returns on behalf of its non-resident partners, while in other
states it may be required to withhold state taxes with respect to its non-
resident partners. The Operating Partnership will deduct the former Limited
Partners' share of any such state taxes imposed from its distributions to such
partners. To the extent that a Limited Partner pays income tax with respect to
the Operating Partnership to a state where it is not resident (or the
Operating Partnership is required (or elects) to pay such tax on behalf of the
Limited Partner), the Limited Partner may be entitled, in whole or in part, to
a deduction or credit against income tax that otherwise would be owed to his
state of residence with respect to the same income. A Limited Partner should
consult with his personal tax advisor with respect to the state and local
income tax implications for such Limited Partner of owning OP Units.
FEDERAL INCOME TAXATION OF HOST REIT FOLLOWING THE MERGERS
General. Host REIT plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Code, effective for its first taxable year
commencing after the REIT Conversion. Host REIT believes that, commencing with
such first taxable year, it will be organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and Host REIT
intends to continue to operate in such a manner, but no assurance can be given
that it in fact will continue to operate in such a manner so as to qualify or
remain qualified.
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The sections of the Code and the corresponding Treasury Regulations that
govern the federal income tax treatment of a REIT and its shareholders are
highly technical and complex. The following sets forth a summary of the
material aspects of these rules, which summary, however, is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Hogan & Hartson has acted as counsel to Host REIT in connection with the
REIT Conversion and Host REIT's election to be taxed as a REIT. Host REIT
expects that Hogan & Hartson will provide to Host REIT at the Closing an
opinion to the effect that, beginning with Host REIT's first taxable year
commencing after the REIT Conversion, Host REIT will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion
will be conditioned upon certain representations made by Host REIT and the
Operating Partnership as to factual matters relating to the organization and
operation of Host REIT, the Operating Partnership, the Hotel Partnerships, the
Subsidiary Partnerships, the Non-Controlled Subsidiaries, the Incentive
Compensation Trust and SLC and the Lessees, including the structure of each
Lease. In addition, this opinion will be based upon the factual
representations of Host REIT concerning its business and properties as
described in this Consent Solicitation and will assume that the actions
described in this Consent Solicitation are completed in a timely fashion.
Moreover, such qualification and taxation as a REIT depends upon Host REIT's
ability to meet on an ongoing basis (through actual annual operating results,
distribution levels and diversity of share ownership) the various
qualification tests imposed under the Code discussed below, the results of
which will not be reviewed by Hogan & Hartson. Accordingly, no assurance can
be given that the actual results of Host REIT's operations for any particular
taxable year will satisfy such requirements. Further, the anticipated income
tax treatment described in this Consent Solicitation may be changed, perhaps
retroactively, by legislative, administrative or judicial action at any time.
See "--Failure of Host REIT to Qualify as a REIT" below.
If Host REIT qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the
"double taxation" (at the corporate and shareholder levels) that generally
results from investment in a regular corporation. However, Host REIT will be
subject to federal income tax as follows:
1. Host REIT will be taxed at regular corporate rates on any undistributed
"REIT taxable income," including undistributed net capital gains
(provided, however, that properly designated undistributed capital gains
will effectively avoid taxation at the shareholder level). A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT
subject to certain adjustments, including a deduction for dividends
paid.
2. Under certain circumstances, Host REIT may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host REIT has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on such income.
4. If Host REIT has net income from "prohibited transactions" (which are,
in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other
than foreclosure property), such income will be subject to a 100% tax.
5. If Host REIT should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been
met, it will be subject to a 100% tax on an amount equal to (a) the
gross income attributable to the greater of the amount by which Host
REIT fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect Host REIT's profitability.
6. If Host REIT should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, Host REIT would be
subject to a 4% excise tax on
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the excess of such required distribution over the sum of amounts
actually distributed and amounts retained but with respect to which
federal income tax was paid.
7. If Host REIT acquires any asset from a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in a transaction in
which the basis of the asset in the hands of Host REIT is determined by
reference to the basis of the asset in the hands of the C corporation (a
"Built-In Gain Asset"), and Host REIT recognizes gain on the disposition
of such asset during the ten-year period beginning on the date on which
such asset was acquired by Host REIT (the "Recognition Period"), then,
to the extent of the asset's "Built-In Gain" (i.e., the excess of (a)
the fair market value of such asset over (b) Host REIT's adjusted basis
in the asset, determined when Host REIT acquired the asset), such gain
will be subject to tax at the highest regular corporate rate applicable.
Host REIT will own an indirect interest in appreciated assets that Host held
before the REIT Conversion. Such appreciated assets will have a "carryover"
basis and thus will be "Built-In Gain Assets" with respect to Host REIT. Under
IRS Notice 88-19, unless Host REIT were to elect to be subject to corporate
income tax on any Built-In Gain recognized with respect to such Built-In Gain
Assets during the Recognition Period commencing on the first day of Host
REIT's first taxable year as a REIT, Host would have to pay federal corporate
income tax on the Built-In Gain at the time of the REIT Conversion. In
connection with the REIT Conversion, Host REIT will make the election provided
for in Notice 88-19 with respect to all of Host's assets that will be owned by
the Operating Partnership subsequent to the REIT Conversion. As a result of
this election, if such appreciated property is sold within the ten-year period
following the REIT Conversion, Host REIT will generally be subject to regular
corporate tax on that gain to the extent of the Built-In Gain in that property
at the time of the REIT Conversion. The total amount of gain on which Host
REIT can be taxed is limited to its net Built-In Gain (defined for these
purposes as the excess of the aggregate fair market value of its assets at the
time it became a REIT over the adjusted tax bases of those assets at that
time) at the time of the REIT Conversion. This tax could be very material,
however, and may result in the Operating Partnership and Host REIT seeking to
avoid a taxable disposition of any significant assets owned by Host at the
time of the REIT Conversion for the ten taxable years following the REIT
Conversion (even though such disposition might otherwise be in the best
interests of the Operating Partnership and Host REIT). However, it is likely
that substantial deferred liabilities of Host will be recognized over the next
ten years (notwithstanding Host REIT's status as a REIT), and the IRS could
assert substantial additional liabilities for taxes against Host for taxable
years prior to the time Host REIT qualifies as a REIT. Under the terms of the
REIT Conversion and the Partnership Agreement, the Operating Partnership will
be responsible for paying (or reimbursing Host REIT for the payment of) all
such tax liabilities as well as any other liabilities (including contingent
liabilities and liabilities attributable to litigation that Host REIT may
incur) whether such liabilities are incurred by reason of Host's activities
prior to the REIT Conversion or the activities of Host REIT subsequent
thereto.
The Operating Partnership will pay (or reimburse Host REIT for) all taxes
incurred by Host REIT (except for taxes imposed on Host REIT by reason of its
failure to qualify as a REIT or to distribute to its shareholders an amount
equal to its "REIT taxable income," including net capital gains). This
obligation by the Operating Partnership would include any federal corporate
income tax imposed on Built-In Gain.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859
of the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities) (the "not closely held"
requirement); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of twelve months, or during a proportionate
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part of a taxable year of less than twelve months. Conditions (v) and (vi)
will not apply until after the first taxable year for which Host REIT makes
the election to be taxed as a REIT. For purposes of conditions (v) and (vi),
pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi). Compliance with condition (v) shall be determined by disregarding the
ownership of Host REIT shares by any person(s) who: (1) acquired such Host
REIT shares as a gift or bequest or pursuant to a legal separation or divorce;
(2) is the estate of any person making such transfer to the estate; or (3) is
a company established exclusively for the benefit of (or wholly-owned by)
either the person making such transfer or a person described in (1) or (2). In
connection with condition (vi), Host REIT is required to send annual letters
to its shareholders requesting information regarding the actual ownership of
its shares. If Host REIT complies with this requirement, and it does not know,
or exercising reasonable diligence would not have known, whether it failed to
meet condition (vi), then it will be treated as having met condition (vi). If
Host REIT fails to send such annual letters, it will be required to pay either
a $25,000 penalty or, if the failure is intentional, a $50,000 penalty. The
IRS may require Host REIT, under those circumstances, to take further action
to ascertain actual ownership of its shares, and failure to comply with such
an additional requirement would result in an additional $25,000 (or $50,000)
penalty. No penalty would be assessed in the first instance, however, if the
failure to send the letters is due to reasonable cause and not to willful
neglect.
Host REIT believes that it will meet conditions (i) through (iv). In
addition, Host REIT believes that it will have outstanding (commencing with
its first taxable year as a REIT) Common Shares with sufficient diversity of
ownership to allow it to satisfy conditions (v) and (vi). With respect to
condition (vi), Host REIT intends to comply with the requirement that it send
annual letters to its shareholders requesting information regarding the actual
ownership of its shares. In addition, Host REIT's Declaration of Trust
provides for restrictions regarding the transfer and ownership of Common
Shares, which restrictions are intended to assist Host REIT in continuing to
satisfy the share ownership requirements described in (v) and (vi) above. Such
ownership and transfer restrictions are described in "Description of Shares of
Beneficial Interest--Restrictions on Ownership and Transfer." These
restrictions, together with compliance with the annual shareholder letter
requirement described above, however, may not ensure that Host REIT will, in
all cases, be able to satisfy the share ownership requirements described
above. If Host REIT fails to satisfy such share ownership requirements, Host
REIT's status as a REIT will terminate. See "--Failure of Host REIT to Qualify
as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host currently has adopted a 52-53 week year ending on
the Friday closest to January 1, Host REIT will adopt a calendar year taxable
year in connection with the REIT Conversion.
In order to qualify as a REIT, Host REIT cannot have at the end of any
taxable year any undistributed "earnings and profits" that are attributable to
a "C corporation" taxable year. A REIT has until the close of its first
taxable year in which it has non-REIT earnings and profits to distribute such
accumulated earnings and profits. In connection with the REIT Conversion, Host
intends to make a distribution to its existing shareholders of cash (and
possibly securities) and that portion of the SLC common stock that will not be
transferred to the Blackstone Entities. The aggregate amount of such
distribution is currently expected to be in the range of $400-550 million and
is intended to eliminate a substantial portion, if not all, of Host's
undistributed earnings and profits. To the extent, however, that Host has any
such undistributed earnings and profits at the time of the REIT Conversion
(including earnings and profits resulting from either transactions undertaken
in contemplation of the REIT Conversion or the REIT Conversion itself), such
earnings and profits (the "Acquired Earnings") will carry over to Host REIT
and will be treated as accumulated earnings and profits of a REIT attributable
to non-REIT years. Host REIT will be required to distribute these earnings and
profits prior to the end of 1999 (the first taxable year for which the REIT
election of Host REIT is expected to be effective). Failure to do so would
result in disqualification of Host REIT as a REIT at least for taxable year
1999. If Host REIT should be so disqualified for taxable year 1999, subject to
the satisfaction by Host REIT of certain "deficiency dividend" procedures
described below in "--Annual Distribution Requirements Applicable to REITs"
and assuming that Host REIT otherwise satisfies the requirements for
qualification as a REIT, Host REIT should qualify as a REIT for taxable year
2000 and thereafter. Host REIT believes that, prior to December 31, 1999, the
distributions made in
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connection with the REIT Conversion, together with any distributions of
Acquired Earnings made after the REIT Conversion but prior to December 31,
1999, will be sufficient to distribute all of the Acquired Earnings, but there
are substantial uncertainties relating to the estimate of the Acquired
Earnings, as described below, and the value of noncash consideration to be
distributed as part of Acquired Earnings, and, thus, there can be no assurance
this requirement will be met.
The estimated amount of the Acquired Earnings will be based on the
consolidated earnings and profits of Host (including each of its predecessors)
accumulated from 1929, the first year that the predecessor of Host was a C
corporation, through and including Host's 1998 taxable year, determined based
on the available tax returns and certain assumptions with respect to both such
returns and other matters. The calculation of the Acquired Earnings, however,
depends upon a number of factual and legal interpretations related to the
activities and operations of Host and its corporate affiliates during its
entire corporate existence and is subject to review and challenge by the IRS.
There can be no assurance that the IRS will not examine the tax returns of
Host and its affiliates for all years prior to and including the REIT
Conversion and propose adjustments to increase their taxable income. The
impact of such proposed adjustments, if any, may be material. If the IRS were
to examine Host's calculation of its earnings and profits (and thus the amount
of Acquired Earnings, if any), the IRS can consider all taxable years of Host,
its affiliates and its predecessors as open for review for purposes of such
determination. Hogan & Hartson will express no opinion as to the amount of the
earnings and profits of Host and its predecessors and, accordingly, for
purposes of its opinion as to the qualification of Host REIT as a REIT
following the REIT Conversion, Hogan & Hartson is relying upon a
representation from Host REIT that it will have made distributions by the end
of 1999 in an amount sufficient for it to be considered to have satisfied the
requirement that it have eliminated any Acquired Earnings by such time.
Qualified REIT Subsidiary. If Host REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income,
deduction and credit of the subsidiary will be treated as assets, liabilities
and items of Host REIT itself. Generally, a qualified REIT subsidiary is a
corporation all of the capital stock of which is owned by one REIT. Host REIT
anticipates owning one or more qualified REIT subsidiaries for purposes of
holding de minimis indirect interests in the Hotel Partnerships. A "qualified
REIT subsidiary" will not be subject to federal corporate income taxation,
although it may be subject to state and local taxation in certain
jurisdictions.
Ownership of Partnership Interests by a REIT. In the case of a REIT which
is a partner in a partnership, Treasury Regulations provide that the REIT will
be deemed to own its proportionate share of the assets of the partnership and
will be deemed to be entitled to the income of the partnership attributable to
such share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code (including satisfying the gross income
tests and the asset tests). Thus, Host REIT's proportionate share of the
assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of the Hotel Partnerships and any
other subsidiaries that are partnerships or LLCs) will be treated as assets
and items of income of Host REIT for purposes of applying the requirements
described herein. A summary of the rules governing the federal income taxation
of partnerships and their partners is provided below in "--Tax Aspects of Host
REIT's Ownership of OP Units." As the sole general partner of the Operating
Partnership, Host REIT will have direct control over the Operating Partnership
and indirect control over the Hotel Partnerships and the partnerships in which
the Operating Partnership or the Hotel Partnerships have a controlling
interest and intends to operate these entities consistent with the
requirements for qualification of Host REIT as a REIT.
Income Tests Applicable to REITs. In order to maintain qualification as a
REIT, Host REIT annually must satisfy two gross income requirements. First, at
least 75% of Host 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 Host
REIT's gross income (excluding gross income from "prohibited transactions")
for each taxable year must be derived
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from such real property investments, dividends, interest, certain hedging
instruments and gain from the sale or disposition of stock or securities,
including certain hedging instruments (or from any combination of the
foregoing).
Rents paid pursuant to the Leases (together with dividends and interest
received from the Non-Controlled Subsidiaries) will constitute substantially
all of the gross income of Host REIT. Several conditions must be satisfied in
order for rents received by Host REIT, including the rents received pursuant
to the Leases, to qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described in the preceding paragraph.
First, the amount of rent must not be based in whole or in part on the income
or profits of any person. However, an amount received or accrued generally
will not be excluded from the term "rents from real property" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if Host REIT, or an actual or
constructive owner of 10% or more of Host REIT, actually or constructively
owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property" (as discussed above in "--Tax Consequences of the
Mergers--Taxable Income Attributable to Sales of Personal Property in
Connection with the REIT Conversion") (the "15% Personal Property Test").
Finally, if (i) Host REIT operates or manages a property or furnishes or
renders services to the tenants at the property other than through an
independent contractor from whom Host REIT derives no revenue, excluding for
these purposes services "usually or customarily rendered" in connection with
the rental of real property and not otherwise considered "rendered to the
occupant," and (ii) the greater of (a) the income derived from such services
or (b) 150% of the cost of providing such services (the "Impermissible Tenant
Service Income") exceeds one percent of the total amount received by Host REIT
with respect to the property (or, if such services are not available to all
tenants at a property, possibly with respect to each tenant to whom the
services are made available), then no amount received by Host REIT with
respect to the property (or, where possibly applicable, such tenant) will
qualify as "rents from real property." If the Impermissible Tenant Service
Income is one percent or less of the total amount received by the REIT with
respect to the property (or, where possibly applicable, such tenant), then
only the Impermissible Tenant Service Income will not qualify as "rents from
real property." To the extent that services other than those customarily
furnished or rendered in connection with the rental of real property are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
The Operating Partnership and each Hotel Partnership that owns Hotels
(together with certain other subsidiaries of the Operating Partnership that
may own Hotels) will enter into a Lease with a Lessee that is an SLC
subsidiary, pursuant to which the owner of such Hotels will lease the Hotels
that it owns to the Lessee for a term of years (ranging from seven to ten
years, depending upon the particular Hotel) commencing on or before the
Effective Date of the REIT Conversion. In addition, the Operating Partnership
will lease to the Lessees, on similar terms, the Hotels contributed by the
Blackstone Entities. Each Lease will provide for thirteen payments per annum
of the specified Base Rent plus, to the extent that it would exceed the Base
Rent, Percentage Rent, which Percentage Rent will be calculated based upon the
gross sales of the Hotels subject to the particular Lease, plus certain other
amounts. See "Business and Properties--The Leases."
Neither Host REIT nor the Operating Partnership will (i) provide any
services to the Lessees with respect to the operation of the Hotels; (ii)
charge rent for any Hotel that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above); (iii) rent any Hotel to a Related
Party Tenant (unless the Board of Trustees determines in its discretion that
the rent received from such Related Party Tenant is not material and will not
jeopardize Host REIT's status as a REIT); or (iv) derive rental income
attributable to personal property other than personal property leased in
connection with the lease of real property, the amount of which is less than
15% of the total rent received under the lease (unless the Board of Trustees
determines in its discretion that the amount of such rent attributable to
personal property is not material and will not jeopardize Host REIT's status
as a REIT).
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In order for the rent paid pursuant to the Leases to constitute "rents from
real property," (i) the Lessees must not be regarded as Related Party Tenants;
and (ii) the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other
type of arrangement. A Lessee will be regarded as a Related Party Tenant only
if Host REIT and/or one or more actual or constructive owners of 10% or more
of Host REIT, actually or constructively, own 10% or more of such Lessee
through an ownership interest in SLC. In order to help preclude the Lessees
from being regarded as Related Party Tenants, (i) the Articles of
Incorporation of SLC will expressly prohibit any person, including Host REIT
(and/or any 10% or greater shareholder of Host REIT), from owning more than
9.8% of the lesser of the number or value of SLC; (ii) the Declaration of
Trust of Host REIT will expressly prohibit any person or entity from owning,
directly or by attribution, more than 9.8% of the lesser of the number or
value of Host REIT's Common Shares (subject to an exception for Common Shares
held prior to the REIT Conversion, so long as the holder thereof would not own
more than 9.8% in value of the outstanding shares of beneficial interest of
Host REIT) or any other class or series of shares of Host REIT; and (iii) the
Partnership Agreement of the Operating Partnership will expressly prohibit any
person or entity (other than Host REIT and the Blackstone Entities) from
owning more than 4.9% by value of any class of interests in the Operating
Partnership. Each of these prohibitions will contain self-executing
enforcement mechanisms. Assuming that these prohibitions are enforced at all
times (and no waivers thereto are granted), the Lessees should not be regarded
as Related Party Tenants. However, there is no assurance that the ownership
restrictions described herein will ensure, in all cases, that the Lessees will
not be regarded as Related Party Tenants.
The determination of whether the Leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties; (ii) the form of the agreement;
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required simply to use its best efforts
to perform its obligations under the agreement); and (iv) the extent to which
the property owner retains the risk of loss with respect to the property
(e.g., whether the lessee bears the risk of increases in operating expenses or
the risk of damage to the property) or the potential for economic gain (e.g.,
appreciation) with respect to the property.
In addition, Section 7701(e) of the Code provides that a contract that
purports to be a service contract (or a partnership agreement) is treated
instead as a lease of property if the contract is properly treated as such,
taking into account all relevant factors, including whether or not: (i) the
service recipient is in physical possession of the property; (ii) the service
recipient controls the property; (iii) the service recipient has a significant
economic or possessory interest in the property (e.g., the property's use is
likely to be dedicated to the service recipient for a substantial portion of
the useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any appreciation in
the value of the property, the recipient shares in savings in the property's
operating costs or the recipient bears the risk of damage to or loss of the
property); (iv) the service provider does not bear any risk of substantially
diminished receipts or substantially increased expenditures if there is
nonperformance under the contract; (v) the service provider does not use the
property concurrently to provide significant services to entities unrelated to
the service recipient; and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract should be treated as a
lease is inherently factual, the presence or absence of any single factor may
not be dispositive in every case.
The Leases have been structured with the intent to qualify as true leases
for federal income tax purposes. For example, with respect to each Lease (i)
the Operating Partnership (or, where appropriate, the applicable Hotel
Partnership or other lessor entity) and the Lessee intend for their
relationship to be that of a lessor and lessee and such relationship is
documented by a lease agreement, (ii) the Lessee has the right to exclusive
possession and use and quiet enjoyment of the Hotels covered by the Lease
during the term of the Lease, (iii) the Lessee bears the cost of, and will be
responsible for, day-to-day maintenance and repair of the Hotels (other than
the cost of certain capital expenditures), and will dictate how the Hotels are
operated and maintained, (iv) the Lessee bears all of the costs and expenses
of operating the Hotels (including the cost of any inventory used in their
operation) during the term of the Lease (other than the cost of certain
furniture, fixtures and equipment, and certain capital expenditures), (v) the
Lessee benefits from any savings (and bears the burdens of any increases)
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in the costs of operating the Hotels during the term of the Lease, (vi) in the
event of damage or destruction to a Hotel, the Lessee is at economic risk
because it will be obligated either (A) to restore the property to its prior
condition, in which event it will bear all costs of such restoration in excess
of any insurance proceeds or (B) in certain circumstances, terminate the
Lease, (vii) the Lessee has indemnified the Operating Partnership (or, where
appropriate, the applicable Hotel Partnership or other lessor entity) against
all liabilities imposed on the Operating Partnership (or, where appropriate,
the applicable Hotel Partnership or other lessor entity) during the term of
the Lease by reason of (A) injury to persons or damage to property occurring
at the Hotels or (B) the Lessee's use, management, maintenance or repair of
the Hotels, (viii) the Lessee is obligated to pay, at a minimum, substantial
Base Rent for the period of use of the Hotels under the Lease, (ix) the Lessee
stands to incur substantial losses (or reap substantial gains) depending on
how successfully it operates the Hotels, and (x) Host REIT and the Operating
Partnership believe that each Lessee reasonably expects to derive a meaningful
profit, after expenses and taking into account the risks associated with the
Lease, from the operation of the Hotels during the term of its Leases.
Moreover, upon termination of a Lease, each Hotel is expected to have a
remaining useful life equal to at least 20% of its expected useful life on the
date of the consummation of the REIT Conversion, and a fair market value equal
to at least 20% of its fair market value on the date of the consummation of
the REIT Conversion.
Based upon representations made by Host REIT and the Operating Partnership
(including, but not limited to, a representation as to the matters described
in the previous paragraph), Hogan & Hartson, counsel to Host REIT, expects to
provide to Host REIT an opinion letter to the effect that the Leases will be
respected as leases for federal income tax purposes. As noted previously,
however, an opinion of counsel does not bind the IRS or the courts. Moreover,
Limited Partners should be aware that there are no controlling Treasury
Regulations, published IRS rulings or judicial decisions involving leases with
terms substantially the same as the Leases that discuss whether such leases
constitute true leases for federal income tax purposes. Therefore, there can
be no assurance that the IRS will not assert a contrary position or that such
position will be sustained by a court if so challenged. If the Leases are
recharacterized as service contracts or partnership agreements, rather than
true leases, or disregarded altogether for tax purposes, all or part 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, Host REIT very
likely would not be able to satisfy either the 75% or 95% gross income tests
and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to the
Leases should qualify as "rents from real property" since they will be based
on either a fixed dollar amount (i.e., Base Rent) or specified percentages of
gross sales (i.e., Percentage Rents) which percentages will be fixed at the
time the Leases are entered into. The foregoing assumes that the Leases (i)
are not renegotiated during their term in a manner that has the effect of
basing either Percentage Rent or Base Rent on income or profits and (ii) are
not in reality used as a means of basing rent on income or profits. More
generally, the rent payable under the Leases would not qualify as "rents from
real property" if, considering the Leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing rent on income or profits. Because
each of the Base Rent and the Percentage Rent will be based on fixed dollar
amounts and fixed percentages of the gross sales of each Hotel that are
established in the Leases, and Host REIT has represented that (i) the
percentages will not be renegotiated during the terms of the Leases in a
manner that has the effect of basing rent on income or profits and (ii) the
Leases conform with normal business practice, the rent payable under the
Leases should not be considered based in whole or in part on the income or
profits of any person. Furthermore, Host REIT has represented that, with
respect to other 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).
Host REIT may lease certain items of personal property to the Lessees in
connection with the Leases. The 15% Personal Property Test provides that if a
lease provides for the rental of both real and personal property and the
portion of the rent attributable to personal property is 15% or less of the
total rent due under the lease, then all rent paid pursuant to such lease
qualifies as "rent from real property." If, however, a lease provides for the
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rental of both real and personal property, and the portion of the rent
attributable to personal property exceeds 15% of the total rent due under the
lease, then the portion of the rent that is attributable to personal property
does not qualify as "rent from real property." The amount of rent attributable
to personal property is that amount which bears the same ratio to total rent
for the taxable year as the average of the adjusted tax bases of the personal
property at the beginning and end of the year bears to the average of the
aggregate adjusted tax bases of both the real and personal property at the
beginning and end of such year. Host REIT has represented that, with respect
to each Lease that includes a lease of items of personal property, the amount
of rent attributable to personal property with respect to such Lease,
determined as set forth above, will not exceed 15% of the total rent due under
the Lease (except for several Leases where the rent attributable to personal
property, which would constitute non-qualifying income for purposes of the 75%
and 95% gross income tests, would not be material relative to the overall
gross income of Host REIT). Each Lease permits the Operating Partnership to
take certain measures, including requiring the Lessee to purchase certain
furniture, fixtures and equipment or to lease such property from a third party
(including a Non-Controlled Subsidiary), if necessary to ensure that all of
the rent attributable to personal property with respect to such Lease will
qualify as "rent from real property." In order to protect Host REIT's ability
to qualify as a REIT, the Operating Partnership will require, immediately
prior to the Mergers, that certain of the Hotel Partnerships (including
Atlanta Marquis, Hanover, MHP and PHLP) sell a portion of the personal
property associated with some or all of the Hotels owned by such Partnerships
to a Non-Controlled Subsidiary. See "Tax Consequences of the Mergers--Taxable
Income Attributable to Sales of Personal Property in Connection with the REIT
Conversion." In connection with the REIT Conversion, the Operating Partnership
also plans to sell to a Non-Controlled Subsidiary substantial personal
property associated with a number of Hotels currently owned by Host or being
acquired in connection with the REIT Conversion. The Non-Controlled Subsidiary
will separately lease all such personal property directly to the applicable
Lessee and will receive rental payments which Host REIT believes represents
the fair rental value of such personal property directly from the Lessees.
If any of the Hotels were to be operated directly by the Operating
Partnership or a Hotel Partnership as a result of a default by a Lessee under
the applicable Lease, such Hotel would constitute foreclosure property until
the close of the third tax year following the tax year in which it was
acquired (or for up to an additional three years if an extension is granted by
the IRS), provided that (i) the operating entity conducts operations through
an independent contractor (which might, but would not necessarily in all
circumstances, include Marriott International and its subsidiaries) within 90
days after the date the Hotel is acquired as the result of a default by a
Lessee, (ii) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were more than
10% complete before default became imminent, and (iii) foreclosure was not
regarded as foreseeable at the time the applicable Hotel Partnership entered
into such Leases. For as long as any of these Hotels constitute foreclosure
property, the income from the Hotels would be subject to tax at the maximum
corporate rates, but it would qualify under the 75% and 95% gross income
tests. However, if any of these Hotels does not constitute foreclosure
property at any time in the future, income earned from the disposition or
operation of such property will not qualify under the 75% and 95% gross income
tests.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any
person. However, interest will not fail to so qualify solely by reason of
being based upon a fixed percentage or percentages of receipts or sales. Host
REIT does not expect to derive significant amounts of interest that will not
qualify under the 75% and 95% gross income tests.
One or more Non-Controlled Subsidiaries will hold various assets contributed
by Host and its subsidiaries to the Operating Partnership, the ownership of
which by the Operating Partnership might jeopardize Host REIT's status as a
REIT. These assets primarily will consist of partnership or other interests in
Hotels that are not leased and certain foreign hotels in which Host owns
interests. In addition, as described above, the Operating Partnership and the
Hotel Partnerships (including Atlanta Marquis, Hanover, MHP and PHLP, if they
participate in the Mergers) will sell to a Non-Controlled Subsidiary
approximately $200 million in value of personal property associated with
certain Hotels, in order to facilitate Host REIT's compliance with the 15%
Personal Property Test. The Operating Partnership will own 100% of the
nonvoting stock of each Non-Controlled
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Subsidiary but none of the voting stock (or control) of that Non-Controlled
Subsidiary. Each Non-Controlled Subsidiary is taxable as a regular "C"
corporation. The Operating Partnership's share of any dividends received from
a Non-Controlled Subsidiary should qualify for purposes of the 95% gross
income test, but not for purposes of the 75% gross income test. The Operating
Partnership does not anticipate that it will receive sufficient dividends from
the Non-Controlled Subsidiaries to cause it to exceed the limit on non-
qualifying income under the 75% gross income test.
Given the magnitude and scope of Host's existing operations, Host REIT
inevitably will have some gross income from various sources (including, but
not limited to, "safe harbor" leases, the operation of the Hotel in
Sacramento, minority partnership interests in partnerships that own hotels
that are not leased under leases that produce rents qualifying as "rents from
real property" and rent attributable to personal property at a few Hotels that
does not satisfy the 15% Personal Property Test) that fails to constitute
qualifying income for purposes of one or both of the 75% or 95% gross income
tests. Host REIT, however, believes that, even taking into account the
anticipated sources of non-qualifying income, its aggregate gross income from
all sources will satisfy the 75% and 95% gross income tests applicable to
REITs for each taxable year commencing subsequent to the date of the REIT
Conversion.
If Host REIT fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if Host REIT's failure to meet
such tests was due to reasonable cause and not due to willful neglect, Host
REIT attaches a schedule of the sources of its income to its federal income
tax return and any incorrect information on the schedule was not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances Host REIT would be entitled to the benefit of these relief
provisions. For example, if Host REIT fails to satisfy the gross income tests
because nonqualifying income that Host REIT intentionally incurs exceeds the
limits on such income, the IRS could conclude that Host REIT's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving Host REIT,
Host REIT will not qualify as a REIT. As discussed above in "Federal Income
Taxation of Host REIT Following the Mergers--General," even if these relief
provisions apply, a tax would be imposed with respect to the excess net
income.
Any gain realized by Host REIT on the sale of any property held as inventory
or other property held primarily for sale to customers in the ordinary course
of business (including Host REIT's share of any such gain realized by the
Operating Partnership) will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon Host REIT's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends
upon all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends that both it and the Hotel
Partnerships will hold the Hotels for investment with a view to long-term
appreciation, to engage in the business of acquiring and owning the Hotels
(and other hotels) and to make such occasional sales of the Hotels as are
consistent with the Operating Partnership's investment objectives. There can
be no assurance, however, that the IRS might not contend that one or more of
such sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. Host REIT, at the close of each quarter of
its taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Host REIT's total assets must be
represented by real estate assets, including for this purpose (i) its
allocable share of real estate assets held by partnerships in which Host REIT
owns an interest (including its allocable share of the assets held through the
Operating Partnership) and (ii) stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of Host REIT, cash, cash items and government
securities. Second, not more than 25% of Host REIT's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by Host REIT may not exceed 5% of the value of Host REIT's
total assets and Host REIT may not own more than 10% of any one issuer's
outstanding voting securities.
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The Operating Partnership does not own any of the voting stock of a Non-
Controlled Subsidiary but it will own 100% of the nonvoting stock of each Non-
Controlled Subsidiary. The Operating Partnership may also own nonvoting stock,
representing substantially all of the equity, in other corporate entities that
serve as partners or members in the various entities that hold title to the
Hotels. Host REIT will represent, however, that neither Host REIT, the
Operating Partnership nor any of the Hotel Partnerships Subsidiary
Partnerships will own more than 10% of the voting securities of any entity
that would be treated as a corporation for federal income tax purposes. In
addition, Host REIT and its senior management believe, and Host REIT will
represent, that the securities of any one issuer owned by Host REIT, the
Operating Partnership, the Hotel Partnerships and any Subsidiary Partnerships
(including Host REIT's pro rata share of the value of the securities of each
Non-Controlled Subsidiary) will not exceed 5% of the total value of Host
REIT's assets. There can be no assurance, however, that the IRS might not
contend that the value of such securities exceeds the 5% value limitation or
that nonvoting stock of a Non-Controlled Subsidiary or another corporate
entity owned by the Operating Partnership should be considered "voting stock"
for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
REIT will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of Host REIT increasing its interest in the Operating Partnership as a
result of the exercise of the Unit Redemption Right or an additional capital
contribution of proceeds from an offering of Common Shares by Host REIT), the
failure can be cured by disposition of sufficient nonqualifying assets within
30 days after the close of that quarter. Host REIT intends to maintain
adequate records of the value of its assets to ensure compliance with the
asset tests and to take such other actions within 30 days after the close of
any quarter as may be required to cure any noncompliance. If Host REIT fails
to cure noncompliance with the asset tests within such time period, Host REIT
would cease to qualify as a REIT.
Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's fiscal year 1999 budget proposal, announced on February 2,
1998, includes a proposal to amend the 10% voting securities test. The
proposal would require a REIT to own no more than 10% of the vote or value of
all classes of stock of any corporation (except for qualified REIT
subsidiaries or corporations that qualify as REITs). Corporations (referred to
herein as "subsidiary corporations") existing prior to the effective date of
the proposal generally would be "grandfathered"; i.e., the REIT would be
subject to the existing 10% voting securities test (described above) with
respect to grandfathered subsidiary corporations. However, such grandfathered
status would terminate with respect to a subsidiary corporation if the
subsidiary corporation engaged in a new trade or business or acquired
substantially new assets.
Because the Operating Partnership will own 100% of the nonvoting stock of
each Non-Controlled Subsidiary, and Host REIT will be deemed to own an
interest in each Non-Controlled Subsidiary equal to its proportionate interest
in the Operating Partnership, Host REIT would not satisfy the proposed 10%
value limitation with respect to any of the Non-Controlled Subsidiaries.
Whether any of the Non-Controlled Subsidiaries would qualify as a
grandfathered subsidiary corporation as the proposal is currently drafted
would depend upon the effective date of the proposal (which is not yet known).
If a Non-Controlled Subsidiary otherwise eligible for "grandfathered" status
were to engage in a new trade or business or were to acquire substantial new
assets, or if Host REIT were to make a capital contribution to a Non-
Controlled Subsidiary otherwise eligible for "grandfathered" status, its
grandfathered status would terminate and Host REIT would fail to qualify as a
REIT. Moreover, Host REIT would not be able to own, directly or indirectly,
more than 10% of the vote or value of any subsidiary corporation formed or
acquired after the effective date of the proposal. Thus, the proposal, if
enacted, would materially impede Host REIT's ability to engage in new third-
party management or similar activities (and, if enacted prior to the REIT
Conversion, might materially impair Host's ability to complete the REIT
Conversion.)
Annual Distribution Requirements Applicable to REITs. Host REIT, in order to
qualify as a REIT, is required to distribute dividends (other than capital
gain dividends) to its shareholders in an amount at least equal
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to (i) the sum of (a) 95% of Host REIT's REIT taxable income (computed without
regard to the dividends paid deduction and Host 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. In addition, if Host
REIT disposes of any Built-In Gain Asset during its Recognition Period, Host
REIT will be required, pursuant to Treasury Regulations which have not yet
been promulgated, to distribute at least 95% of the Built-In Gain (after tax),
if any, recognized on the disposition of such asset. See "--General" above for
a discussion of "Built-In Gain Assets." Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before Host REIT timely files its tax return for such year and if
paid on or before the first regular dividend payment date after such
declaration. Host REIT intends to make timely distributions sufficient to
satisfy these annual distribution requirements. In this regard, the
Partnership Agreement authorizes Host REIT, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to distribute to
its partners an amount sufficient to permit Host REIT to meet these
distribution requirements.
To the extent that Host REIT does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its REIT taxable income,
as adjusted, it will be subject to tax thereon at regular ordinary and capital
gain corporate tax rates. Host REIT, however, may designate some or all of its
retained net capital gain, so that, although the designated amount will not be
treated as distributed for purposes of this tax, a shareholder would include
its proportionate share of such amount in income, as capital gain, and would
be treated as having paid its proportionate share of the tax paid by Host REIT
with respect to such amount. The shareholder's basis in its Common Shares
would be increased by the amount the shareholder included in income and
decreased by the amount of the tax the shareholder is treated as having paid.
Host REIT would make an appropriate adjustment to its earnings and profits.
For a more detailed description of the tax consequences to a shareholder of
such a designation, see "--Taxation of Taxable U.S. Shareholders of Host REIT
Generally."
It is expected that Host REIT's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, Host REIT anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that Host
REIT, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and
(ii) the inclusion of such income and deduction of such expenses in arriving
at taxable income of Host REIT. If such timing differences occur, in order to
meet the distribution requirements, Host REIT may find it necessary to arrange
for short-term, or possibly long-term, borrowings or to pay dividends in the
form of taxable stock dividends.
Host REIT intends to calculate its REIT taxable income based upon the
conclusion that the Hotel Partnerships, the Subsidiary Partnerships or the
Operating Partnership, as applicable, is the owner of the Hotels for federal
income tax purposes. As a result, Host REIT expects that the depreciation
deductions with respect to the Hotels will reduce its REIT taxable income.
This conclusion is consistent with the conclusion above that the Leases will
be treated as true leases for federal income tax purposes. If the IRS were to
challenge successfully this position, in addition to failing in all likelihood
the 75% and 95% gross income tests described above, Host REIT also might be
deemed retroactively to have failed to meet the REIT distribution requirements
and would have to rely on the payment of a "deficiency dividend" in order to
retain its REIT status.
Under certain circumstances, Host REIT may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in Host REIT's
deduction for dividends paid for the earlier year. Thus, Host REIT may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
Host REIT will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Furthermore, if Host REIT should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, Host REIT would be subject to
a 4% excise tax on the excess
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of such required distribution over the sum of amounts actually distributed and
amounts retained with respect to which the REIT pays federal income tax.
Failure of Host REIT to Qualify as a REIT. If Host REIT fails to qualify for
taxation as a REIT in any taxable year, and if the relief provisions do not
apply, Host REIT will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. Distributions
to shareholders in any year in which Host REIT fails to qualify will not be
deductible by Host REIT nor will they be required to be made. As a result,
Host REIT's failure to qualify as a REIT would significantly reduce the cash
available for distribution by Host REIT to its shareholders and could
materially reduce the value of the Common Shares and, consequently, the OP
Units. In addition, if Host REIT fails to qualify as a REIT, all distributions
to shareholders will be taxable as ordinary income, to the extent of Host
REIT's current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, Host REIT also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances Host REIT
would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS OF HOST REIT GENERALLY
As used herein, the term "U.S. Shareholder" means a holder of Common Shares
who (for United States federal income tax purposes) is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who have
the authority to control all substantial decisions of the trust.
Distributions by Host REIT. As long as Host REIT qualifies as a REIT,
distributions made by Host REIT out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute
dividends taxable to its taxable U.S. Shareholders as ordinary income. Such
distributions will not be eligible for the dividends received deduction in the
case of U.S. Shareholders that are corporations. To the extent that Host REIT
makes distributions (not designated as capital gain dividends) in excess of
its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Shareholder,
reducing the adjusted basis which such U.S. Shareholder has in its Common
Shares for tax purposes by the amount of such distribution (but not below
zero), with distributions in excess of a U.S. Shareholder's adjusted basis in
its Common Shares taxable as capital gains (provided that the Common Shares
have been held as a capital asset). Dividends declared by Host REIT in
October, November or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
Host REIT and received by the shareholder on December 31 of such year,
provided that the dividend is actually paid by Host REIT on or before January
31 of the following calendar year.
Distributions made by Host REIT that are properly designated by Host REIT as
capital gain dividends will be taxable to taxable non-corporate U.S.
Shareholders (i.e., individuals, estates or trusts) as gain from the sale or
exchange of a capital asset held for more than one year (to the extent that
they do not exceed Host REIT's actual net capital gain for the taxable year)
without regard to the period for which such non-corporate U.S. Shareholder has
held his Common Shares. In the event that Host REIT designates any portion of
a dividend as a "capital gain dividend," a U.S. Shareholder's share of such
capital gain dividend would be an amount which bears the same ratio to the
total amount of dividends paid to such U.S. Shareholder for the year as the
aggregate amount designated as a capital gain dividend bears to the aggregate
amount of all dividends paid on all classes of shares for the year. On
November 10, 1997, the IRS issued Notice 97-64, which provides generally that
Host REIT may classify portions of its designated capital gain dividend as (i)
a 20% gain distribution (which would be taxable to non-corporate U.S.
Shareholders at a maximum rate of 20%), (ii) an unrecaptured Section 1250 gain
distribution (which would be taxable to non-corporate U.S. Shareholders at a
maximum rate of 25%) or (iii) a
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28% rate gain distribution (which would be taxable to non-corporate U.S.
Shareholders at a maximum rate of 28%). If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate gain
distribution. Notice 97-64 provides that a REIT must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Code as if the REIT were an
individual whose ordinary income were subject to a marginal tax rate of at
least 28%. Notice 97-64 further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling 89-
81, which requires that distributions made to different classes of shares be
composed proportionately of dividends of a particular type. On July 22, 1998,
as part of the IRS Restructuring Act, the holding period requirement for the
application of the 20% and 25% capital gain tax rates was reduced to 12 months
from 18 months for sales of capital gain assets on or after January 1, 1998.
Although Notice 97-64 will apply to sales of capital gain assets after July
28, 1997 and before January 1, 1998, it is expected that the IRS will issue
clarifying guidance (most likely applying the same principles set forth in
Notice 97-64) regarding a REIT's designation of capital gain dividends in
light of the new holding period requirements. For a discussion of the capital
gain tax rates applicable to non-corporate U.S. Shareholders, see"--1997 Act
and IRS Restructuring Act Changes to Capital Gain Taxation" below.
Distributions made by Host REIT that are properly designated by Host REIT as
capital gain dividends will be taxable to taxable corporate U.S. Shareholders
as long-term gain (to the extent that they do not exceed Host REIT's actual
net capital gain for the taxable year) at a maximum rate of 35% without regard
to the period for which such corporate U.S. Shareholder has held his Common
Shares. Such U.S. Shareholders may, however, be required to treat up to 20% of
certain capital gain dividends as ordinary income.
U.S. Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of Host REIT. Instead, such losses
would be carried over by Host REIT for potential offset against future income
(subject to certain limitations). Distributions made by Host REIT and gain
arising from the sale or exchange by a U.S. Shareholder of Common Shares will
not be treated as passive activity income, and, as a result, U.S. Shareholders
generally will not be able to apply any "passive losses" against such income
or gain. In addition, taxable distributions from Host REIT generally will be
treated as investment income for purposes of the investment interest
limitation. Capital gain dividends and capital gains from the disposition of
shares (including distributions treated as such), however, will be treated as
investment income only if the U.S. Shareholder so elects, in which case such
capital gains will be taxed at ordinary income rates.
Host REIT will notify shareholders after the close of its taxable year as to
the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host REIT may designate
(by written notice to its shareholders) its net capital gain so that with
respect to retained net capital gains, a U.S. Shareholder would include its
proportionate share of such gain in income, as long-term capital gain, and
would be treated as having paid its proportionate share of the tax paid by
Host REIT with respect to the gain. The U.S. Shareholder's basis in its Common
Shares would be increased by its share of such gain and decreased by its share
of such tax. With respect to such long-term capital gain of a U.S. Shareholder
that is an individual or an estate or trust, the IRS, as described above in
this section, has authority to issue regulations that could apply the special
tax rate applicable generally to the portion of the long-term capital gains of
an individual or an estate or trust attributable to deductions for
depreciation taken with respect to depreciable real property. IRS Notice 97-
64, described above in this section, did not address the taxation of non-
corporate REIT shareholders with respect to retained net capital gains.
Sale of Shares. Upon any sale or other disposition of Common Shares, a U.S.
Shareholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such Common Shares for tax purposes. Such
gain or loss will be capital gain or loss if the Common Shares have been held
by the U.S. Shareholder as a capital asset. In the case of a U.S. Shareholder
who is an individual or an estate or trust, such gain or loss will be long-
term capital gain or loss, subject to a 28% tax rate, if such shares have been
held for more than one year but not more than 18 months, and long-term capital
gain or
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loss, subject to a 20% tax rate, if such shares have been held for more than
18 months. In the case of a U.S. Shareholder that is a corporation, such gain
or loss will be long-term capital gain or loss if such shares have been held
for more than one year. In general, any loss recognized by a U.S. Shareholder
upon the sale or other disposition of Common Shares that have been held for
six months or less (after applying certain holding period rules) will be
treated as a long-term capital loss, to the extent of distributions received
by such U.S. Shareholder from Host REIT that were required to be treated as
long-term capital gains. For a U.S. Shareholder that is an individual, trust
or estate, the long-term capital loss will be apportioned among the applicable
long-term capital gain groups to the extent that distributions received by
such U.S. Shareholder were previously so treated.
1997 Act and IRS Restructuring Act Changes to Capital Gain Taxation. The
1997 Act altered the taxation of capital gain income. Under the 1997 Act,
individuals, trusts and estates that hold certain investments for more than 18
months may be taxed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Individuals, trusts and estates that
hold certain assets for more than one year but not more than 18 months may be
taxed at a maximum long-term capital gain rate of 28% on the sale or exchange
of those investments. The 1997 Act also provides a maximum rate of 25% for
"unrecaptured Section 1250 gain" for individuals, trusts and estates, special
rules for "qualified 5-year gain" and other changes to prior law. The recently
enacted IRS Restructuring Act, however, reduced the holding period requirement
established by the 1997 Act for the application of the 20% and 25% capital
gain tax rates to 12 months from 18 months for sales of capital gain assets
after December 31, 1997. The 1997 Act allows the IRS to prescribe regulations
on how the 1997 Act's capital gain rates will apply to sales of capital assets
by "pass-through entities" (including REITs, such as Host REIT) and to sales
of interests in "pass-through entities." For a discussion of the rules under
the 1997 Act that apply to the taxation of distributions by the Company to its
shareholders that are designated by Host REIT as "capital gain dividends," see
"--Distributions by Host REIT" above. Shareholders are urged to consult with
their own tax advisors with respect to the rules contained in the 1997 Act and
the IRS Restructuring Act.
BACKUP WITHHOLDING FOR HOST REIT DISTRIBUTIONS
Host REIT will report to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. Shareholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Shareholder that does not provide Host REIT
with a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, Host REIT may be
required to withhold a portion of its capital gain distributions to any U.S.
Shareholders who fail to certify their non-foreign status to Host REIT. See
"--Taxation of Non-U.S. Shareholders of Host REIT."
TAXATION OF TAX-EXEMPT SHAREHOLDERS OF HOST REIT
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
a tax-exempt entity. Based on that ruling, provided that a tax-exempt
shareholder (except certain tax-exempt shareholders described below) has not
held its Common Shares as "debt financed property" within the meaning of the
Code and such Common Shares are not otherwise used in a trade or business, the
dividend income from Host REIT will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Shares will not constitute UBTI
unless such tax-exempt shareholder has held such Common Shares as "debt
financed property" within the meaning of the Code or has used the Common
Shares in a trade or business.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans exempt from federal income taxation under
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Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income
from an investment in Host REIT will constitute UBTI unless the organization
is properly able to deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its investment in Host REIT.
Such prospective shareholders should consult their own tax advisors concerning
these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 (the "1993 Act") provides that, effective for taxable years beginning in
1994, a portion of the dividends paid by a "pension held REIT" shall be
treated as UBTI as to any trust which (i) is described in Section 401(a) of
the Code, (ii) is tax-exempt under Section 501(a) of the Code and (iii) holds
more than 10% (by value) of the interests in the REIT. Tax-exempt pension
funds that are described in Section 401(a) of the Code are referred to below
as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes
of the "not closely held" requirement, as owned by the beneficiaries of the
trust (rather than by the trust itself) and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT or
(b) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend
treated as UBTI is equal to the ratio of (i) the UBTI earned by the REIT
(treating the REIT as if it were a qualified trust and therefore subject to
tax on UBTI) to (ii) the total gross income of the REIT. A de minimis
exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts.
Based on the anticipated ownership of Common Shares immediately following
the REIT Conversion and as a result of certain limitations on transfer and
ownership of Common Shares contained in the Declaration of Trust, Host REIT
does not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS OF HOST REIT
The rules governing federal income taxation of the ownership and disposition
of Common Shares by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of federal
income tax and does not address state, local or foreign tax consequences that
may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that Host REIT qualifies for taxation as a
REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income
tax laws with regard to an investment in Common Shares, including any
reporting requirements.
Distributions by Host REIT. Distributions by Host REIT to a Non-U.S.
Shareholder that are neither attributable to gain from sales or exchanges by
Host REIT of United States real property interests nor designated by Host REIT
as capital gains dividends will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and
profits of Host REIT. Such distributions ordinarily will be subject to
withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are treated
as effectively connected with the conduct by the Non-U.S. Shareholder of a
United States trade or business. Under certain treaties, however, lower
withholding rates generally applicable to dividends do not apply to dividends
from a REIT, such as Host REIT. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. Dividends that are effectively
connected with such a trade or business will be subject to tax on a net basis
(that is, after allowance of deductions) at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such dividends and are
generally not subject to withholding. Any such dividends received by a Non-
U.S.
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Shareholder that is a corporation may also be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Host REIT expects to withhold United States
income tax at the rate of 30% on any distribution made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form or
certification evidencing eligibility for that lower rate is filed with Host
REIT or (ii) a Non-U.S. Shareholder files an IRS Form 4224 with Host REIT
claiming that the distribution is effectively connected income.
Distributions in excess of current or accumulated earnings and profits of
Host REIT will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's Common Shares, but
rather will reduce the adjusted basis of such Common Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
Common Shares, they will give rise to gain from the sale or exchange of its
Common Shares, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that Host REIT will be required to withhold 10% of any distribution in
excess of Host REIT's current and accumulated earnings and profits.
Consequently, although Host REIT intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that Host REIT does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate)
will be subject to withholding at a rate of 10%. However, the Non-U.S.
Shareholder may seek a refund of such amounts from the IRS if it subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of Host REIT, and the amount withheld
exceeded the Non-U.S. Shareholder's United States tax liability, if any, with
respect to the distribution.
Distributions to a Non-U.S. Shareholder that are designated by Host REIT at
the time of distribution as capital gain dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) the
investment in the Common Shares is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. Shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax, as discussed above) or (ii)
the Non-U.S. Shareholder is a nonresident alien individual who is present in
the United States for 183 days or more during the taxable year and has a "tax
home" in the United States, in which case the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains.
Pursuant to FIRPTA, distributions to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by Host REIT of United States
real property interests (whether or not designated as capital gain dividends)
will cause the Non-U.S. Shareholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to
U.S. Shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a Non-U.S. Shareholder that is a corporation, as
discussed above. Host REIT is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Shareholder's
federal income tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by Host REIT pursuant to the 1997 Act as undistributed
capital gains in respect of the Common Shares held by U.S. Shareholders (see
"--Annual Distribution Requirements Applicable to REITs" above) would be
treated with respect to Non-U.S. Shareholders in the manner outlined in the
preceding two paragraphs for actual distributions by Host REIT of capital gain
dividends. Under that approach, the Non-U.S. Shareholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom their proportionate share of the tax paid by Host REIT on
such undistributed capital gains (and to receive from the IRS a refund to the
extent their proportionate share of such tax paid by Host REIT were to exceed
their actual United States federal income tax liability).
Sale of Common Shares. Gain recognized by a Non-U.S. Shareholder upon the
sale or exchange of Common Shares generally will not be subject to United
States taxation unless such shares constitute a "United
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States real property interest" within the meaning of FIRPTA. The Common Shares
will not constitute a "United States real property interest" so long as Host
REIT is a "domestically controlled REIT." A "domestically controlled REIT" is
a REIT in which at all times during a specified testing period less than 50%
in value of its stock is held directly or indirectly by Non-U.S. Shareholders.
Host REIT is unable at this time to predict whether it will be a "domestically
controlled REIT," and therefore whether the sale of Common Shares will be
subject to taxation under FIRPTA. Moreover, even if Host REIT initially
qualifies as a "domestically controlled REIT," because the Common Shares are
expected to be publicly traded, no assurance can be given that Host REIT would
continue to be a "domestically controlled REIT." Notwithstanding the
foregoing, gain from the sale or exchange of Common Shares not otherwise
subject to FIRPTA will be taxable to a Non-U.S. Shareholder if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in
the United States. In such case, the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain.
Even if Host REIT does not qualify as or ceases to be a domestically-
controlled REIT, gain arising from the sale or exchange by a Non-U.S.
Shareholder of Common Shares would not be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" if (i) the
Common Shares are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market (e.g., the NYSE) and (ii)
such Non-U.S. Shareholder owned 5% or less of the Common Shares throughout the
five-year period ending on the date of the sale or exchange. If gain on the
sale or exchange of Common Shares were subject to taxation under FIRPTA, the
Non-U.S. Shareholder would be subject to regular United States income tax with
respect to such gain in the same manner as a taxable U.S. Shareholder (subject
to any applicable alternative minimum tax, a special alternative minimum tax
in the case of nonresident alien individuals and the possible application of
the 30% branch profits tax in the case of foreign corporations) and the
purchaser of the Common Shares would be required to withhold and remit to the
IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gain dividends or
(iii) distributions attributable to gain from the sale or exchange by Host
REIT of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Shares by or through a foreign office of a
foreign broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of Common Shares by a foreign
office of a broker that (a) is a United States person, (b) derives 50% or more
of its gross income for certain periods from the conduct of a trade or
business in the United States or (c) is a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States shareholders)
for United States tax purposes, unless the broker has documentary evidence in
its records that the holder is a Non-U.S. Shareholder and certain other
conditions are met or the shareholder otherwise establishes an exemption.
Payment to or through a United States office of a broker of the proceeds of a
sale of Common Shares is subject to both backup withholding and information
reporting unless the shareholder certifies under penalty of perjury that the
shareholder is a Non-U.S. Shareholder, or otherwise establishes an exemption.
A Non-U.S. Shareholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate
under rules currently in effect (unless otherwise invalidated due to changes
in the circumstances of the person whose name is on such certificate). A Non-
U.S. Shareholder should consult its own advisor regarding the effect of the
new Treasury Regulations.
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TAX ASPECTS OF HOST REIT'S OWNERSHIP OF OP UNITS
General. Substantially all of Host REIT's investments will be held through
the Operating Partnership, which will hold the Hotels either directly or
through the Hotel Partnerships (which, in turn, may hold Hotels through
certain Subsidiary Partnerships). In general, partnerships are "pass-through"
entities that are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from
the partnership. Host REIT will include in its income its proportionate share
of the foregoing partnership items for purposes of the various REIT income
tests and in the computation of its REIT taxable income. Moreover, for
purposes of the REIT asset tests, Host REIT will include its proportionate
share of assets held through the Operating Partnership, the Hotel Partnerships
and any Subsidiary Partnerships. See "--Federal Income Taxation of Host REIT
Following the Mergers--Ownership of Partnership Interests by a REIT."
Entity Classification. If the Operating Partnership, any of the Hotel
Partnerships, any of the Subsidiary Partnerships, or any other partnership or
LLC in which the Operating Partnership has a direct or indirect interest were
treated as an association, the entity would be taxable as a corporation and
therefore would be subject to an entity level tax on its income. In such a
situation, the character of Host REIT's assets and items of gross income would
change and could preclude Host REIT from qualifying as a REIT (see "Federal
Income Taxation of Host REIT Following the Mergers--Asset Tests Applicable to
REITs" and "--Income Tests Applicable to REITs").
At the time of the closing of the Mergers, Hogan & Hartson will deliver an
opinion to Host REIT stating that, based on certain factual assumptions and
representations described in the opinion, the Operating Partnership, each of
the Hotel Partnerships and each of the Subsidiary Partnerships will be treated
as a partnership (or disregarded) for federal income tax purposes (and not
treated as an association taxable as a corporation).
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the Partnership Agreement and the partnership agreements for
the Hotel Partnerships (and any Subsidiary Partnerships) are intended to
comply with the requirements of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels. As described above, pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property (such as the Hotels) that is contributed
to a partnership in exchange for an interest in the partnership must be
allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the Book-Tax Difference associated with the
property at the time of the contribution. The Partnership Agreement requires
that such allocations be made in a manner consistent with Section 704(c) of
the Code.
In general, the partners of the Operating Partnership who contributed
depreciated assets having an adjusted tax basis less than their fair market
value at the time of contribution (which includes all of the Limited Partners
owning interests in the Partnerships) will be allocated depreciation
deductions for tax purposes that are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition
of any of the contributed assets which have such a Book-Tax Difference, all
income attributable to such Book-Tax Difference generally will be allocated to
such partners. These allocations will tend to eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) do
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not always entirely eliminate the Book-Tax Difference on an annual basis or
with respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the contributed assets in the hands of the Operating
Partnership may cause Host REIT to be allocated lower depreciation and other
deductions, and possibly an amount of taxable income in the event of a sale of
such contributed assets in excess of the economic or book income allocated to
it as a result of such sale. Such an allocation might cause Host REIT to
recognize taxable income in excess of cash proceeds, which might adversely
affect Host REIT's ability to comply with the REIT distribution requirements.
See "Federal Income Taxation of Host REIT Following the Mergers--Annual
Distribution Requirements Applicable to REITs."
As described above in "Tax Consequences of the Merger Relief from
Liabilities/Deemed Cash Distribution," the Operating Partnership and Host REIT
have determined to use generally the traditional method, with a provision for
a curative allocation of gain on sale to the extent prior allocations of
depreciation with respect to a specific Hotel were limited by the "ceiling
rule" applicable under the traditional method, to account for Book-Tax
Differences with respect to the Hotels contributed to the Operating
Partnership in connection with the Mergers (although there may be certain
exceptions). This method is generally a more favorable method for accounting
for Book-Tax Differences from the perspective of those partners (including
Host REIT) receiving OP Units in exchange for property with a low basis
relative to value at the time of the Mergers and is a less favorable method
from the perspective of those partners contributing cash (or "high basis"
assets) to the Operating Partnership (including Host REIT, to the extent it
contributes cash to the Operating Partnership).
With respect to any property purchased by the Operating Partnership
subsequent to the Mergers, such property will initially have a tax basis equal
to its fair market value, and Section 704(c) of the Code will not apply.
OTHER TAX CONSEQUENCES FOR HOST REIT AND ITS SHAREHOLDERS
Host REIT and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it (through the
Operating Partnership) or they transact business or reside. The state and
local tax treatment of Host REIT and its shareholders may not conform to the
federal income tax consequences discussed above. Consequently, prospective
shareholders of Host REIT should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in Host REIT.
A portion of the cash to be used by Host REIT to fund distributions is
expected to come from each Non-Controlled Subsidiary through payments of
dividends on the shares of such corporation held by the Operating Partnership
(and interest on notes held by the Operating Partnership). Each Non-Controlled
Subsidiary will pay federal and state income tax at the full applicable
corporate rates. To the extent that a Non-Controlled Subsidiary is required to
pay federal, state or local taxes, the cash otherwise available for
distribution by Host REIT to its shareholders will be reduced accordingly.
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VOTING PROCEDURES
DISTRIBUTION OF SOLICITATION MATERIALS
This Consent Solicitation, together with the accompanying transmittal letter
and the Limited Partner consent (the "Consent Form"), constitute the
Solicitation Materials being distributed to the Limited Partners to obtain
their votes for, against or to abstain with respect to a Merger.
In order to participate in a Merger, the Limited Partners of each
Partnership must approve such participation by a certain vote of limited
partner interests as set forth in the table below under "--Required Vote and
Other Conditions." Each Partnership that approves the Merger will effect a
Merger as set forth below and in the Supplement relating to the individual
Partnership. Each Limited Partner, therefore, should complete and return the
Consent Form before the expiration of the Solicitation Period. The
Solicitation Period is the time period during which Limited Partners may vote
for or against the Mergers or abstain with respect thereto and indicate
whether they will retain their OP Units or exchange them for Notes. The
Solicitation Period will commence upon delivery of the Solicitation Materials
to the Limited Partners (on or about , 1998) and will continue until the
later of (a) , 1998 (a date not less than 60 calendar days from the
initial delivery of the Solicitation Materials) or (b) such later date as may
be selected by the General Partners and the Operating Partnership and as to
which notice is given to the Limited Partners. At their discretion, the
General Partners and the Operating Partnership may elect to extend the
Solicitation Period. Under no circumstances will the Solicitation Period be
extended beyond , 1998. Any Consent Form received by the information
agent (the "Information Agent") prior to 5:00 p.m., Eastern time, on the last
day of the Solicitation Period will be effective provided that such Consent
Form has been properly completed and signed. THE PARTNERSHIP INTERESTS OF
ATLANTA MARQUIS, CHICAGO SUITES, MDAH OR PHLP LIMITED PARTNERS WHO FAIL TO
RETURN A SIGNED CONSENT FORM BY THE END OF THE SOLICITATION PERIOD OR WHO
ABSTAIN WITH RESPECT THERETO WILL BE COUNTED AS VOTING AGAINST THE MERGER. THE
PARTNERSHIP INTERESTS OF DESERT SPRINGS, HANOVER, MHP OR MHP2 LIMITED PARTNERS
WHO FAIL TO RETURN A SIGNED CONSENT FORM BY THE END OF THE SOLICITATION PERIOD
WILL NOT BE COUNTED FOR PURPOSES OF DETERMINING WHETHER A MAJORITY OF LIMITED
PARTNER PARTNERSHIP INTERESTS ARE PRESENT, WHILE THE PARTNERSHIP INTERESTS OF
THOSE WHO ABSTAIN WILL BE COUNTED FOR PURPOSES OF DETERMINING WHETHER A
MAJORITY OF LIMITED PARTNER PARTNERSHIP INTERESTS ARE PRESENT, BUT WILL
EFFECTIVELY BE COUNTED AS VOTING AGAINST THE MERGER. FAILURE OF A LIMITED
PARTNER TO RETURN A SIGNED CONSENT FORM, WHETHER IT COUNTS AS A VOTE AGAINST
THE MERGER OR HINDERS THE DETERMINATION OF WHETHER A MAJORITY OF LIMITED
PARTNER PARTNERSHIP INTERESTS ARE PRESENT, MAY JEOPARDIZE COMPLETION OF THE
MERGERS.
The Consent Form seeks a Limited Partner's consent to the Merger and certain
related matters. If a Limited Partner has interests in more than one
Partnership, all of such interests will be set forth on the Consent Form and
the Consent Form will provide for separate votes by the Limited Partner for
each Partnership listed. LIMITED PARTNERS WHO RETURN A SIGNED CONSENT FORM BUT
FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY MATTER (INCLUDING THE
MERGER) WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER.
FIRPTA CERTIFICATION OR WITHHOLDING CERTIFICATE REQUIRED
As a condition to the receipt of OP Units in the Mergers, each Limited
Partner who does not want to be subject to withholding under FIRPTA, will be
required to provide to the Operating Partnership either a certification, made
under penalties of perjury, that it is a United States citizen or resident (or
if an entity, an entity organized under the laws of the United States) or,
alternatively, a withholding certificate from the IRS providing that no
withholding is required with respect to such Limited Partner in connection
with the Mergers. If such certification or withholding certificate is not
provided, the Operating Partnership will be required to withhold an amount
equal to 10% of the "amount realized" by such Limited Partner in the Mergers,
including both the value of the OP Units received and such Limited Partner's
share of the liabilities of his Partnership. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Withholding."
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NO SPECIAL MEETINGS
None of the Partnerships has scheduled a special meeting of its Limited
Partners to discuss the Solicitation Materials or the terms of the Mergers.
The General Partners, members of Host REIT's management and the Information
Agent intend to solicit actively the support of the Limited Partners for the
Mergers and, subject to applicable federal and state securities laws, hold
informal meetings with Limited Partners, answer questions about the Mergers
and the Solicitation Materials and explain the reasons for the recommendation
that Limited Partners vote to approve the Mergers. Costs of solicitation will
be allocated as set forth in "The Mergers and the REIT Conversion Expenses."
No person will receive compensation contingent upon solicitation of a
favorable vote.
REQUIRED VOTE AND OTHER CONDITIONS
The General Partners and the Operating Partnership have conditioned
participation in the Mergers by each Partnership upon obtaining the required
votes set forth in the table below. See "The Mergers and the REIT Conversion--
Conditions to the Consummation of the Mergers."
PARTNERSHIP REQUIRED VOTE
Atlanta Marquis Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests in each class of
Partnership Units and the
approval of the General Partner.
The General Partner holds 0.28%
of the outstanding Class A
limited partner interests. The
General Partner may vote its
Class A limited partner interests
and intends to vote such Class A
limited partner interests FOR the
Merger.
Chicago Suites Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner holds no limited partner
interests.
Desert Springs Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner must vote all of its
limited partner interests in the
same manner as the majority of
limited partner interests vote so
long as consents of a majority of
limited partner interests held by
Limited Partners are returned and
not withdrawn prior to the end of
the Solicitation Period. The
General Partner holds no limited
partner interests.
Hanover Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. An affiliate of
the General Partner holds 47.62%
of the outstanding limited
partner interests. The
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affiliate of the General Partner
must vote all of its limited
partner interests in the same
manner as the majority of limited
partner interests vote so long as
consents of a majority of limited
partner interests held by Limited
Partners are returned and not
withdrawn prior to the end of the
Solicitation Period.
MDAH Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner holds 0.48% of the
limited partner interests. The
General Partner may not vote its
limited partner interests.
MHP Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner and its affiliate
collectively hold 48.33% of the
outstanding limited partner
interests. The General Partner
and its affiliate must vote all
of their limited partner
interests in the same manner as
the majority of limited partner
interests vote so long as
consents of a majority of limited
partner interests held by Limited
Partners are returned and not
withdrawn prior to the end of the
Solicitation Period.
MHP2 Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner and its affiliate
collectively hold 52.62% of the
outstanding limited partner
interests. The General Partner
and its affiliate must vote all
of their limited partner
interests in the same manner as
the majority of limited partner
interests other than those
limited partner interests held by
the General Partner and its
affiliates actually voted (so
long as a majority of the outside
limited partners are present for
purposes of a vote by submitting
ballots or otherwise).
PHLP Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. The General
Partner holds 0.06% of the
limited partner interests. The
General Partner may vote its
limited partner interests and
intends to vote such limited
partner interests FOR the Merger.
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Record Date and Outstanding Partnership Units. The Record Date is , 1998
for all Partnerships. As of the Record Date, the following number of
Partnership Units were held of record by the number of Limited Partners
indicated below:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF UNITS
LIMITED UNITS HELD REQUIRED FOR APPROVAL
PARTNERSHIP PARTNERS OF RECORD OF THE MERGER
----------- --------- ----------- ----------------------
<S> <C> <C> <C>
Atlanta Marquis.................... 530 266
Chicago Suites..................... 335 168
Desert Springs..................... 900 N/A(1)
Hanover............................ 84 N/A(1)
MDAH............................... 414 206(2)
MHP................................ 1,000 N/A(1)
MHP2............................... 745 N/A(1)
PHLP............................... 1,800 901
</TABLE>
- --------
(1) The number of Partnership Units required for approval of a Merger cannot
be calculated because approval requires the affirmative vote of a majority
of the number of Partnership Units actually voted by Limited Partners;
provided, that, the total number of Partnership Units voted by Limited
Partners constitutes a majority of the outstanding Partnership Units held
by Limited Partners.
(2) The General Partner of MDAH holds 2.5 Partnership Units and may not vote
such Partnership Units. Therefore only 411.5 Partnership Units are
eligible to be voted and the total number of Partnership Units required to
approve the MDAH Merger is 206.
Each Limited Partner is entitled to one vote for each Partnership Unit held.
Accordingly, the number of Partnership Units entitled to vote with respect to
the Merger is equivalent to the number of Partnership Units held of record at
the Record Date.
Investor Lists. Under Rule 14a-7 of the Exchange Act, each Partnership is
required, upon the written request of a Limited Partner, to provide to the
requesting Limited Partner (i) a statement of the approximate number of
Limited Partners in such Limited Partner's Partnership and (ii) the estimated
cost of mailing a proxy statement, form of proxy or other similar
communication to such Limited Partners. In addition, a Limited Partner has the
right, at his or her option, either (a) to have his Partnership mail (at the
Limited Partner's expense) copies of any proxy statement, proxy form or other
soliciting materials furnished by the Partnership to the Partnership's Limited
Partners designated by the Limited Partner or (b) to have the Partnership
deliver to the requesting Limited Partner, within five business days of the
receipt of the request, a reasonably current list of the names, addresses and
class of Partnership Units held by the Partnership's Limited Partners. The
right to receive the list of Limited Partners is subject to the requesting
Limited Partner's payment of the cost of mailing and duplication at a rate of
$0.15 per page.
Tabulation of Votes. An automated system administered by will
tabulate the votes and dissents in connection with the Mergers. will
make the tabulation available to the General Partners and any Limited Partner
upon request. Abstentions will be tabulated with respect to the Mergers and
related matters. The number of Partnership Units that must be voted in favor
of the Merger for it to be approved by the respective Partnerships is shown in
the table above.
EXPERTS
The financial statements and schedule of Host Marriott Hotels as of January
2, 1998 and January 3, 1997 and for each of the three years in the period
ended January 2, 1998, the financial statements of HMC Senior Living
Communities, Inc. as of January 2, 1998 and for the period June 21, 1997
(inception) through January 2,
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1998, and the balance sheet of Host Marriott, L.P. as of June 19, 1998 and the
financial statements of Atlanta Marriott Marquis II Limited Partnership,
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P., Desert Springs
Marriott Limited Partnership, Hanover Marriott Limited Partnership, Marriott
Diversified American Hotels, L.P., Marriott Hotel Properties Limited
Partnership, Marriott Hotel Properties II Limited Partnership and Potomac
Hotel Limited Partnership as of December 31, 1997 and 1996 and each of the
three years ended December 31, 1997 included in this Consent Solicitation and
in the Supplements hereto have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
The Appraisals and the Fairness Opinion included in this Consent
Solicitation or the Registration Statement of which it is a part have been
prepared by American Appraisal Associates, Inc. and are included herein and
therein in reliance upon the authority of said Firm as experts are giving such
reports.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for the Operating Partnership and Host REIT by Hogan & Hartson L.L.P.,
Washington, D.C.
AVAILABLE INFORMATION
The Partnerships (except Chicago Suites, Hanover and MDAH) are subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and are required to file reports and other information
with the Securities and Exchange Commission (the "Commission"), 450 Fifth
Street N.W., Washington, D.C. 20549. In addition, the Operating Partnership
has filed a Registration Statement on Form S-4 under the Securities Act of
1933, as amended (the "Securities Act) and the rules and regulations
thereunder, with respect to the securities offered pursuant to this
Prospectus/Consent Solicitation Statement. This Prospectus/Consent
Solicitation Statement, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and financial schedules thereto. For further information concerning
the Mergers, please refer to the reports of the Partnerships (except Chicago
Suites, Hanover and MDAH) filed under the Exchange Act and the Operating
Partnership's Registration Statement and such exhibits and schedules, copies
of which may be examined without charge at, or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and which
will also be available for inspection and copying at the regional offices of
the Commission located at Room 1400, 75 Park Place, New York, New York 10007
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission at "http: www.sec.gov".
A separate Supplement to this Prospectus/Consent Solicitation Statement has
been prepared for each Partnership and will be delivered to each Limited
Partner of the Partnership covered thereby. Upon receipt of a written request
by a Limited Partner or representative so designated in writing, the General
Partners will send a copy of any Supplement without charge. All requests
should be directed to: Investor Relations, 10400 Fernwood Road, Bethesda,
Maryland 20817, telephone number: (301) 380-2070 (between the hours of 9:00
a.m. and 4:00 p.m., eastern time).
Statements contained in this Prospectus/Consent Solicitation Statement or
any supplements hereto as to the contents of any contract or other document
which is filed as an exhibit to the Registration Statement are not necessarily
complete, and each such statement is qualified in its entirety by reference to
the full text of such contract or document.
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Upon consummation of the REIT Conversion, Host REIT and the Operating
Partnership will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
NYSE requirements, if any, holders of the OP Units and the Common Shares will
receive annual reports containing audited financial statements with a report
thereon by Host REIT's and the Operating Partnership's independent public
accountants, and quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year. If a Partnership
does not participate in the Mergers and REIT Conversion, such Partnership will
continue to file reports and other information with the Commission as required
by law, if applicable.
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GLOSSARY
"100% Participation with No Notes Issued" means all Partnerships participate
in the Mergers and the REIT Conversion and no Notes are issued.
"100% Participation with Notes Issued" means all Partnerships participate in
the Mergers and the REIT Conversion and every Limited Partner elects to
receive Notes.
"15% Personal Property Test" means the test applied to determine whether a
REIT satisfies the requirement under the Code that, in order for rent
attributable to the lease of personal property to qualify as "rents from real
property," such rent must not account for more than 15% of the total rent
received under the lease of real and personal property.
"1993 Act" means the Omnibus Budget Reconciliation Act of 1993.
"1997 Act" means the Taxpayer Relief Act of 1997.
"AAA" means American Appraisal Associates, Inc., an independent, nationally
recognized hotel valuation and financial advisory firm that performed the
Appraisals as to the Hotel(s) owned by each Partnership and rendered the
Fairness Opinion.
"Acquired Earnings" mean undistributed earnings and profits of Host REIT
attributable to a "C Corporation" taxable year (including accumulated
undistributed earnings and profits acquired from Host, some of which may have
resulted from either transactions undertaken in contemplation of the REIT
Conversion or the REIT Conversion itself).
"ADA" means the Americans with Disabilities Act.
"Adjusted Appraised Value" of a Partnership equals the Appraised Value of
its Hotels, adjusted as of the Final Valuation Date for lender reserves,
capital expenditure reserves, existing indebtedness (including a "mark to
market" adjustment to reflect the fair market value of such indebtedness),
certain deferred maintenance costs, deferred management fees and transfer and
recordation taxes and fees.
"Adjusted NOI" means NOI as adjusted for incentive management fees and
certain capital expenditures.
"AMTI" means alternative minimum taxable income.
"Anti-Abuse Rule" means a regulation under the Partnership Provisions of the
Code that authorizes the IRS, in certain "abusive" transactions involving
partnerships, to disregard the form of the transaction and recast it for
federal tax purposes as the IRS deems appropriate.
"Appraisal" means an appraisal of a Partnership's Hotel performed by AAA as
of March 1, 1998 that is an evaluation of the Market Value of a property as if
available for sale in the open market.
"Appraised Value" means the market value of each Partnership's Hotels as of
March 1, 1998 as determined by AAA.
"Atlanta Marquis" means Atlanta Marriott Marquis II Limited Partnership, a
Delaware limited partnership, or, as the context may require, such entity
together with its subsidiaries, or any of such subsidiaries.
"Available Cash" means net income plus depreciation and amortization and any
reduction in reserves and minus interest and principal payments on debt,
capital expenditures, any additions to reserves and other adjustments.
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"Blackstone Acquisition" means the acquisition, on the Effective Date, by
the Operating Partnership of twelve full-service hotels and certain other
assets from the Blackstone Entities in exchange for approximately 43.7 million
OP Units, assumption of debt or cash payments totaling approximately $862
million and a distribution of up to 18% of the shares of SLC common stock.
"Blackstone Entities" mean The Blackstone Group, a Delaware limited
partnership and a series of funds controlled by Blackstone Real Estate
Partners, a Delaware limited partnership.
"Blackstone Hotels" mean the twelve upscale and luxury full-service hotel
properties to be acquired by Host from the Blackstone Entities in the
Blackstone Acquisition.
"Bond Refinancing" means the refinancing of $1.55 billion of outstanding
public bonds through offers to purchase such debt securities for cash and a
concurrent solicitation of consents to amend the terms of the debt securities
to permit the transactions constituting the REIT Conversion.
"Book-Tax Difference" means the difference between the fair market value of
property contributed to a partnership at the time of contribution and the
adjusted tax basis of such property at the time of such contribution.
"Built-In Gain Asset" means an asset which has been acquired from a C
corporation in a transaction in which the basis of the asset in the hands of
Host REIT is determined by reference to the basis of the asset in the hands of
the C corporation.
"Business Day" means any day, other than a Saturday or Sunday, on which the
banking institutions in the City of New York are open for business.
"Chain Services" mean services generally furnished on a central or regional
basis to the Hotels. Such services include the following: (i) the development
and operation of computer systems and reservation services, (ii) regional
management and administrative services, regional marketing and sales services,
regional training services, manpower development and relocation costs of
regional personnel and (iii) such additional central or regional services as
may from time to time be more efficiently performed on a regional or group
level.
"Chicago Suites" means Mutual Benefit Chicago Marriott Suite Hotel Partners,
L.P., a Rhode Island limited partnership.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the U.S. Securities and Exchange Commission.
"Common Share" means a common share of beneficial interest, $.01 par value
per share, of Host REIT.
"Company" means Host, with respect to periods prior to the REIT Conversion,
and Host REIT and the Operating Partnership, or any of their subsidiaries,
with respect to the period after the REIT Conversion.
"Consent Solicitation" means the Prospectus/Consent Solicitation Statement
of the Operating Partnership dated , 1998.
"Continuation Value" of a Partnership represents AAA's estimate, as adopted
by the General Partners, of the discounted present value as of January 1, 1998
of the limited partners' share of estimated future cash distributions and
estimated net sales proceeds plus lender reserves assuming that the
Partnership continues as an operating business for twelve years and its assets
are sold on December 31, 2009 for their then estimated fair market value.
"Control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
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"Control shares" mean voting shares which, if aggregated with all other
voting 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.
"Convertible Preferred Securities" means the 6 3/4% Convertible Quarterly
Income Preferred Securities issued by Host Marriott Financial Trust, with an
aggregate liquidation amount of $550 million, which are guaranteed on a
subordinated basis by, and convertible into the common stock of, Host.
"CPI" means the Consumer Price Index.
"Declaration of Trust" means the Declaration of Trust of Host REIT, dated
, 1998.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act.
"Desert Springs" means Desert Springs Marriott Limited Partnership, a
Delaware limited partnership, or, as the context may require, such entity
together with its subsidiaries, or any of such subsidiaries.
"Disguised Sale Regulations" mean Section 707 of the Code and the Treasury
Regulations thereunder.
"Effective Date" means the date of the closing of the Mergers.
"Effective Time" means the time at which the Certificates of Merger with
respect to the Mergers of the Merger Partnerships with the Participating
Partnerships are filed with the Secretaries of State of the State of Delaware
and the State of Rhode Island.
"EITF" means the Emerging Issues Task Force of the Financial Accounting
Standards Board.
"Employee Benefits Allocation Agreement" means the Employee Benefits
Allocation and Other Employment Matters Agreement entered into by Host and HM
Services that provides for the allocation of certain responsibilities with
respect to employee compensation, benefits and labor matters.
"Engineering Study" means a study prepared by an engineer retained by Host
with respect to the deferred maintenance requirements for each of the
Partnership's Hotels.
"Excess FF&E" means replacement FF&E that would cause the average tax basis
of the items of the Lessor's FF&E and other personal property that are leased
to the applicable Lessee to exceed 15% of the aggregate average tax basis of
the real and personal property subject to the applicable Lease.
"Excess Losses" mean losses that would have the effect of creating a deficit
balance in a Limited Partner's capital account.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Value" of a Partnership or Partnership Interest means the value
equal to the greatest of its Adjusted Appraised Value, Continuation Value and
Liquidation Value.
"Fairness Opinion" means the fairness opinion rendered by AAA which
concluded that: (i) the Exchange Value and the methodologies and underlying
assumptions used to determine the Exchange Value, the Adjusted Appraised
Value, the Continuation Value and the Liquidation Value of each Partnership
(including, without limitation, the assumptions used to determine the various
adjustments to the Appraised Values of the Hotels) are fair and reasonable,
from a financial point of view, to the Limited Partners of each Partnership
and (ii) the
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methodologies used to determine the price of an OP Unit and to allocate the
equity in the Operating Partnership to be received by the Limited Partners of
Partnership are fair and reasonable to the Limited Partners of each
Partnership.
"FF&E" means furniture, fixtures and equipment.
"FF&E Adjustment" means the amount by which the annual Minimum Rent would be
reduced in the case that the average tax basis of the items of the Lessor's
FF&E and other personal property that are leased to the applicable Lessee
exceeds 15% of the aggregate average tax basis of the real and personal
property subject to the applicable Lease. The FF&E Adjustment is equal to (i)
the Market Leasing Factor times the cost of the excess FF&E (if the Special
Subsidiary leases the FF&E to the Lessee) or (ii) 110% of the Market Leasing
Factor times the cost of the excess FF&E (if the Special Subsidiary does not
lease the FF&E to the Lessee), for a period equal to the weighted average
useful life of the excess FF&E.
"FF&E Replacements" mean FF&E to be acquired and certain routine repairs
that are normally capitalized to be performed in the next year.
"Final Valuation Date" means the date that is the end of the four-week
accounting period ending at least 20 days prior to the Effective Date and is
the date when the Exchange Values will be finally determined.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Forum Group" means the Forum Group, Inc., which was acquired by Host on
June 21, 1997 from Marriott Senior Living Services, Inc., a subsidiary of
Marriott International. The Forum Group holds interests in 31 premier senior
living communities.
"Full Participation Scenario" means the REIT Conversion occurs, all the
Partnerships participate and no Notes are issued.
"Funds From Operations" or "FFO" as defined by NAREIT is net income computed
in accordance with GAAP, excluding gains or losses from debt restructuring and
sales of properties, plus real estate related depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures. FFO
should not be considered as an alternative to net income, operating profit,
cash flows from operations or any other operating or liquidity performance
measure prescribed by GAAP. FFO is also not an indicator of funds available to
fund the Company's cash needs, including its ability to make distributions.
The Company's method of calculating FFO may be different from methods used by
other REITs and, accordingly, is not comparable to such other REITs.
"GAAP" means generally accepted accounting principles.
"General Partner" means the general partner of a Partnership, each of which
general partners is a wholly owned, direct or indirect subsidiary of Host
(except in the case of PHLP, in which Host is the General Partner).
"Gross Revenues" mean proceeds from aggregate sales from a Hotel, including
room sales, food and beverage sales and telephone and other sales.
"Hanover" means Hanover Marriott Limited Partnership, a Delaware limited
partnership.
"Holders" mean persons in whose names the Notes are registered in the
security register for the Notes.
"Host" means Host Marriott Corporation, a Delaware corporation.
"Host REIT" means Host Marriott Trust, a Maryland real estate investment
trust, which will be the sole general partner of the Operating Partnership and
the successor to Host.
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"Hotel Partnership" means any Partnership or Private Partnership.
"Hotels" mean the approximately 120 full-service hotels operating primarily
under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand
names in which the Operating Partnership and its subsidiaries will initially
have controlling interests or own outright following the REIT Conversion and
the Blackstone Acquisition.
"Impermissible Tenant Service Income" means any amount charged to a tenant
for services rendered by Host REIT or its affiliates other than through an
independent contractor from whom Host REIT derives no revenue excluding for
these purposes services "usually or customarily rendered" in connection with
the rental of real property and not otherwise considered "rendered to the
occupant."
"Incentive Compensation Trust" means the Host Marriott Incentive
Compensation Statutory Trust, a Delaware statutory business trust, the
beneficiaries of which with respect to distributions of income are employees
of Host REIT eligible to participate in the Comprehensive Stock Incentive Plan
(excluding Trustees of Host REIT and certain other highly compensated
employees). The Incentive Compensation Trust is the owner of the voting stock
of the Non-Controlled Subsidiaries.
"Indenture" means the indenture entered into between the Operating
Partnership and pursuant to which the Notes will be issued.
"Indenture Trustee" means , the trustee under the
Indenture.
"Information Agent" means .
"Initial Basis" means a Limited Partner's initial tax basis in his OP Units.
"Initial Valuation Date" means , 1998.
"Interest Payment Date" means each June 15 and December 15 commencing June
15, 1999.
"Interested Shareholder" means a person who owns 10% or more of the voting
power of a trust's then outstanding shares of beneficial interests or his
affiliate.
"IRS" means the Internal Revenue Service.
"IRS Restructuring Act" means the Internal Revenue Service Restructuring and
Reform Act of 1998, which was signed into law on July 22, 1998.
"Leases" mean the lease agreements under which the Lessees will lease the
Hotels from the Operating Partnership.
"Lessees" mean the entities to which the Operating Partnership will lease
the Hotels and who will operate the Hotels under the existing management
agreements and pay rent to the Operating Partnership.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" mean the limited partners, excluding those affiliated
with Host, of the Partnerships.
"Liquidation Value" of a Partnership represents the General Partners'
estimate of the net proceeds to limited partners resulting from the assumed
sale as of December 31, 1998 of the Hotel(s) of the Partnership, each at its
Adjusted Appraised Value (after eliminating any "mark to market" adjustment
and adding back the deduction for transfer taxes, if any, made in deriving the
Adjusted Appraised Value) less (i) estimated liquidation costs, expenses and
contingencies equal to 2.5% of Appraised Value and (ii) prepayment penalties
or defeasance costs, as applicable.
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"Management Agreements" mean the current management agreements pursuant to
which the Managers manage the Hotels. Following REIT Conversion, the
management agreements will be assigned to the Lessees for the term of the
applicable Lease.
"Managers" mean the subsidiaries of Marriott International and other
companies who manage the Hotels on behalf of Host or the Hotel Partnerships
(and following the REIT Conversion, on behalf of the Lessees) pursuant to the
existing management agreements.
"Market Leasing Factor" means the amount used to determine the FF&E
Adjustment to Minimum Rent in the case that the average tax basis of the items
of the Lessor's FF&E and other personal property that are leased to the
applicable Lessee exceed 15% of the aggregate average tax basis of the real
and personal property subject to the applicable Lease. The Market Leasing
Factor will be determined for the first two years under a Lease at the time
the Lease is executed. Each year thereafter, the Market Leasing Factor will be
determined by an independent valuation expert, mutually acceptable to the
Lessor and the Lessee, who shall determine the amount based upon the median of
the leasing rates of at least three nationally recognized companies engaged in
the business of leasing similar personal property.
"Market Value" means the most probable price which a property should bring
in a competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably and
assuming the price is not affected by undue stimuli. Implicit in this
definition is the consummation of a sale as of a specific date and the passing
of title from seller to buyer under conditions whereby: (i) the buyer and
seller are typically motivated; (ii) both parties are well informed or well
advised, and each is acting in what he considers his own best interest; (iii)
a reasonable time frame is allowed for exposure in the open market;
(iv) payment is made in terms of cash in U.S. dollars or in terms of financial
arrangements comparable thereto and (v) the price represents the normal
consideration for the property sold unaffected by special or creative
financing or sales concessions granted by anyone associated with the sale.
"Marriott International" means Marriott International, Inc., a Delaware
corporation.
"Maryland REIT Law" means Title 8 of the MGCL.
"Maturity Date" means December 15, 2005.
"MDAH" means Marriott Diversified American Hotels, L.P., a Delaware limited
partnership.
"Merger" means the proposed merger of a Merger Partnership into a
Partnership pursuant to this Consent Solicitation, in which the Partnership is
the surviving entity.
"Merger Expenses" mean all costs and expenses incurred in connection with
the proposed Mergers, including transfer and recordation taxes and fees.
"Merger Partnership" means a newly formed direct or indirect subsidiary of
the Operating Partnership which will merge with and into a Partnership.
"MGCL" means the Maryland General Corporation Law.
"MHP" means Marriott Hotel Properties Limited Partnership, a Delaware
limited partnership, or, as the context may require, such entity together with
its subsidiaries, or any of such subsidiaries.
"MHP2" means Marriott Hotel Properties II Limited Partnership, a Delaware
limited partnership, or, as the context may require, such entity together with
its subsidiaries, or any of such subsidiaries.
"Minimum Rent" means a fixed dollar amount of rent payable monthly by the
Lessee to the Operating Partnership.
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"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"Net Cash Proceeds" mean net cash proceeds from the (i) sale or other
disposition of a Hotel for an amount in excess of (a) the amount required to
repay mortgage indebtedness (outstanding immediately prior to the Mergers)
secured by such Hotel or otherwise required to be applied to the reduction of
indebtedness of such Partnership and (b) the costs incurred by the Partnership
in connection with such sale or other disposition or (ii) refinancing (whether
at maturity or otherwise) of any indebtedness secured by any Hotel in an
amount in excess of (a) the amount of indebtedness secured by such Hotel at
the time of the Mergers, calculated prior to any repayment or other reduction
in the amount of such indebtedness in the Mergers and (b) the costs incurred
by the Operating Partnership or such Partnership in connection with such
refinancing.
"New Credit Facility" means a new $1.25 billion unsecured credit facility.
"NOI" means net operating income or the income before interests, taxes,
depreciation and amortization.
"Non-Controlled Subsidiaries" mean the one or more taxable corporations in
which the Operating Partnership will own 95% of the economic interest but no
voting stock and which will hold various assets contributed by Host and its
subsidiaries to the Operating Partnership, which assets, if owned directly by
the Operating Partnership, might jeopardize Host REIT's status as a REIT.
"Non-Participating Partnership" means a Partnership whose Limited Partners
do not vote in favor of the Merger and which does not participate in a Merger.
"Non-U.S. Shareholders" mean persons that are, for purposes of federal
income taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts.
"Note" means an unsecured % Callable Note due December 15, 2005 of the
Operating Partnership which a Limited Partner, having previously so elected at
the time of voting, can receive at the time of the Mergers in exchange for OP
Units with a principal amount equal to the Note Election Amount of the Limited
Partner's Partnership Interest.
"Note Election Amount" means the principal amount of a Note received by a
Limited Partner who elects to receive such Note in exchange for OP Units,
which is equal to the greater of (i) the Liquidation Value or (ii) 60% of the
Exchange Value.
"Note Election" means the acquisition and ownership of Notes received by
Limited Partners who elect to tender the OP Units received in the Mergers to
the Operating Partnership in exchange for Notes.
"NYSE" means the New York Stock Exchange, Inc.
"OP Unit" means a unit of limited partnership interest in the Operating
Partnership.
"Operating Partnership" means Host Marriott, L.P., a Delaware limited
partnership, or, as the context may require, such entity together with its
subsidiaries, including the Non-Controlled Subsidiaries, or any of them; also
means Host, when used to describe such entity on a pro forma basis before the
REIT Conversion.
"Original Limited Partner's Original Basis" means the amount of basis, for
tax purposes, that a Limited Partner who purchased his Partnership Interest in
the original offering by the Partnership of Partnership Interests and who has
held such Partnership Interest at all times since would have.
"Ownership Limit" means the prohibition against ownership, directly or by
virtue of the attribution provisions of the Code, by any single shareholder of
more than (i) 9.8% of the lesser of the number or value of Common Shares
outstanding or (ii) 9.8% of the lesser of the number or value of the issued
and outstanding preferred shares of any class or series of Host REIT.
257
<PAGE>
"Participating Partnership" means a Partnership whose Limited Partners vote
in favor of the Merger and which participates in a Merger.
"Partnership" means any of Atlanta Marquis, Chicago Suites, Desert Springs,
Hanover, MDAH, MHP, MHP2 or PHLP or, as the context may require, any such
entity together with its subsidiaries, or any of such subsidiaries.
"Partnership Agreement" means the amended and restated agreement of limited
partnership of the Operating Partnership substantially in the form attached
hereto as Appendix A.
"Partnership Interests" mean the interests of the Limited Partners in their
respective Partnerships.
"Partnership Provisions" mean the partnership provisions of the Code.
"Partnership Unit" means a unit of limited partnership interest in a
Partnership.
"Percentage Rent" means an amount of rent based upon specified percentages
of aggregate sales (including room sales, food and beverage sales and
telephone and other sales) at each Hotel which is subject to a Lease.
"Person" means an individual, corporation, partnership, limited liability
company, trust or other entity.
"PHLP" means Potomac Hotel Limited Partnership, a Delaware limited
partnership.
"Plan Assets" mean the underlying assets of Host REIT which are deemed to be
assets of an investing ERISA Plan.
"Private Partnership" means a partnership (other than a Partnership) or
limited liability company that owns one or more full-service Hotels and that,
prior to the REIT Conversion, is partially but not wholly owned by Host or one
of its subsidiaries. The Private Partnerships are not participating in the
Mergers.
"Projected Year" means the twelve-month period ending February 28, 1999,
used by AAA to estimate the Appraised Value of each Hotel.
"Prohibited Owner" means a Person holding record title to any shares in
excess of the Ownership Limit.
"Prohibited Transferee" means a Person who would violate the Ownership Limit
or any other restriction in the Declaration of Trust because of a transfer of
shares of beneficial interest of Host REIT to such Person or any other event.
"Recognition Period" means the ten-year period beginning on the date on
which a Built-In Gain Asset is acquired by Host REIT.
"Record Date" means , 1998.
"Redemption Amount" means an amount of cash equal to the deemed fair market
value of OP Units at the time of redemption.
"Redemption Price" means an amount of cash equal to the sum of the principal
amount of the Notes being redeemed plus accrued interest thereon to the
redemption date.
"Regular Record Date" means a date 15 days prior to an Interest Payment
Date, on which the Holders of the Notes are determined, regardless of whether
such day is a Business Day.
"REIT" means a real estate investment trust.
258
<PAGE>
"REIT Conversion" means (i) the contribution by Host of its wholly owned
Hotels, its interests in the Hotel Partnerships and certain other businesses
and assets to the Operating Partnership, (ii) the refinancing and amendment of
the debt securities and certain credit facilities of Host substantially in the
manner described herein, (iii) the Mergers (if and to the extent consummated),
(iv) the acquisition (whether by merger or otherwise) by the Operating
Partnership of certain Private Partnerships or interests therein, (v) the
Blackstone Acquisition (if and to the extent such acquisition is consummated),
(vi) the creation and capitalization of the Non-Controlled Subsidiaries, (vii)
the merger of Host into Host REIT and subsequent distribution by Host REIT of
SLC common stock, cash and possibly other consideration to Host REIT's
shareholders and the Blackstone Entities, (viii) the leasing of the Hotels to
subsidiaries of SLC or others and (ix) such other transactions and steps
occurring prior to, substantially concurrent with or within a reasonable time
after the Effective Date as may be necessary or desirable to complete the
transactions contemplated herein or otherwise to permit Host REIT to elect to
be treated as a REIT for federal income tax purposes.
"Related Party Tenant" means a tenant in which Host REIT, or an actual or
constructive owner of 10% or more of Host REIT, actually or constructively
owns 10% or more of the interests.
"REVPAR" means revenue per available room. REVPAR measures daily room
revenues generated on a per room basis by combining the average daily room
rate charged and the average daily occupancy achieved. REVPAR excludes food
and beverage and other ancillary revenues generated by the hotel.
"Rhode Island Act" means the Rhode Island Uniform Limited Partnership Act.
"RIC" means a Regulated Investment Company.
"SAR" means stock appreciation rights.
"Section 704(c) Minimum Gain" means the amount of any taxable gain that
would be allocated to a partner under Section 704(c) of the Code (or in the
same manner as Section 704(c) of the Code in connection with a revaluation of
partnership property) if the partnership disposed of all partnership property
(in a taxable transaction) subject to one or more nonrecourse liabilities of
the partnership in full satisfaction of such liabilities and for no other
consideration.
"Section 751 Assets" mean "unrealized receivables" (including depreciation
recapture) and/or "substantially appreciated inventory items" as defined in
Section 751 of the Code.
"Securities Act" means the Securities Act of 1933, as amended.
"SFAS" means Statement of Financial Accounting Standard.
"Significant Subsidiary" means each significant subsidiary (as defined in
Rule 1-02(w) of Regulation S-X promulgated under the Securities Act) of the
Operating Partnership.
"SLC" means HMC Senior Communities, Inc., a Delaware corporation, or, as the
context may require, such entity together with the Lessees and its other
subsidiaries or any of them, which currently is a wholly owned subsidiary of
Host but will become a separate public company as part of the REIT Conversion
when Host distributes the common stock of SLC to Host's existing shareholders
and the Blackstone Entities.
"Solicitation Materials" mean the Consent Solicitation and the Consent Form.
"Solicitation Period" means the period of time commencing at the time the
Consent Solicitation and other Solicitation Materials are first distributed to
the Limited Partners and ending at the later of (i) , 1998 or (ii) such
later date as the Operating Partnership may elect, in its sole and absolute
discretion.
"Subsidiary Partnerships" mean partnerships or limited liability companies
in which either the Operating Partnership or the Hotel Partnerships have an
interest.
259
<PAGE>
"Tax Matters Partner" means the Person designated at the partnership level
to represent the partnership in a unified partnership proceeding to determine
income, gain, loss, deduction and credit for each Partner. The Partnership
Agreement appoints Host REIT as the Tax Matters Partner for the Operating
Partnership.
"TEFRA" means the Tax Equity and Fiscal Responsibility Act of 1982.
"TMT" means tentative minimum tax.
"Total Market Capitalization" means total debt plus fully diluted market
equity value.
"Treasury Regulations" mean the regulations promulgated by the IRS under the
Code.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States or any political subdivision
thereof, (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have authority to control
all substantial decisions of the trust.
"UBTI" means unrelated business taxable income.
"Unit Redemption Right" means the right of Limited Partners to redeem,
beginning one year following the Effective Date, their OP Units and receive,
at Host REIT's election, either Common Shares on a one-for-one basis (subject
to adjustment) or cash in an amount equal to the market value of such shares.
"UPREIT" means an umbrella partnership real estate investment trust.
260
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial information is included on the pages indicated:
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOST MARRIOTT HOTELS (PREDECESSOR TO THE OPERATING PARTNERSHIP)
Report of Independent Public Accountants................................. F-2
Combined Consolidated Balance Sheets as of January 2, 1998 and January 3,
1997.................................................................... F-3
Combined Consolidated Statements of Operations for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995.................. F-4
Combined Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995.................. F-5
Notes to Combined Consolidated Financial Statements...................... F-6
Condensed Combined Consolidated Balance Sheet as of June 19, 1998
(unaudited)............................................................. F-29
Condensed Combined Consolidated Statements of Operations for the Twenty-
four Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)............ F-30
Condensed Combined Consolidated Statements of Cash Flows for the Twenty-
four Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)............ F-31
Notes to Condensed Combined Consolidated Financial Statements
(unaudited)............................................................. F-32
HMC SENIOR COMMUNITIES, INC., WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION (TENANT FINANCIAL STATEMENTS)
Report of Independent Public Accountant.................................. F-38
Consolidated Balance Sheet as of January 2, 1998......................... F-39
Consolidated Statement of Operations for the Period from June 21, 1997
(inception) through January 2, 1998..................................... F-40
Consolidated Statement of Shareholders' Equity for the Period from June
21, 1997 (inception) through January 2, 1998............................ F-41
Consolidated Statement of Cash Flows for the Period from June 21, 1997
(inception) through January 2, 1998..................................... F-42
Notes to Consolidated Financial Statements............................... F-43
Condensed Consolidated Balance Sheet as of June 19, 1998 (unaudited)..... F-53
Condensed Consolidated Statement of Operations for the Twenty-four Weeks
Ended June 19, 1998 (unaudited)......................................... F-54
Condensed Consolidated Statement of Cash Flows for the Twenty-four Weeks
Ended June 19, 1998 (unaudited)......................................... F-55
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-56
HOST MARRIOTT, L.P.
Report of Independent Public Accountants................................. F-58
Balance Sheet as of June 19, 1998........................................ F-59
Notes to Balance Sheet................................................... F-60
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OPERATING PARTNERSHIP
Introduction to Unaudited Pro Forma Financial Statements of the Company.. F-62
100% Participation with No Notes Issued
Pro Forma Balance Sheet as of June 19, 1998.............................. F-64
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................... F-68
Pro Forma Statements of Cash Flows for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................... F-72
100% Participation with Notes Issued
Pro Forma Balance Sheet as of June 19, 1998.............................. F-75
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................... F-78
Pro Forma Statements of Cash Flows for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................... F-82
SLC
Introduction to Unaudited Pro Forma Financial Statements of SLC.......... F-86
Pro Forma Balance Sheet as of June 19, 1998.............................. F-87
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998 .................................. F-88
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying combined consolidated balance sheets of
Host Marriott Hotels (as defined in Note 1) as of January 2, 1998 and January
3, 1997, and the related combined consolidated statements of operations and
cash flows for each of the three fiscal years in the period ended January 2,
1998. These financial statements are the responsibility of Host Marriott
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the combined consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Host
Marriott Hotels as of January 2, 1998 and January 3, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 2, 1998, in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 2 to the combined consolidated financial
statements, in 1995 Host Marriott Hotels changed its method of accounting for
the impairment of long-lived assets.
Arthur Andersen LLP
Washington, D.C.
May 22, 1998
F-2
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Property and Equipment, net..................................... $4,634 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)...... 54 297
Due from Managers............................................... 87 89
Investments in Affiliates....................................... 13 11
Other Assets.................................................... 271 246
Short-term Marketable Securities................................ 354 --
Cash and Cash Equivalents....................................... 494 704
------ ------
$5,907 $5,152
====== ======
LIABILITIES AND EQUITY
Debt
Senior Notes.................................................. $1,585 $1,021
Mortgage Debt................................................. 1,784 1,529
Other......................................................... 97 97
------ ------
3,466 2,647
Accounts Payable and Accrued Expenses........................... 59 74
Deferred Income Taxes........................................... 487 464
Other Liabilities............................................... 371 290
------ ------
Total Liabilities........................................... 4,383 3,475
------ ------
Obligation to Host Marriott Corporation Related to Mandatorily
Redeemable Convertible Preferred Securities of a Subsidiary
Trust Holding Company of Host Marriott Corporation
Substantially All of Whose Assets are the Convertible
Subordinated Debentures Due 2026 ("Convertible Preferred
Securities")................................................... 550 550
Equity
Investments and Advances from Host Marriott Corporation....... 974 1,127
------ ------
$5,907 $5,152
====== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-3
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
REVENUES
Hotels................................................. $1,093 $ 717 $ 474
Net gains (losses) on property transactions............ (11) 1 (3)
Equity in earnings of affiliates....................... 5 3 --
Other.................................................. 23 11 13
------ ----- -----
Total revenues....................................... 1,110 732 484
------ ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management
fees of $162 million, $101 million and $67 million,
respectively)......................................... 649 461 281
Other (including a $60 million write-down of undevel-
oped land in 1995).................................... 29 38 89
------ ----- -----
Total operating costs and expenses................... 678 499 370
------ ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................... 432 233 114
Minority interest........................................ (32) (6) (2)
Corporate expenses....................................... (45) (43) (36)
Interest expense......................................... (287) (237) (178)
Dividends on Convertible Preferred Securities............ (37) (3) --
Interest income.......................................... 52 48 27
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................... 83 (8) (75)
Benefit (provision) for income taxes..................... (36) (5) 13
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS................. 47 (13) (62)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995)........................ -- -- (8)
Provision for loss on disposal (net of income tax benefit
of $23 million in 1995)................................. -- -- (53)
------ ----- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................. 47 (13) (123)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income tax expense (benefit) of $1 million
in 1997 and ($10) million in 1995)...................... 3 -- (20)
------ ----- -----
NET INCOME (LOSS)........................................ $ 50 $ (13) $(143)
====== ===== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-4
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................. $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 231 168 122
Income taxes........................................... (20) (35) (35)
Amortization of deferred income........................ (4) (6) (7)
Net (gains) losses on property transactions............ 19 4 70
Equity in earnings of affiliates....................... (4) (3) --
Other.................................................. 62 49 33
Changes in operating accounts:
Other assets......................................... 57 9 (2)
Other liabilities.................................... 44 32 (9)
----- ----- ------
Cash from continuing operations........................ 432 205 110
Cash from (used in) discontinued operations............ -- (4) 32
----- ----- ------
Cash from operations................................... 432 201 142
----- ----- ------
INVESTING ACTIVITIES
Proceeds from sales of assets............................ 51 373 358
Less non-cash proceeds................................. -- (35) (33)
----- ----- ------
Cash received from sales of assets....................... 51 338 325
Acquisitions............................................. (359) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements..... (129) (87) (56)
Lodging construction funded by project financing....... -- (3) (40)
New investment capital expenditures.................... (29) (69) (64)
Purchases of short-term marketable securities............ (354) -- --
Notes receivable collections............................. 6 13 43
Affiliate notes receivable and collections, net.......... (6) 21 2
Other.................................................... 13 (15) 26
----- ----- ------
Cash used in investing activities from continuing
operations............................................ (807) (504) (156)
Cash used in investing activities from discontinued
operations............................................ -- -- (52)
----- ----- ------
Cash used in investing activities...................... (807) (504) (208)
----- ----- ------
FINANCING ACTIVITIES
Issuances of debt........................................ 857 46 1,251
Issuances of Convertible Preferred Securities, net....... -- 533 --
Issuances of common stock by Host Marriott............... 6 454 13
Scheduled principal repayments........................... (90) (82) (100)
Debt prepayments......................................... (403) (173) (960)
Cash transfers to Host Marriott.......................... (226) -- --
Other.................................................... 21 28 --
----- ----- ------
Cash from financing activities from continuing
operations............................................ 165 806 204
Cash used in financing activities from discontinued
operations............................................ -- -- (4)
----- ----- ------
Cash from financing activities......................... 165 806 200
----- ----- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (210) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............. 704 201 67
----- ----- ------
CASH AND CASH EQUIVALENTS, end of year................... $ 494 $ 704 $ 201
===== ===== ======
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties............................................ $ 394 $ 696 $ 141
===== ===== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-5
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by spin-off of Host Marriott's senior living business
("Senior Living") and contribution of Host Marriott's hotels and certain other
assets and liabilities to a newly formed Delaware limited partnership, Host
Marriott, L.P. (the "Operating Partnership") whose sole general partner will
be Host Marriott Trust, a newly formed Maryland Real Estate Investment Trust
("REIT") that will merge with Host Marriott Corporation, a Delaware
corporation. Host Marriott's contribution of its hotels and certain assets and
liabilities to the Operating Partnership (the "Contribution") in exchange for
units of limited partnership interests in the Operating Partnership will be
accounted for at Host Marriott's historical basis.
The accompanying combined consolidated financial statements include the
accounts of the Host Marriott hotels and the assets and liabilities expected
to be included in the Contribution by Host Marriott to the Operating
Partnership upon its planned conversion to a REIT (the "REIT Conversion") and
is the predecessor to the Operating Partnership. In these combined
consolidated financial statements, the predecessor to the Operating
Partnership is referred to as "Host Marriott Hotels" or the "Company." The
combined consolidated financial statements exclude the assets, liabilities,
equity, operations and cash flows related to Host Marriott's portfolio of 31
senior living communities. After the REIT Conversion, Senior Living will own
these assets and lease the existing hotels from the Company.
In connection with the REIT Conversion, the Operating Partnership is
proposing the purchase of remaining interests in eight public limited
partnerships in which Host Marriott or its subsidiaries are general partners
that own or control 24 full-service hotels. Five of the partnerships (nine
hotels) are already controlled and consolidated by Host Marriott as are two of
the hotels in another of the partnerships for which a subsidiary of Host
Marriott provided 100% non-recourse financing for the acquisition of these two
hotels. The operating Partnership is also proposing to purchase certain
private partnerships in which Host Marriott or its subsidiaries are general
partners in exchange for units in the Operating Partnership ("OP Units"). OP
units will be convertible into one share of Host Marriott common stock for
each OP unit owned or at the election of Host Marriott Trust, cash in an
amount equal to the market value of such shares beginning one year after the
issuance of the OP Unit.
However, consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of the Company, including final
Board approval, consent of shareholders, partners, bondholders, lenders, and
ground lessors of Host Marriott, its affiliates and other third parties.
Accordingly, there can be no assurance that the REIT Conversion will be
completed.
DESCRIPTION OF BUSINESS
As of January 2, 1998, the Company owned, or had controlling interests in,
95 upscale and luxury full-service hotel lodging properties generally located
throughout the United States and operated under the Marriott and Ritz-Carlton
brand names. Most of these properties are managed by Marriott International,
Inc. ("Marriott International"). At that date, the Company also held minority
interests in various partnerships that own 242 additional properties,
including 22 full-service hotel properties, managed by Marriott International.
On December 29, 1995, Host Marriott distributed to its shareholders through
a special tax-free dividend (the "Special Dividend") its food, beverage, and
merchandise concessions business at airports, on tollroads, and at arenas and
other attractions (the "Operating Group"). See Note 2 for a discussion of the
Special Dividend. The 1995 financial statements were restated to reflect the
Operating Group as discontinued operations.
F-6
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The structure of Host Marriott was substantially altered on October 8, 1993
(the "Marriott International Distribution Date") when the Company distributed
the stock of a wholly-owned subsidiary, Marriott International, Inc., in a
special dividend (the "Marriott International Distribution"). See Note 14 for
a description of the Marriott International Distribution and related
transactions.
An analysis of the activity in the "Investments and Advances from Host
Marriott Corporation" follows (in millions):
<TABLE>
<S> <C>
Balance, December 30, 1994.......................................... $ 710
Net loss............................................................ (143)
Distribution of Host Marriott Services Corporation.................. 91
Issuances of common stock and other activity of Host Marriott....... 17
------
Balance, December 29, 1995.......................................... 675
Net loss............................................................ (13)
Adjustment for distribution of Host Marriott Services Corporation... (4)
Issuances of common stock and other activity of Host Marriott....... 469
------
Balance January 3, 1997............................................. 1,127
Net income.......................................................... 50
Cash transfers to Host Marriott..................................... (226)
Issuance of common stock and other activity of Host Marriott........ 23
------
Balance, January 2, 1998............................................ $ 974
======
</TABLE>
The average balance in the "Investment and Advances from Host Marriott
Corporation" was $692 million for 1995, $901 million for 1996 and $1,051
million for 1997. The "Cash transfers to Host Marriott" reflects cash
transfers to Host Marriott for the purchase of the Senior Living assets which,
as contemplated, will be spun-off in conjunction with the REIT Conversion.
PRINCIPLES OF CONSOLIDATION
The combined consolidated financial statements include the accounts of the
Company and its subsidiaries and controlled affiliates. Investments in
affiliates over which the Company has the ability to exercise significant
influence, but does not control, are accounted for using the equity method.
All material intercompany transactions and balances have been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31. Fiscal
years 1997 and 1995 included 52 weeks compared to 53 weeks for fiscal year
1996.
REVENUES AND EXPENSES
Revenues primarily represent house profit from the Company's hotel
properties because the Company has delegated substantially all of the
operating decisions related to the generation of house profit from its hotel
properties to the manager. Revenues also include net gains (losses) on
property transactions and equity in the earnings of affiliates. House profit
reflects the net revenues flowing to the Company as property owner and
represents hotel properties' operating results, less property-level expenses,
excluding depreciation, management fees, real and personal property taxes,
ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses in the accompanying combined
consolidated financial statements. See Note 17.
F-7
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that it is preferable for the Company to include
property-level revenues and operating costs and expenses of its hotels in its
statements of operations for properties that are subject to management
agreements (see Note 15). However, in connection with the pending REIT
Conversion the Company will be leasing all of its hotel properties. Subsequent
to the REIT Conversion, the Company expects that it will be recording lease
revenue. Therefore, the Company believes that adoption of EITF 97-2 is not
advisable at this time. As such, the revenues reported on the Company's
financial statements continue to reflect the house profit of its hotel
properties (as described further in footnote 3). In the event the REIT
conversion does not occur or is unreasonably delayed the Company will change
its presentation of revenues and operating costs and expenses. The effect of
this change would be to increase revenues and operating costs and expenses by
approximately $1.7 billion; $1.2 billion and $0.9 billion in 1997, 1996 and
1995, respectively, and would have no impact on operating profit, net income
or earnings per share.
EARNINGS (LOSS) PER OP UNIT
Basic and diluted earnings per OP Unit have been calculated based on the
number of Host Marriott common shares outstanding for all periods presented
because it is expected that upon the REIT Conversion the Operating Partnership
will issue OP Units to Host Marriott in exchange for the Contribution equal to
the number of shares of outstanding Host Marriott common stock, accordingly,
the following discussion of earnings (loss) per OP Unit is on a pro forma
basis as if the REIT Conversion and the Contribution had occurred.
Basic earnings (loss) per OP Unit are computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding of Host
Marriott. Diluted earnings (loss) per OP Unit are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding plus other dilutive securities of Host Marriott. Diluted earnings
(loss) per OP Unit has not been adjusted for the impact of the Convertible
Preferred Securities for 1997 and 1996 and for the comprehensive stock plan
and warrants for 1996 and 1995 as they are anti-dilutive.
Basic and diluted (loss) earnings per OP Unit on a pro forma basis are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Basic earnings (loss) per OP Unit:
Continuing operations................................. $.23 $(.07) $(.39)
Discontinued operations (net of income taxes)......... -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes)........................... .02 -- (.12)
---- ----- -----
Basic earnings (loss) per OP Unit..................... $.25 $(.07) $(.90)
==== ===== =====
Diluted earnings (loss) per OP Unit:
Continuing operations................................. $.23 $(.07) $(.39)
Discontinued operations (net of income taxes)......... -- -- (.39)
Extraordinary items--Gain (loss) on extinguishment of
debt (net of income taxes)........................... .01 -- (.12)
---- ----- -----
Diluted earnings (loss) per OP Unit................... $.24 $(.07) $(.90)
==== ===== =====
</TABLE>
F-8
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the number of shares utilized (based on Host Marriott
shares) for the calculation of dilutive earnings per OP Unit follows (in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding...... 203.1 188.7 158.3
Assuming distribution of common shares granted under com-
prehensive stock plan, less shares assumed purchased at
average market price..................................... 4.8 -- --
Assuming distribution of common shares issuable for war-
rants, less shares assumed purchased at average market
price.................................................... .3 -- --
----- ----- -----
Shares utilized for the calculation of diluted earnings
per OP Unit.............................................. 208.2 188.7 158.3
===== ===== =====
</TABLE>
INTERNATIONAL OPERATIONS
The combined consolidated statements of operations include the following
amounts related to non-U.S. subsidiaries and affiliates of Host Marriott:
revenues of $39 million and $18 million and loss before income taxes of $9
million and $2 million in 1997 and 1996, respectively. International revenues
and income before income taxes in 1995 were not material.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, rent and real estate taxes incurred during development
and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.
DEFERRED CHARGES
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
CASH, CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $103 million and $67 million at January 2,
1998 and January 3, 1997, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally for
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase.
F-9
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's short-term marketable securities represent investments in U.S.
government agency notes and high quality commercial paper. The short-term
marketable securities are categorized as available for sale and, as a result,
are stated at fair market value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SELF-INSURANCE PROGRAMS
Prior to the Marriott International Distribution Date, the Company was self-
insured for certain levels of general liability, workers' compensation and
employee medical coverage. Estimated costs of these self-insurance programs
were accrued at present values of projected settlements for known and
anticipated claims. The Company discontinued its self-insurance programs for
claims arising subsequent to the Marriott International Distribution Date.
INTEREST RATE SWAP AGREEMENTS
The Company has entered into a limited number of interest rate swap
agreements to diversify certain of its debt to a variable rate or fixed rate
basis. The interest rate differential to be paid or received on interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" during 1995. Adoption of these statements did not have a
material effect on the Company's continuing operations. See Note 2 for a
discussion of the adoption of SFAS No. 121 on discontinued operations.
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 123 did not have a material effect on
the Company's combined consolidated financial statements. (See Note 10.)
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," SFAS
No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
combined consolidated financial statements and the appropriate disclosures
required by these statements have been incorporated herein. The Company will
adopt SFAS No. 130, "Reporting Comprehensive Income," in 1998 and does not
expect it to have a material effect on the Company's combined consolidated
financial statements.
F-10
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, Host Marriott distributed to its shareholders through
the Special Dividend all of the outstanding shares of common stock of Host
Marriott Services Corporation ("HM Services"), formerly a wholly-owned
subsidiary of Host Marriott, which, as of the date of the Special Dividend,
owned and operated food, beverage and merchandise concessions at airports, on
tollroads and at stadiums and arenas and other tourist attractions. The
Special Dividend provided Host Marriott shareholders with one share of common
stock of HM Services for every five shares of Host Marriott common stock held
by such shareholders on the record date of December 22, 1995. Host Marriott
recorded approximately $9 million of expenses related to the consummation of
the Special Dividend in 1995. Revenues for Host Marriott's discontinued
operations totaled $1,158 million in 1995. The provision for loss on disposal
includes the operating loss from discontinued operations from August 9, 1995
(measurement date) through December 29, 1995 of $44 million, net of taxes, and
estimated expenses related to the Special Dividend of $9 million.
Effective September 9, 1995, the Company adopted SFAS No. 121, which
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flows
associated with the asset. As a result of the adoption of SFAS No. 121, the
Company recognized a non-cash, pre-tax charge during the fourth quarter of
1995 of $47 million. Such charge has been reflected in discontinued operations
for fiscal year 1995.
For purposes of governing certain of the ongoing relationships between Host
Marriott and HM Services after the Special Dividend and to provide for an
orderly transition, Host Marriott and HM Services entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of December 29, 1995, these agreements provide, among other
things, for the division between Host Marriott and HM Services of certain
assets and liabilities, including but not limited to liabilities related to
employee stock and other benefit plans and the establishment of certain
obligations for HM Services to issue shares upon exercise of warrants (see
Note 7) and to issue shares or pay cash to Host Marriott upon exercise of
stock options held by certain former employees of Host Marriott (see Note 10).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 418 $ 349
Buildings and leasehold improvements......................... 4,325 3,507
Furniture and equipment...................................... 688 548
Construction in progress..................................... 38 82
------ ------
5,469 4,486
Less accumulated depreciation and amortization............... (835) (681)
------ ------
$4,634 $3,805
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $1 million in 1997, $3 million in 1996 and $5
million in 1995.
In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction
F-11
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
costs, which has been included in net gains (losses) on property transactions
in the accompanying combined consolidated financial statements.
In 1996, the Company recorded additional depreciation expense of $15 million
as a result of a change in the estimated depreciable lives and salvage values
for certain hotel properties. Also, in 1996, the Company recorded a $4 million
charge to write down an undeveloped land parcel to its net realizable value
based on its expected sales value.
In 1995, the Company made a determination that its owned Courtyard and
Residence Inn properties were held for sale and recorded a $10 million charge
to write down the carrying value of five of these individual properties to
their estimated net realizable values. In the fourth quarter of 1995,
management instituted a program to liquidate certain non-income producing
assets and to reinvest the proceeds in the acquisition of full-service hotels.
As part of this program, management determined that a 174-acre parcel of
undeveloped land in Germantown, Maryland that was to be developed into an
office project over an extended period of time would no longer be developed
and instead decided to attempt to sell the property. Accordingly, the Company
recorded a pre-tax charge of $60 million in the fourth quarter of 1995 to
reduce the asset to its estimated sales value. In 1997, the Company sold a
portion of the land parcel at its approximate net book value of $11 million.
4. INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1997 1996
--------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 22 full-service Marriott
Hotels, 120 Courtyard hotels, 50 Residence Inns and 50
Fairfield Inns operated by Marriott International, as
of January 2, 1998.................................... 1%-50% $13 $ 11
Notes and other receivables, net........................ -- 23 156
--- ----
$36 $167
=== ====
</TABLE>
Hotel properties owned by affiliates generally were acquired from the
Company in connection with limited partnership offerings. The Company or one
of its subsidiaries typically serve as a general partner of each partnership
and the hotels are operated by Marriott International under long-term
agreements.
In 1997, the Company acquired all of the outstanding interests in the
Chesapeake Hotel Limited Partnership ("CHLP") that owns six hotels and
acquired controlling interests in three affiliated partnerships for
approximately $510 million, including the assumption of approximately $395
million of debt. These affiliated partnerships included the partnerships that
own the 353-room Hanover Marriott and the 884-room Marriott's Desert Springs
Resort and Spa and the Marriott Hotel Properties Limited Partnership ("MHPLP")
that owns the 1,503-room Marriott Orlando World Center and a 50.5% interest in
the 624-room Marriott Harbor Beach Resort. Subsequent to year-end, the Company
obtained a controlling interest in the partnership that owns the 1,671-room
Atlanta Marriott Marquis for approximately $239 million, including the
assumption of $164 million of mortgage debt.
In 1996, the Company purchased controlling interests in four affiliated
partnerships for $640 million, including $429 million of existing debt. These
affiliated partnerships included the partnership that owns the 1,355-room San
Diego Marriott Hotel and Marina; the Marriott Hotel Properties II Limited
Partnership that owns the 1,290-room New Orleans Marriott, the 999-room San
Antonio Marriott Rivercenter, the 368-room San
F-12
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Ramon Marriott, and a 50% limited partner interest in the 754-room Santa Clara
Marriott; the Marriott Suites Limited Partnership that owns four hotels; and
the partnership that owns the 510-room Salt Lake City Marriott.
Receivables from affiliates are reported net of reserves of $144 million at
January 2, 1998 and $227 million at January 3, 1997. Receivables from
affiliates at January 2, 1998 include a $10 million debt service guarantee for
the partnership that owns the Atlanta Marriott Marquis, which was repaid in
early 1998. Receivables from affiliates at January 3, 1997 included a $140
million mortgage note at 9% that amortizes through 2003, which is eliminated
in the consolidated financial statements in 1997. The Company has committed to
advance additional amounts to affiliates, if necessary, to cover certain debt
service requirements. Such commitments are limited, in the aggregate, to an
additional $60 million at January 2, 1998. Subsequent to January 2, 1998, this
amount was reduced to $20 million in connection with the refinancing and
acquisition of a controlling interest in the Atlanta Marriott Marquis. Net
amounts repaid to the Company under these commitments totaled $2 million and
$13 million in 1997 and 1996, respectively. Net amounts funded by the Company
totaled $10 million in 1997 and $8 million in 1995. There were no fundings in
1996.
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income............................................... $11 $17 $16
Equity in net income.......................................... 5 3 --
--- --- ---
$16 $20 $16
=== === ===
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $1,980 $2,605
Other assets................................................. 283 331
------ ------
Total assets............................................... $2,263 $2,936
====== ======
Debt, principally mortgages.................................. $2,179 $2,834
Other liabilities............................................ 412 672
Partners' deficit............................................ (328) (570)
------ ------
Total liabilities and partners' deficit.................... $2,263 $2,936
====== ======
</TABLE>
Combined summarized operating results for the Company's affiliates follow:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................ $ 603 $ 731 $ 759
Operating expenses:
Cash charges (including interest)..................... (376) (460) (495)
Depreciation and other non-cash charges............... (190) (229) (240)
----- ----- -----
Income before extraordinary items....................... 37 42 24
Extraordinary items--forgiveness of debt................ 40 12 181
----- ----- -----
Net income............................................ $ 77 $ 54 $ 205
===== ===== =====
</TABLE>
F-13
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of senior notes, mortgage notes and other debt, all of which
are included in these financial statements because the debt or replacement
debt is expected to be contributed to the Company upon the REIT conversion.
Prior to the REIT Conversion, the Company plans to exchange or repay the
Properties Notes, New Properties Note and Acquisition Notes described below.
Debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Properties Notes, with a rate of 9 1/2% due May 2005.......... $ 600 $ 600
New Properties Notes, with a rate of 8 7/8% due July 2007..... 600 --
Acquisitions Notes, with a rate of 9% due December 2007....... 350 350
Senior Notes, with an average rate of 9 3/4% at January 2,
1998, maturing through 2012.................................. 35 71
------ ------
Total Senior Notes.......................................... 1,585 1,021
------ ------
Mortgage debt (non-recourse) secured by $2.4 billion of real
estate assets, with an average rate of 8.5% at January 2,
1998, maturing through 2022.................................. 1,762 1,529
Line of Credit, secured by $500 million of real estate assets,
with a variable rate of Eurodollar plus 1.7% or Base Rate (as
defined) plus 0.7% at the option of the Company (7.6% at
January 2, 1998) due June 2004............................... 22 --
------ ------
Total Mortgage Debt......................................... 1,784 1,529
------ ------
Other notes, with an average rate of 7.4% at January 2, 1998,
maturing through 2017........................................ 89 86
Capital lease obligations..................................... 8 11
------ ------
Total Other................................................. 97 97
------ ------
$3,466 $2,647
====== ======
</TABLE>
In May 1995, HMH Properties, Inc. ("Properties"), a wholly-owned subsidiary
of Host Marriott Hospitality, Inc., issued an aggregate of $600 million of 9
1/2% senior secured notes (the "Properties Notes"). The bonds were issued in
conjunction with a concurrent $400 million offering by a subsidiary of the
discontinued HM Services' business at par, and have a final maturity of May
2005. The net proceeds were used to defease, and subsequently redeem, all of
the senior notes issued by Host Marriott Hospitality, Inc. and to repay
borrowings under the line of credit with Marriott International. In connection
with the redemptions and defeasance, the Company recognized an extraordinary
loss in 1995 of $17 million, net of taxes, related to continuing operations.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect, wholly-owned subsidiary of Host Marriott, issued $350 million of 9%
senior notes (the "Acquisitions Notes"). The Acquisitions Notes were issued at
par and have a final maturity of December 2007. A portion of the net proceeds
were utilized to repay in full the outstanding borrowings under the $230
million revolving line of credit (the "Acquisition Revolver"), which was then
terminated. In connection with the termination of the Acquisition Revolver,
the Company recognized an extraordinary loss in 1995 of $3 million, net of
taxes.
On July 10, 1997, Properties and Acquisitions completed consent
solicitations (the "Consent Solicitations") with holders of their senior notes
to amend certain provisions of their senior notes' indentures. The Consent
Solicitations facilitated the merger of Acquisitions with and into Properties
(the "Properties Merger"). The amendments to the indentures also increased the
ability of Properties to acquire, through certain subsidiaries,
F-14
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional properties subject to non-recourse indebtedness and controlling
interests in corporations, partnerships and other entities holding attractive
properties and increased the threshold required to permit Properties to make
distributions to affiliates.
Concurrent with the Consent Solicitations and the Properties Merger,
Properties issued an aggregate of $600 million of 8 7/8% senior notes (the
"New Properties Notes") at par with a maturity of July 2007. Properties
received net proceeds of approximately $570 million, net of the costs of the
Consent Solicitations and the Offering, which will be used to fund future
acquisitions of, or the purchase of interests in, full-service hotels and
other lodging-related properties, as well as for general corporate purposes.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other existing
future senior indebtedness of Properties. Properties was the owner of 58 of
the Company's 95 lodging properties at January 2, 1998.
The net assets of Properties at January 2, 1998 were approximately $518
million, substantially all of which were restricted. The indentures governing
the Properties Notes, the Acquisitions Notes and the New Properties Notes
contain covenants that, among other things, limit the ability to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell stock of subsidiaries, and enter into certain mergers
and consolidations.
During 1997, Host Marriott, through a newly-created, wholly-owned
subsidiary, HMC Capital Resources Corporation ("Capital Resources"), entered
into a revolving line of credit agreement (the "Line of Credit") with a group
of commercial banks under which it may borrow up to $500 million for the
acquisition of lodging real estate and for Host Marriott's working capital
purposes. On June 19, 2000, any outstanding borrowings on the Line of Credit
convert to a term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Line of Credit bear interest at either the Eurodollar
rate plus 1.7% or the Base Rate (as defined in the agreement) plus 0.7%, at
the option of Host Marriott. An annual fee of 0.35% is charged on the unused
portion of the commitment. The Line of Credit was originally secured by six
hotel properties contributed to Capital Resources, with a carrying value of
approximately $500 million as of January 2, 1998, and is guaranteed by the
Company. As a result of this transaction, Host Marriott terminated its line of
credit with Marriott International. As of January 2, 1998, outstanding
borrowings on the Line of Credit were approximately $22 million as a result of
a borrowing to fund the acquisition of the Ontario Airport Marriott.
Host Marriott also purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott in 1997. Host Marriott purchased
the bonds for $219 million, an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the
$11 million discount less the write-off of unamortized deferred financing
fees, net of taxes.
In 1997, Host Marriott incurred approximately $418 million of mortgage debt
in conjunction with the acquisition of 11 hotels.
In conjunction with the construction of the Philadelphia Marriott, which was
completed and opened in January 1995, the Company obtained first mortgage
financing from Marriott International for 60% of the construction and
development costs of the hotel. In the fourth quarter of 1996, Host Marriott
repaid the $109 million mortgage, prior to the rate increasing to 10% per
annum with an additional 2% deferred, with the proceeds from the convertible
preferred securities offering discussed in Note 6. In the first quarter of
1997, Host Marriott obtained $90 million in first mortgage financing from two
insurance companies secured by the Philadelphia Marriott. The mortgage bears
interest at a fixed rate of 8.49% and matures in April 2009.
F-15
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, Host Marriott successfully completed the refinancing of
the MHPLP mortgage debt for approximately $152 million. The new mortgage bears
interest at 7.48% and matures in January 2008. In connection with the
refinancing, the Company recognized an extraordinary loss of $2 million which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.
At January 2, 1998, the Company was party to an interest rate exchange
agreement with a financial institution (the contracting party) with an
aggregate notional amount of $100 million. Under this agreement, the Company
collects interest based on specified floating interest rates of one month
LIBOR (rate of 6% at January 2, 1998) and pays interest at fixed rates (rate
of 7.99% at January 2, 1998). This agreement expires in 1998 in conjunction
with the maturity of the mortgage on the New York Marriott Marquis. Also in
1997, the Company was party to two additional interest rate swap agreements
with an aggregate notional amount of $400 million which expired in May 1997.
The Company realized a net reduction of interest expense of $1 million in
1997, $6 million in 1996 and $5 million in 1995 related to interest rate
exchange agreements. The Company monitors the creditworthiness of its
contracting parties by evaluating credit exposure and referring to the ratings
of widely accepted credit rating services. The Standard and Poors' long-term
debt rating for the contracting party is A-. The Company is exposed to credit
loss in the event of non-performance by the contracting party to the interest
rate swap agreements; however, the Company does not anticipate non-performance
by the contracting party.
Aggregate debt maturities at January 2, 1998, excluding capital lease
obligations, are (in millions):
<TABLE>
<S> <C>
1998.................................................................. $ 316
1999.................................................................. 28
2000.................................................................. 131
2001.................................................................. 132
2002.................................................................. 156
Thereafter............................................................ 2,695
------
$3,458
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts
capitalized, was $278 million in 1997, $220 million in 1996 and $177 million
in 1995. Deferred financing costs, which are included in other assets,
amounted to $96 million and $61 million, net of accumulated amortization, as
of January 2, 1998 and January 3, 1997, respectively. Amortization of deferred
financing costs totaled $7 million, $5 million and $4 million in 1997, 1996
and 1995, respectively.
6. OBLIGATION TO HOST MARRIOTT CORPORATION RELATED TO MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST HOLDING COMPANY OF
HOST MARRIOTT CORPORATION SUBSTANTIALLY ALL OF WHOSE ASSETS ARE THE
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2026
The obligation for the Convertible Preferred Securities has been pushed down
to these financial statements because it is expected that upon the REIT
Conversion the Operating Partnership will assume primary liability for
repayment of the convertible debentures of Host Marriott underlying the
Convertible Preferred Securities and the related common securities of the Host
Marriott Financial Trust (the "Issuer"), a wholly-owned subsidiary trust of
Host Marriott, will be contributed to the Operating Partnership. Upon
conversion by a Convertible Preferred Securities holder, the Operating
Partnership will purchase common shares from Host Marriott Trust in exchange
for a like number of OP Units and distribute the common shares to the
Convertible Preferred Securities holder.
In December 1996, the Issuer issued 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
F-16
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by Host Marriott to the extent the Issuer has funds
available therefor. This guarantee, when taken together with Host Marriott
obligations under the indenture pursuant to which the Debentures were issued,
the Debentures, Host Marriott's obligations under the Trust Agreement and its
obligations under the indenture to pay costs, expenses, debts and liabilities
of the Issuer (other than with respect to the Convertible Preferred
Securities) provides a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities. Proceeds from the issuance of the
Convertible Preferred Securities were invested in 6 3/4% Convertible
Subordinated Debentures (the "Debentures") due December 2, 2026 issued by Host
Marriott. The Issuer exists solely to issue the Convertible Preferred
Securities and its own common securities (the "Common Securities") and invest
the proceeds therefrom in the Debentures, which is its sole asset. Separate
financial statements of the Issuer are not presented because of Host
Marriott's guarantee described above; Host Marriott's management has concluded
that such financial statements are not material to investors and the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Host Marriott common stock at the rate of 2.6876
shares per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Host Marriott common stock at a
conversion rate of 2.6876 shares for each $50 in principal amount of
Debentures. The Issuer will only convert Debentures pursuant to a notice of
conversion by a holder of Convertible Preferred Securities. During 1997 and
1996, no shares were converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the Convertible Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Debentures. Host Marriott may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, Host Marriott will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by Host Marriott of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
As part of the Contribution, the Operating Partnership will become an
Obligor under the Convertible Preferred Securities.
7. SHAREHOLDERS' EQUITY OF HOST MARRIOTT
It is expected that upon the REIT Conversion that the Company will issue OP
Units to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, limited
partnership units issued to partners of the eight public limited partnerships
and five private limited partnerships will be convertible on a one for one
basis into a share of stock of Host Marriott for each OP Unit owned or at the
election of Host Marriott Trust, in an amount equal to the market value of
such shares beginning one year after the issuance of the OP Unit.
F-17
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Six hundred million shares of common stock of Host Marriott, with a par
value of $1 per share, are authorized, of which 203.8 million and 202.0
million were issued and outstanding as of January 2, 1998 and January 3, 1997,
respectively. One million shares of no par value preferred stock are
authorized with none outstanding. During 1995, substantially all outstanding
shares of such preferred stock were converted into approximately five million
shares of Host Marriott common stock with the remainder defeased.
On March 27, 1996, Host Marriott completed the issuance of 31.6 million
shares of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, Host Marriott issued warrants
to purchase up to 7.7 million shares of Host Marriott's common stock at $8.00
per share through October 8, 1996 and $10.00 per share thereafter. During
1996, 6.8 million warrants were exercised at $8.00 per share and an equivalent
number of shares of Host Marriott common stock were issued. During 1997,
approximately 60,000 warrants were exercised at $10.00 per share and an
equivalent number of shares of Host Marriott common stock were issued. As of
January 2, 1998, there were approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors of Host Marriott adopted a
shareholder rights plan under which a dividend of one preferred stock purchase
right was distributed for each outstanding share of Host Marriott's common
stock. Each right entitles the holder to buy 1/1,000th of a share of a newly
issued series of junior participating preferred stock of Host Marriott at an
exercise price of $150 per share. The rights will be exercisable 10 days after
a person or group acquires beneficial ownership of at least 20%, or begins a
tender or exchange offer for at least 30%, of Host Marriott's common stock.
Shares owned by a person or group on February 3, 1989 and held continuously
thereafter are exempt for purposes of determining beneficial ownership under
the rights plan. The rights are non-voting and will expire on February 2,
1999, unless exercised or previously redeemed by Host Marriott for $.01 each.
If Host Marriott is involved in a merger or certain other business
combinations not approved by the Board of Directors, each right entitles its
holder, other than the acquiring person or group, to purchase common stock of
either Host Marriott or the acquiror having a value of twice the exercise
price of the right.
8. INCOME TAXES
The accompanying financial statements reflect the deferred income taxes
related to the expected future tax consequences of those temporary differences
specifically allocable to the Company based on the Contribution. Upon the REIT
Conversion and the Contribution it is expected that the Company will be a
limited partnership and taxable income or loss will be allocated among its
partners. Further, Host Marriott expects to qualify as a REIT and will
allocate its taxable income or loss to its shareholders. Accordingly, upon the
REIT Conversion and the Contribution, the Company will not have a Federal tax
provision or a state tax provision in many states and in accordance with
Statement of Financial Accounting Standards No. 109 the Company will record an
adjustment to the tax provision in the fiscal year during which the REIT
Conversion takes place for the tax effect of the reversal of certain of the
Company's deferred taxes.
Total deferred tax assets and liabilities at January 2, 1998 and January 3,
1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets......................................... $ 159 $ 139
Deferred tax liabilities.................................... (646) (603)
------ ------
Net deferred income tax liability......................... $ (487) $ (464)
====== ======
</TABLE>
F-18
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 and January 3, 1997 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates................................... $ (310) $ (303)
Property and equipment...................................... (179) (135)
Safe harbor lease investments............................... (65) (73)
Deferred tax gain........................................... (92) (92)
Reserves.................................................... 103 97
Alternative minimum tax credit carryforwards................ 41 26
Other, net.................................................. 15 16
------ ------
Net deferred income tax liability........................... $ (487) $ (464)
====== ======
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Current-- Federal...................................... $ 19 $ (2) $ 7
-- State............................................... 4 3 3
-- Foreign............................................. 3 3 --
---- ----- -----
26 4 10
---- ----- -----
Deferred-- Federal..................................... 8 2 (23)
-- State............................................... 2 (1) --
---- ----- -----
10 1 (23)
---- ----- -----
$ 36 $ 5 $ (13)
==== ===== =====
At January 2, 1998, Host Marriott had approximately $41 million of
alternative minimum tax credit carryforwards available which do not expire.
Through 1997, Host Marriott settled with the Internal Revenue Service
("IRS") substantially all issues for tax years 1979 through 1993. Host
Marriott expects to resolve any remaining issues with no material impact on
the combined consolidated financial statements. Host Marriott made net
payments to the IRS of approximately $10 million and $45 million in 1997 and
1996, respectively, related to these settlements. Certain adjustments totaling
approximately $2 million and $11 million in 1996 and 1995, respectively, were
made to the tax provision related to those settlements.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate............................. 35.0% (35.0)% (35.0)%
State income taxes, net of Federal tax benefit......... 4.9 21.7 2.5
Tax credits............................................ (2.7) -- (0.1)
Additional tax on foreign source income................ 6.0 40.8 --
Tax contingencies...................................... -- 25.0 14.6
Permanent items........................................ 0.1 9.0 --
Other, net............................................. 0.1 1.0 0.7
---- ----- -----
Effective income tax rate.............................. 43.4% 62.5% (17.3)%
==== ===== =====
</TABLE>
F-19
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of the Marriott International Distribution and the Special Dividend,
Host Marriott, Marriott International and HM Services entered into tax-sharing
agreements which reflect each party's rights and obligations with respect to
deficiencies and refunds, if any, of Federal, state or other taxes relating to
the businesses of Host Marriott, Marriott International and HM Services prior
to the Marriott International Distribution and the Special Dividend.
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $56 million in 1997, $40 million in 1996 and $22 million in
1995.
9. LEASES
The Company leases certain property and equipment under non-cancelable
operating and capital leases. Future minimum annual rental commitments for all
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1998....................................................... $ 2 $ 115
1999....................................................... 2 111
2000....................................................... 1 108
2001....................................................... 1 106
2002....................................................... 1 103
Thereafter................................................. 5 1,358
--- ------
Total minimum lease payments............................... 12 $1,901
======
Less amount representing interest.......................... (4)
---
Present value of minimum lease payments.................... $ 8
===
</TABLE>
As discussed in Note 12, Host Marriott sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to Hospitality Properties Trust. Additionally, in 1996, Host Marriott sold and
leased back 18 of its Residence Inns to Hospitality Properties Trust. These
leases, which are accounted for as operating leases and are included above,
have initial terms expiring through 2012 for the Courtyard properties and 2010
for the Residence Inn properties, and are renewable at the option of the
Company. Minimum rent payments are $51 million annually for the Courtyard
properties and $17 million annually for the Residence Inn properties, and
additional rent based upon sales levels are payable to the owner under the
terms of the leases.
Leases also include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provision for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals of $124 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at January 2, 1998 on certain leases
relating to divested non-lodging properties. Such contingent liabilities
aggregated $110 million at January 2, 1998. However, management considers the
likelihood of any substantial funding related to these leases to be remote.
F-20
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense consists of:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $ 98 $83 $34
Additional rentals based on sales............................. 20 16 17
---- --- ---
$118 $99 $51
==== === ===
</TABLE>
10. EMPLOYEE STOCK PLANS
It is expected that upon the REIT Conversion the Company will issue OP Units
to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, OP Units
issued to partners of the eight public limited partnerships and five private
limited partnerships will be convertible on a one for one basis into shares of
Host Marriott stock for each OP Unit owned or, at the election of Host
Marriott Trust, in an amount equal to the market value of such shares
beginning one year after the issuance of the OP Unit.
At January 2, 1998, Host Marriott has two stock-based compensation plans
which are described below. Under the comprehensive stock plan (the
"Comprehensive Plan"), Host Marriott may award to participating employees (i)
options to purchase Host Marriott common stock, (ii) deferred shares of Host
Marriott's common stock and (iii) restricted shares of Host Marriott's common
stock. In addition, Host Marriott has an employee stock purchase plan (the
"Employee Stock Purchase Plan"). The principal terms and conditions of the two
plans are summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 2, 1998 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive Plan............................................. 28
Employee Stock Purchase Plan................................... 3
---
31
===
</TABLE>
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Options granted before May 11, 1990 expire 10 years after the
date of grant and nonqualified options granted on or after May 11, 1990 expire
up to 15 years after the date of grant. Most options vest ratably over each of
the first four years following the date of the grant. In connection with the
Marriott International Distribution, Host Marriott issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options, then outstanding, based on the relative trading prices of shares of
the common stock of the two companies.
Host Marriott continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Accordingly, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively: risk-free interest rate of 6.2%,
6.6% and 6.8%, respectively, volatility of 35%, 36% and 37%, respectively,
expected lives of 12 years and no dividend yield. The weighted average fair
value per option granted during the year was $13.13 in 1997, $8.68 in 1996 and
$5.76 in 1995.
F-21
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma compensation cost for 1997, 1996 and 1995 would have reduced
(increased) net income (loss) by approximately $330,000, ($150,000) and
($5,000), respectively. Basic and diluted earnings per share on a pro forma
basis for Host Marriott were not impacted by the pro forma compensation cost
in 1997, 1996 and 1995.
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1995, 1996 and 1997 have been considered.
In connection with the Special Dividend, the then outstanding options held
by current and former employees of Host Marriott were redenominated in both
Host Marriott and HM Services stock and the exercise prices of the options
were adjusted based on the relative trading prices of shares of the common
stock of the two companies. For all options held by certain current and former
employees of Marriott International, the number and exercise price of the
options were adjusted based on the trading prices of shares of the Host
Marriott's common stock immediately before and after the Special Dividend.
Therefore, the options outstanding reflect these revised exercise prices.
Pursuant to the Distribution Agreement between the Company and HM Services,
Host Marriott has the right to receive up to 1.4 million shares of HM
Services' common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. As of January 2, 1998, Host Marriott valued this right at
approximately $20 million, which is included in other assets. A summary of the
status of Host Marriott's stock option plan for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 8.3 $ 4 10.0 $ 4 11.7 $ 4
Granted................. .1 20 .2 13 -- --
Exercised............... (1.6) 4 (1.9) 4 (2.3) 4
Forfeited/Expired....... -- -- -- -- (.3) 4
Adjustment for Special
Dividend............... -- -- -- -- .9 4
---- ---- ----
Balance, at end of
year................. 6.8 4 8.3 4 10.0 4
==== ==== ====
Options exercisable at
year-end............... 6.4 7.6 8.5
</TABLE>
The following table summarizes information about stock options outstanding
at January 2, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
SHARES WEIGHTED AVERAGE SHARES
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES JANUARY 2, 1998 LIFE PRICE JANUARY 2, 1998 PRICE
- --------------- --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1-3 4.4 9 $ 2 4.4 $ 2
4-6 1.7 4 6 1.7 6
7-9 .4 12 9 .3 9
10-12 .1 14 12 -- --
13-15 .1 14 15 -- --
19-22 .1 15 20 -- --
--- ---
6.8 6.4
=== ===
</TABLE>
F-22
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing for 10 years. Employees also could
elect to forfeit one-fourth of their deferred stock incentive plan award in
exchange for accelerated vesting over a 10-year period. Host Marriott accrues
compensation expense for the fair market value of the shares on the date of
grant, less estimated forfeitures. In 1997, 1996 and 1995, 14,000, 13,000 and
158,000 shares were granted, respectively, under this plan. The compensation
cost that has been charged against income for deferred stock was $1 million in
1995 and was not material in 1996 and 1997. The weighted average fair value
per share granted during each year was $15.81 in 1997, $11.81 in 1996 and
$8.49 in 1995.
In 1993, 3,537,000 restricted stock plan shares under the Comprehensive Plan
were issued to officers and key executives to be distributed over the next
three to 10 years in annual installments based on continued employment and the
attainment of certain performance criteria. Host Marriott recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of Host Marriott's common stock. In 1997
and 1996, 198,000 and 2,511,000 shares of additional restricted stock plan
shares were granted to certain key employees under terms and conditions
similar to the 1993 grants. Approximately 161,000 and 500,000 shares were
forfeited in 1996 and 1995, respectively. There were no shares forfeited in
1997. Host Marriott recorded compensation expense of $13 million, $11 million
and $5 million in 1997, 1996 and 1995, respectively, related to these awards.
The weighted average fair value per share granted during each year was $16.88
in 1997 and $14.01 in 1996. There were no restricted stock plan shares granted
in 1995.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.
11. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
Host Marriott contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by Host
Marriott is determined annually by the Board of Directors. Host Marriott
provides medical benefits to a limited number of retired employees meeting
restrictive eligibility requirements. Amounts for these items were not
material in 1995 through 1997.
12. ACQUISITIONS AND DISPOSITIONS
In 1998, the Company acquired, or purchased controlling interests in six
full-service hotels totaling 3,270 rooms for an aggregate purchase price of
approximately $388 million and entered into an agreement to acquire a
controlling interest in the 397-room Ritz-Carlton in Tysons Corner, Virginia.
In April 1998, Host Marriott reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire interests in 12 world-class luxury
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.735 billion, including the assumption of two mortgages, one
of which is secured by a thirteenth hotel. The Company expects to pay
approximately $862 million in cash and assumed debt and to issue approximately
43.7 million Operating Partnership units. Each OP Unit will be exchangeable
for one share of Host Marriott common stock (or its cash equivalent). Upon
completion of the acquisition, Blackstone will own approximately 18% of the
outstanding shares of Host Marriott common stock on a fully converted basis.
The Blackstone portfolio consists of two Ritz-
F-23
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Carlton, three Four Seasons, one Grand Hyatt, three Hyatt Regencies and four
Swissotel properties and a mortgage on a third Four Seasons.
In 1998, the Company sold two hotels totaling 854 rooms for approximately
$212 million.
In 1997, the Company acquired eight full-service hotels totaling 3,600 rooms
for approximately $145 million. In addition, the Company acquired controlling
interests in nine full-service hotels totaling 5,024 rooms for approximately
$621 million, including the assumption of approximately $418 million of debt.
The Company also completed the acquisition of the 504-room New York Marriott
Financial Center, after acquiring the mortgage on the hotel for $101 million
in late 1996.
In 1996, the Company acquired six full-service hotels totaling 1,964 rooms
for an aggregate purchase price of approximately $189 million. In addition,
the Company acquired controlling interests in 17 full-service hotels totaling
8,917 rooms for an aggregate purchase price of approximately $1.1 billion,
including the assumption of approximately $696 million of debt. The Company
also purchased the first mortgage of the 504-room New York Marriott Financial
Center for approximately $101 million.
In 1995, the Company acquired nine full-service hotels totaling
approximately 3,900 rooms in separate transactions for approximately $390
million.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from Hospitality Properties Trust for
approximately $330 million. The Company received net proceeds from the two
transactions of approximately $297 million and will receive approximately $33
million upon expiration of the leases. A deferred gain of $14 million on the
sale/leaseback transactions is being amortized over the initial term of the
leases.
In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of
approximately $314 million and will receive approximately $35 million upon
expiration of the leases. A deferred gain of $45 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
The Company's summarized, unaudited combined consolidated pro forma results
of operations, assuming the above transactions, the refinancings and new debt
activity discussed in Note 5 occurred, along with the purchase of the
remaining interests in the eight public partnerships and five private
partnerships, the contribution and the REIT Conversion, on December 30, 1995,
are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Revenues........................................................ $1,061 $972
Operating profit................................................ 529 454
Income (loss) before extraordinary items........................ 37 (42)
</TABLE>
F-24
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities......... $ 354 $ 354 $ -- $ --
Receivables from affiliates.............. 23 26 156 174
Notes receivable......................... 31 48 141 155
Other.................................... 20 20 13 13
Financial liabilities
Debt, net of capital leases.............. 3,458 3,492 2,636 2,654
Other financial instruments
Obligation to Host Marriott for
Convertible Preferred Securities........ 550 638 550 595
Interest rate swap agreements............ -- -- -- 1
Affiliate debt service commitments......... -- -- -- --
</TABLE>
Short-term marketable securities and the obligation to Host Marriott for
Convertible Preferred Securities are valued based on quoted market prices.
Receivables from affiliates, notes and other financial assets are valued based
on the expected future cash flows discounted at risk-adjusted rates.
Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of the Line of
Credit and other notes are estimated to be equal to their carrying value.
Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations
of certain affiliates (affiliate debt service commitments) with a maximum
commitment of $60 million at January 2, 1998 and $117 million at January 3,
1997. A fair value is assigned to commitments with expected future fundings.
The fair value of the commitments represents the net expected future payments
discounted at risk-adjusted rates. Such payments are accrued on an
undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated
amount the Company would pay or receive to terminate the swap agreements. The
aggregate notional amount of the agreements was $100 million at January 2,
1998 and $525 million at January 3, 1997.
14. MARRIOTT INTERNATIONAL DISTRIBUTION AND RELATIONSHIP WITH MARRIOTT
INTERNATIONAL
On October 8, 1993 (the "Marriott International Distribution Date"),
Marriott Corporation distributed, through a special tax-free dividend (the
"Marriott International Distribution"), to holders of Marriott Corporation's
common stock (on a share-for-share basis), approximately 116.4 million
outstanding shares of common stock of an existing wholly-owned subsidiary,
Marriott International, resulting in the division of Marriott Corporation's
operations into two separate companies. The distributed operations included
the former Marriott Corporation's lodging management, franchising and resort
timesharing operations, senior living service operations, and the
institutional food service and facilities management business. Host Marriott
retained the former Marriott Corporation's airport and tollroad food, beverage
and merchandise concessions operations, as well as most of its real estate
properties. Effective at the Marriott International Distribution Date,
Marriott Corporation changed its name to Host Marriott Corporation.
F-25
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Host Marriott and Marriott International have entered into various
agreements in connection with the Marriott International Distribution and
thereafter which provide, among other things, that (i) the majority of the
Company's hotel lodging properties are managed by Marriott International under
agreements with initial terms of 15 to 20 years and which are subject to
renewal at the option of Marriott International for up to an additional 16 to
30 years (see Note 15); (ii) 10 of the Company's full-service properties are
operated under franchise agreements with Marriott International with terms of
15 to 30 years; (iii) Marriott International guarantees the Company's
performance in connection with certain loans and other obligations ($107
million at January 2, 1998); (iv) the Company borrowed and repaid $109 million
of first mortgage financing for construction of the Philadelphia Marriott (see
Note 5); (v) Marriott International provided the Company with $70 million of
mortgage financing in 1995 for the acquisition of three full-service
properties by the Company at an average interest rate of 8.5% (Marriott
International subsequently sold one of the loans in November 1996); (vi)
Marriott International and the Company formed a joint venture and Marriott
International provided the Company with $29 million in debt financing at an
average interest rate of 12.7% and $28 million in preferred equity in 1996 for
the acquisition of two full-service properties in Mexico City, Mexico; (vii)
in 1995, the Company also acquired a full-service property from a partnership
in which Marriott International owned a 50% interest; and (viii) Marriott
International provides certain limited administrative services.
In 1997, 1996 and 1995, Host Marriott paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$19 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International and $3 million, $4 million and $12 million,
respectively, for limited administrative services. Host Marriott also paid
Marriott International $4 million, $2 million and $1 million, respectively, in
franchise fees in 1997, 1996 and 1995.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of Host Marriott if certain events involving a change in
control of Host Marriott occur.
15. HOTEL MANAGEMENT AGREEMENTS
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages most of the Company's
hotels, generally for an initial term of 15 to 20 years with renewal terms at
the option of Marriott International of up to an additional 16 to 30 years.
The Agreements generally provide for payment of base management fees equal to
one to four percent of sales and incentive management fees generally equal to
20% to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. No agreement with respect to a single lodging facility is
cross-collateralized or cross-defaulted to any other agreement and a single
agreement may be canceled under certain conditions, although such cancellation
will not trigger the cancellation of any other agreement.
Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are allocated among all domestic hotels managed,
owned or leased by Marriott International or its subsidiaries. In addition,
the Company's hotels also participate in the Marriott Rewards program. The
cost of this program is charged to all hotels in the Marriott hotel system.
F-26
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the
Company will be required to establish escrow accounts for such purposes under
terms outlined in the Agreements.
The Company has entered into franchise agreements with Marriott
International for ten hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and beverage sales as well as certain other fees for advertising and
reservations. Franchise fees for room sales vary from four to six percent of
sales, while fees for food and beverage sales vary from two to three percent
of sales. The terms of the franchise agreements are from 15 to 30 years.
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International,
to manage four of the Company's hotels. These agreements have an initial term
of 15 to 25 years with renewal terms at the option of Ritz-Carlton of up to an
additional 10 to 40 years. Base management fees vary from two to four percent
of sales and incentive management fees are generally equal to 20% of available
cash flow or operating profit, as defined in the agreements.
The Company has also entered into management agreements with hotel
management companies other than Marriott International and Ritz-Carlton for 12
of its hotels (10 of which are franchised under the Marriott brand). These
agreements generally provide for an initial term of 10 to 20 years with
renewal terms at the option of either party of up to an additional one to 15
years. These agreements generally provide for payment of base management fees
equal to one to three percent of sales. Seven of the 12 agreements also
provide for incentive management fees generally equal to 15 to 20 percent of
available cash flow, as defined in the agreements.
At January 2, 1998 and January 3, 1997, $75 million and $76 million,
respectively, have been advanced to the hotel managers for working capital and
are included in "Due From Managers" in the accompanying combined consolidated
balance sheets.
16. LITIGATION
The Company is from time-to-time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction of
the New York Marriott Marquis. In settlement of the lawsuit, the Company and
its affiliate received a cash settlement of approximately $70 million, the
majority of which was considered a recovery of construction costs and $10
million of which has been recorded as other revenues in the accompanying
combined consolidated financial statements.
17. HOTEL OPERATIONS
As discussed in Note 1, revenues reflect house profit from the Company's
hotel properties. House profit reflects the net revenues flowing to the
Company as property owner and represents all gross hotel operating revenues,
less all gross property-level expenses, excluding depreciation, management
fees, real and personal property taxes, ground and equipment rent, insurance
and certain other costs, which are classified as operating costs and expenses.
F-27
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accordingly, the following table presents the details of house profit for
the Company's hotels for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Rooms............................................. $1,850 $1,302 $ 908
Food and Beverage................................. 776 515 363
Other............................................. 180 125 81
------ ------ ------
Total Hotel Sales............................... 2,806 1,942 1,352
------ ------ ------
Department Costs
Rooms............................................. 428 313 226
Food and Beverage................................. 592 406 284
Other............................................. 189 63 43
------ ------ ------
Total Department Costs.......................... 1,209 782 553
------ ------ ------
Department Profit................................... 1,597 1,160 799
Other Deductions.................................... (504) (443) (325)
------ ------ ------
House Profit........................................ $1,093 $ 717 $ 474
====== ====== ======
</TABLE>
18. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in the full-service hotel segment of the lodging
industry. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brands, contain an average of nearly 500 rooms, as well as supply
other amenities such as meeting space and banquet facilities; a variety of
restaurants and lounges; gift shops; and swimming pools. They are typically
located in downtown, airport, suburban and resort areas throughout the United
States.
As of January 2, 1998, the Company's foreign operations consist of four
full-service hotel properties located in Canada and two full-service hotel
properties located in Mexico. There were no intercompany sales between the
properties and the Company. The following table presents revenues and long-
lived assets for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $1,071 $4,412 $714 $3,587 $482 $2,842
International...... 39 222 18 218 2 40
------ ------ ---- ------ ---- ------
Total............ $1,110 $4,634 $732 $3,805 $484 $2,882
====== ====== ==== ====== ==== ======
</TABLE>
F-28
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
JUNE 19, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Property and Equipment, net........................................ $ 5,054
Notes and Other Receivables, net (including amounts due from affil-
iates of $112 million)............................................ 137
Due from Managers.................................................. 94
Investments in Affiliates.......................................... 5
Other Assets....................................................... 362
Short-term Marketable Securities................................... 46
Cash and Cash Equivalents.......................................... 496
-------
$6,194
=======
LIABILITIES AND EQUITY
Debt
Senior Notes..................................................... $ 1,585
Mortgage Debt.................................................... 1,890
Other............................................................ 95
-------
3,570
Accounts Payable and Accrued Expenses.............................. 77
Deferred Income Taxes.............................................. 464
Other Liabilities.................................................. 517
-------
Total Liabilities.............................................. 4,628
-------
Obligation to Host Marriott Corporation Related to Mandatorily Re-
deemable Convertible Preferred Securities of a Subsidiary Trust of
Host Marriott Corporation Substantially All of Whose Assets are
the Convertible Subordinated Debentures Due 2026 ("Convertible
Preferred Securities")............................................ 550
Equity
Investments and Advances from Host Marriott Corporation.......... 1,016
-------
$6,194
=======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-29
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
REVENUES
Hotels......................................................... $ 652 $ 512
Net gains on property transactions............................. 52 2
Equity in earnings (losses) of affiliates...................... (1) 3
Other.......................................................... 5 5
----- -----
Total revenues............................................... 708 522
----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$102 million and $78 million, respectively)................... 343 291
Other.......................................................... 10 16
----- -----
Total operating costs and expenses........................... 353 307
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE EXPENSES,
REIT CONVERSION EXPENSES AND INTEREST........................... 355 215
Minority interest................................................ (30) (24)
Corporate expenses............................................... (20) (18)
REIT Conversion expenses......................................... (6) --
Interest expense................................................. (151) (122)
Dividends on Convertible Preferred Securities.................... (17) (17)
Interest income.................................................. 26 22
----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................ 157 56
Provision for income taxes....................................... (64) (24)
----- -----
INCOME BEFORE EXTRAORDINARY ITEM................................. 93 32
Extraordinary item--Gain on extinguishment of debt (net of
income taxes of $3 million in 1997)............................. -- 5
----- -----
NET INCOME....................................................... $ 93 $ 37
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-30
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations................................ $ 93 $ 32
Adjustments to reconcile to cash from operations:
Depreciation and amortization.................................. 114 102
Income taxes................................................... 45 --
Gains on sales of hotel properties............................. (51) --
Equity in (earnings) losses of affiliates........................ 1 (3)
Changes in operating accounts.................................... (23) 24
Other............................................................ 27 38
----- -----
Cash from operations......................................... 206 193
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.................................... 209 6
Acquisitions..................................................... (358) (156)
Capital expenditures:
Renewals and replacements...................................... (77) (60)
New development projects....................................... (18) --
New investment capital expenditures............................ (14) (18)
Purchases of short-term marketable securities.................... (97) --
Sales of short-term marketable securities........................ 405 --
Notes receivable collections..................................... 4 4
Affiliate collections, net....................................... (78) 10
Other............................................................ (25) 14
----- -----
Cash used in investing activities............................ (49) (200)
----- -----
FINANCING ACTIVITIES
Cash transferred to Host Marriott................................ (62) --
Issuances of debt................................................ 5 84
Issuances of common stock by Host Marriott....................... 1 3
Scheduled principal repayments................................... (18) (44)
Debt prepayments................................................. (49) (236)
Other............................................................ (32) 5
----- -----
Cash used in financing activities............................ (155) (188)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ 2 $(195)
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase
of controlling interests in, certain hotel properties......... $ 164 $ 258
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-31
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by the spin-off of Host Marriott's senior living
business ("SLC") and the contribution of Host Marriott's hotels and certain
other assets and liabilities to a newly formed Delaware limited
partnership, Host Marriott, L.P. (the "Operating Partnership") whose sole
general partner will be Host Marriott Trust, a newly formed Maryland Real
Estate Investment Trust ("REIT") that will merge with Host Marriott
Corporation, a Delaware corporation. Host Marriott's contribution of its
hotels and certain assets and liabilities to the Operating Partnership (the
"Contribution") in exchange for units of limited partnership interests in
the Operating Partnership will be accounted for at Host Marriott's
historical basis.
The accompanying condensed combined consolidated financial statements
include the accounts of the Host Marriott hotels and the assets and
liabilities expected to be included in the Contribution by Host Marriott to
the Operating Partnership upon its planned conversion to a REIT (the "REIT
Conversion") and is the predecessor to the Operating Partnership. In these
condensed combined consolidated financial statements, the predecessor to
the Operating Partnership is referred to as "Host Marriott Hotels" or the
"Company." The condensed combined consolidated financial statements exclude
the assets, liabilities, equity, operations and cash flows related to Host
Marriott's portfolio of 31 senior living communities. After the REIT
Conversion, SLC will own these assets and lease the existing hotels from
the Company.
In June 1998, as part of the REIT Conversion, Host Marriott filed a
preliminary Prospectus/Consent Solicitation with the Securities and
Exchange Commission. This Prospectus/Consent Solicitation Statement
describes a proposal whereby the Operating Partnership will acquire by
merger (the "Mergers") eight public limited partnerships (the
"Partnerships") that own or control 24 full-service hotels in which Host
Marriott or its subsidiaries are general partners. As more fully described
in the Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units
or, at their election, unsecured notes due December 15, 2005 issued by the
Operating Partnership ("Notes"), in exchange for their partnership
interests in such Partnerships.
However, the consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including
final Board of Directors approval, consents of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates
and other third parties. Accordingly, there can be no assurance that the
REIT Conversion will be completed.
On April 20, 1998, Host Marriott and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for $2.5 billion in securities, which
may include debt, equity or a combination thereof. Host Marriott
anticipates that any net proceeds from the sale of offered securities will
be used for refinancing of Host Marriott's indebtedness, potential future
acquisitions and general corporate purposes.
On August 5, 1998, HMH Properties, Inc. ("HMH Properties"), an indirect
wholly-owned subsidiary of Host Marriott, which owns 61 of Host Marriott's
hotels, purchased substantially all of its (i) $600 million in 9 1/2%
senior notes due 2005, (ii) $350 million in 9% senior notes due 2007 and
(iii) $600 million in 8 7/8% senior notes due 2007 (collectively, the "Old
Senior Notes"). Concurrently with each offer to purchase, HMH Properties
solicited consents (the "1998 Consent Solicitations") from registered
holders of the Old Senior Notes to certain amendments to eliminate or
modify substantially all of the restrictive covenants and certain other
provisions contained in the indentures pursuant to which the Old Senior
Notes were issued. HMH Properties simultaneously utilized the Shelf
Registration to issue an aggregate of $1.7 billion in senior notes (the
"New Senior Notes"). The New Senior Notes were issued in two series, $500
million of 7 7/8 Series A notes due in 2005 and $1.2 billion of 7 7/8
Series B notes due in 2008. The 1998 Consent Solicitations facilitated the
merger of HMC Capital Resources Holdings Corporation ("Capital
F-32
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Resources"), a wholly-owned subsidiary of the Company, with and into HMH
Properties. Capital Resources, the owner of eight of Host Marriott's hotels
was the obligor under the $500 million credit facility (the "Old Credit
Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility")
with a group of commercial banks. The New Credit Facility will initially
have a three year term with two one-year extension options. Borrowings
under the New Credit Facility generally bear interest at the Eurodollar
rate plus 1.75%. The interest rate and commitment fee (currently 0.35% on
the unused portion of the New Credit Facility) fluctuates based on certain
financial ratios of HMH Properties. The New Senior Notes and the New Credit
Facility are guaranteed by Host Marriott and its wholly-owned subsidiary,
Host Marriott Hospitality, Inc. and certain subsidiaries of HMH Properties
and are secured by pledges of equity interests in certain subsidiaries of
HMH Properties.
The New Credit Facility replaces the Company's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility
were used by Host Marriott to purchase substantially all of the Old Senior
Notes, to make repayments outstanding under the Old Credit Facility and to
make bond premium and consent payments totaling approximately $178 million.
These costs, along with the write-off of deferred financing fees of
approximately $55 million related to the Old Senior Notes and the Old
Credit Facility, will be recorded as a pre-tax extraordinary loss on the
extinguishment of debt in the third quarter of 1998. The New Credit
Facility and the indenture under which the New Senior Notes were issued
contain covenants restricting the ability of HMH Properties and certain of
its subsidiaries to incur indebtedness, grant liens on their assets,
acquire or sell assets or make investments in other entities, and make
distributions to equityholders of HMH Properties, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT.
The New Credit Facility and the New Senior Notes also contain certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt.
The accompanying condensed combined consolidated financial statements have
been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed combined consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's audited financial statements for the three fiscal
years in the period ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed combined
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of June 19, 1998
and the results of operations and cash flows for the twenty-four weeks
ended June 19, 1998 and June 20, 1997. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. In April 1998, Host Marriott reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the U.S. and
certain other assets in a transaction valued at approximately $1.735
billion. The Company expects to pay approximately $862 million in cash and
assumed debt and to issue approximately 43.7 million Operating Partnership
units ("OP Units"). Each OP Unit will be exchangeable for one share of Host
Marriott common stock (or its cash equivalent). Upon completion of the
acquisition, Blackstone will own approximately 18% of the outstanding
shares of Host Marriott common stock on a fully converted basis. The
Blackstone portfolio consists of two Ritz-Carltons, two Four Seasons, one
Grand Hyatt, three Hyatt Regencies, four Swissotel properties and a
mortgage note on a third Four Seasons.
F-33
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Blackstone transaction is expected to close immediately after the REIT
Conversion. At that time, Blackstone's hotels and other assets will be
contributed to the Operating Partnership. The hotels will continue to be
managed under the existing management contracts. Consummation of the
Blackstone transaction is also subject to certain conditions, including
consummation of the REIT Conversion by March 31, 1999.
3. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in
earnings (losses) of affiliates. House profit reflects the net revenues
flowing to the Company as property owner and represents gross hotel
operating revenues, less all gross property-level expenses, excluding
depreciation, management fees, real and personal property taxes, ground and
equipment rent, insurance and certain other costs, which are classified as
operating costs and expenses.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Sales
Rooms.............................................. $1,020 $ 831
Food & Beverage.................................... 444 346
Other.............................................. 110 80
----------- -----------
Total Hotel Sales................................. 1,574 1,257
----------- -----------
Department Costs
Rooms.............................................. 227 187
Food & Beverage.................................... 321 255
Other.............................................. 55 40
----------- -----------
Total Department Costs............................ 603 482
----------- -----------
Department Profit................................... 971 775
Other Deductions.................................... 319 263
----------- -----------
House Profit........................................ $ 652 $ 512
=========== ===========
</TABLE>
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that it is preferable for the Company to
include property-level revenues and operating costs and expenses of its
hotels in its statements of operations for properties that are subject to
management agreements (see Note 15). However, in connection with the pending
REIT Conversion the Company will be leasing all of its hotel properties.
Subsequent to the REIT Conversion, the Company expects that it will be
recording lease revenue. Therefore, the Company believes that the adoption
of EITF 97-2 is not advisable at this time. As such, the revenues reported
on the Company's financial statements continue to reflect the house profit
of its hotel properties (as described further in Note 3). In the event the
REIT Conversion does not occur or is unreasonably delayed, the Company will
change its presentation of revenues and operating costs and expenses. The
effect of this change would be to increase revenues and operating costs and
expenses by approximately $0.9 billion, and $0.7 billion for the twenty-four
weeks ended June 19, 1998 and June 20, 1997, respectively, and would have no
impact on operating profit, net income or earnings per share.
4. Basic and diluted earnings per OP Unit have been calculated based on the
number of Host Marriott common shares outstanding for all periods presented
because it is expected that upon the REIT Conversion the Operating
Partnership will issue OP Units to Host Marriott in exchange for the
Contribution equal to the number of shares of outstanding Host Marriott
common stock. Accordingly, the following discussion of earnings per OP Unit
is on a pro forma basis as if the REIT Conversion and Contribution had
occurred.
Basic earnings per OP Unit is computed by dividing net income by the
weighted average number of shares of common stock outstanding of Host
Marriott. Diluted earnings per OP Unit is computed by dividing net income
plus dividends by the weighted average number of shares of common stock
outstanding plus other
F-34
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
potentially dilutive securities of Host Marriott. Diluted earnings per OP
Unit was not adjusted for the impact of the Convertible Preferred
Securities in 1997 as they were anti-dilutive.
Basic and diluted earnings per OP Unit on a pro forma basis are as follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
<S> <C> <C>
Basic earnings per OP Unit:
Income before extraordinary item............. $ .46 $ .16
Extraordinary item--Gain on extinguishment of
debt (net of income taxes).................. -- .02
----------- -----------
Basis earnings per OP Unit................. $ .46 $ .18
=========== ===========
Diluted earnings per OP Unit:
Income before extraordinary item............. $ .43 $ .16
Extraordinary item--Gain on extinguishment of
debt (net of income taxes).................. -- .02
----------- -----------
Diluted earnings per OP Unit............... $ .43 $ .18
=========== ===========
</TABLE>
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per OP Unit follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Weighted average number of common shares
outstanding....................................... 204.0 202.6
Assuming distribution of common shares granted
under the comprehensive stock plan, less shares
assumed purchased at average market price......... 4.3 5.0
Assuming distribution of common shares upon
redemption of Convertible Preferred Securities.... 29.6 --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market price...................................... .1 .3
----------- -----------
Shares utilized for the calculation of diluted
earnings per OP Unit............................ 238.0 207.9
=========== ===========
</TABLE>
5. As of June 19, 1998, the Company had minority interests in 18 affiliates
that own an aggregate of 240 properties, 20 of which are full-service
properties, managed primarily by Marriott International, Inc. The Company's
equity in earnings (losses) of affiliates was a $1 million loss and $3
million for the twenty-four weeks ended June 19, 1998 and June 20, 1997,
respectively.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Revenues........................................ $ 255 $ 303
Operating expenses:
Cash charges (including interest)............. 152 185
Depreciation and other non-cash charges....... 69 95
----------- -----------
Income (loss) before extraordinary item......... 34 23
Extraordinary item--forgiveness of debt......... 4 12
----------- -----------
Net income.................................. $ 38 $ 35
=========== ===========
</TABLE>
In the first quarter of 1998, the Company obtained a controlling interest
in the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage
debt. The Company previously owned a 1.3% general and limited partnership
interest.
F-35
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In second quarter of 1998, the Company acquired the partnership that owns
the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million.
The Company previously owned a 1% managing general partner interest and
held a note receivable interest.
6. In the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns
the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for approximately
$50 million.
In the second quarter of 1998, the Company acquired the 397-room Ritz-
Carlton, Tysons Corner for $96 million and the 281-room Ritz-Carlton,
Phoenix for $75 million. In addition, the Company acquired the 487- room
Torrance Marriott near Los Angeles, California for $52 million. Also in the
second quarter of 1998, the Company sold the 662-room New York Marriott
East Side for approximately $191 million and recorded a pre-tax gain of
approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million.
7. In March 1997, Host Marriott purchased 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott Hotel. Host
Marriott purchased the bonds for $219 million, an $11 million discount to
the face value of $230 million. In connection with the redemption and
defeasance of the bonds, the Company recognized an extraordinary gain of $5
million, which represents the $11 million discount and the write-off of
deferred financing fees, net of taxes.
8. The Company operates in the full-service hotel segment of the lodging
industry. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brands.
As of June 19, 1998 and June 20, 1997, the Company's foreign operations
consist of four full-service hotel properties located in Canada and two
full-service hotel properties located in Mexico. There were no intercompany
sales between the properties and the Company. The following table presents
revenues for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
---------------------------
JUNE 19, 1998 JUNE 20, 1997
------------- -------------
<S> <C> <C>
United States................................. $689 $508
International................................. 19 14
---- ----
Total..................................... $708 $522
==== ====
</TABLE>
9. In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of
all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner
changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
("HMSC") common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. For the twenty-four weeks ended June 19, 1998, other
comprehensive income was $1 million and consisted of the unrealized gain on
the appreciation of the HMSC common stock. For the twenty-four weeks ended
June 19, 1998, comprehensive income was $94 million. For the twenty-four
weeks ended June 20, 1997, other comprehensive income was $3 million. For
twenty-four weeks ended June 20, 1997, comprehensive income $40 million. As
of June 19, 1998 and January 2, 1998, the Company's accumulated other
comprehensive income of approximately $11 million and $10 million,
respectively, was included in Investments and Advances from Host Marriott
Corporation.
10. The obligation for the Convertible Preferred Securities has been pushed
down to these financial statements because it is expected that upon the
REIT Conversion the Operating Partnership will assume primary
F-36
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liability for repayment of the convertible debentures of Host Marriott
underlying the Convertible Preferred Securities and the related common
securities of Host Marriott Financial Trust (the "Issuer"), a wholly-owned
subsidiary trust of Host Marriott, will be contributed to the Operating
Partnership. Upon conversion by a Convertible Preferred Securities holder,
the Operating Partnership will purchase common shares from Host Marriott
Trust in exchange for a like number of OP Units and distribute the common
shares to the Convertible Preferred Securities holder.
In December 1996, the Issuer issued 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by Host Marriott to the extent the Issuer has
funds available therefor. This guarantee, when taken together with Host
Marriott obligations under the indenture pursuant to which the Debentures
were issued, the Debentures, Host Marriott's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses,
debts and liabilities of the Issuer (other than with respect to the
Convertible Preferred Securities) provides a full and unconditional
guarantee of amounts due on the Convertible Preferred Securities. Proceeds
from the issuance of the Convertible Preferred Securities were invested in
6 3/4% Convertible Subordinated Debentures (the "Debentures") due December
2, 2026 issued by Host Marriott. The Issuer exists solely to issue the
Convertible Preferred Securities and its own common securities (the "Common
Securities") and invest the proceeds therefrom in the Debentures, which is
its sole asset. Separate financial statements of the Issuer are not
presented because of Host Marriott's guarantee described above; Host
Marriott's management has concluded that such financial statements are not
material to investors and the Issuer is wholly-owned and essentially has no
independent operations.
Each of the Convertible Preferred Securities is convertible at the option
of the holder into shares of Host Marriott common stock at the rate of
2.6876 shares per Convertible Preferred Security (equivalent to a
conversion price of $18.604 per share of Company common stock). The
Debentures are convertible at the option of the holders into shares of Host
Marriott common stock at the conversion rate of 2.6876 shares for each $50
in principal amount of Debentures. The Issuer will only convert Debentures
pursuant to a notice of conversion by a holder of Convertible Preferred
Securities. During 1998 and 1997, no shares were converted into common
stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and
payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other
payment dates on the Debentures. Host Marriott may defer interest payments
on the Debentures for a period not to exceed 20 consecutive quarters. If
interest payments on the Debentures are deferred, so too are payments on
the Convertible Preferred Securities. Under this circumstance, Host
Marriott will not be permitted to declare or pay any cash distributions
with respect to its capital stock or debt securities that rank pari passu
with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by Host Marriott of
the Debentures after December 2, 1999. Upon repayment at maturity or as a
result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from
which the proceeds will be applied to redeem Convertible Preferred
Securities and Common Securities, together with accrued and unpaid
distributions. As part of the Contribution, the Operating Partnership will
become an Obligor under the Convertible Preferred Securities.
11. In the second quarter of 1998, on behalf of SLC, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International. Host
Marriott now holds a $92 million, 8.5% note due from SLC. Host Marriott
also holds a $14.8 million, 6.375% unsecured note due from SLC which
matures in December, 2007. Host Marriott holds a total of approximately
$107 million in notes due from SLC which are included as notes and other
receivables in the accompanying condensed combined consolidated balance
sheet.
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheet of HMC Senior
Communities, Inc. ("HMCSC"), which is the senior living communities' business
of Host Marriott Corporation, as defined in Note 1 to the consolidated
financial statements, as of January 2, 1998, and the related consolidated
statements of operations, shareholder's equity and cash flows for the period
from June 21, 1997 (inception) through January 2, 1998. These consolidated
financial statements are the responsibility of Host Marriott Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HMCSC as
of January 2, 1998 and the results of its operations and its cash flows for
the period from June 21, 1997 (inception) through January 2, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
May 1, 1998
F-38
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $633,840
Other assets......................................................... 1,332
Restricted cash...................................................... 10,686
Cash and cash equivalents............................................ 17,644
--------
Total assets....................................................... $663,502
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt................................................................. $349,934
Deferred income taxes................................................ 58,705
Accounts payable and other accrued liabilities....................... 15,543
Amounts due to Marriott International, net........................... 3,172
Accrued interest..................................................... 4,906
Due to Host Marriott Corporation..................................... 2,151
Deferred revenue..................................................... 2,027
--------
Total liabilities.................................................. 436,438
--------
Shareholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no par
value............................................................... --
Additional paid-in capital........................................... 226,706
Retained earnings.................................................... 358
--------
Total shareholder's equity......................................... 227,064
--------
Total liabilities and shareholder's equity....................... $663,502
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-39
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.............................................................. $ 36,900
--------
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 10,635
Base management fees to Marriott International........................ 6,481
Property taxes........................................................ 3,626
Other................................................................. 187
--------
Total operating costs and expenses.................................. 20,929
--------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............... 15,971
Corporate expenses.................................................... (2,304)
Interest expense...................................................... (13,396)
Interest income....................................................... 336
--------
INCOME BEFORE INCOME TAXES............................................ 607
Provision for income taxes............................................ (249)
--------
NET INCOME............................................................ $ 358
========
</TABLE>
See Notes to Consolidated Financial Statements.
F-40
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, June 21, 1997.............................. $-- $ -- $--
Common stock issued............................... -- -- --
Capital contributions by Host Marriott Corpora-
tion............................................. -- 226,706 --
Net income........................................ -- -- 358
---- -------- ----
Balance, January 2, 1998............................ $-- $226,706 $358
==== ======== ====
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 21, 1997 (INCEPTION) THROUGH JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 358
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization..................................... 10,635
Change in amounts due to Marriott International................... 10,073
Change in amounts due to Host Marriott............................ 2,151
Equity in earnings of affiliate................................... (997)
Change in other operating accounts................................ 3,156
---------
Cash provided by operating activities............................... 25,376
---------
INVESTING ACTIVITIES
Capital expenditures.............................................. (33,345)
Increase in capital improvement reserve........................... (67)
---------
Cash used in investing activities................................... (33,412)
---------
FINANCING ACTIVITIES
Contribution of cash.............................................. 7,319
Repayments of debt................................................ (2,142)
Issuances of debt................................................. 20,407
Change in financing reserves...................................... 96
---------
Cash provided by financing activities............................... 25,680
---------
Increase in cash and cash equivalents............................... 17,644
Cash and cash equivalents, beginning of period...................... --
---------
Cash and cash equivalents, end of period............................ $ 17,644
=========
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment............................................ $ 601,033
Other assets...................................................... 9,892
Debt assumed...................................................... (331,669)
Other liabilities................................................. (9,479)
Deferred revenue.................................................. (2,054)
Deferred income taxes............................................. 58,435
Expansion costs paid by Host Marriott Corporation, which have been
included in additional paid-in capital........................... 10,099
</TABLE>
See Notes to Consolidated Financial Statements.
F-42
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired all
of the outstanding stock of Forum Group Inc. ("Forum Group") from Marriott
Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott International,
Inc. ("Marriott International") and concurrently contributed all of the assets
and liabilities of Forum Group to HMC Senior Communities, Inc. ("HMCSC"). In
connection with the acquisition, Forum Group assigned to Marriott
International its interest as manager under long-term operating agreements
(See Note 6).
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off
HMCSC to the shareholders of Host Marriott, and contributing Host Marriott's
hotels and certain other assets and liabilities to a newly formed Delaware
limited partnership, Host Marriott, L.P., whose sole general partner will be
Host Marriott Trust, a newly formed Maryland Real Estate Investment Trust.
After the proposed reorganization, HMCSC will lease hotels from Host Marriott,
L.P. and Marriott International will continue to manage the hotels under
long--term management agreements.
Consummation of the reorganization is subject to significant contingencies,
including final Board approval and consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the
reorganization will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
reorganization described above.
HMCSC operates as a unit of Host Marriott utilizing Host Marriott's
employees, insurance and administrative services. HMCSC has no employees.
Periodically, certain operating expenses, capital expenditures and other cash
requirements of HMCSC are paid by Host Marriott and charged directly or
allocated to HMCSC. Certain general and administrative costs of Host Marriott
are allocated to HMCSC using a variety of methods, principally including Host
Marriott's specific identification of individual cost items and otherwise
through allocations based upon estimated levels of effort devoted by its
general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of
management, the methods for allocating corporate, general and administrative
expenses and other direct costs are reasonable. It is not practical to
estimate the costs that would have been incurred by HMCSC if it had been
operated on a stand-alone basis.
The consolidated financial statements present the financial position,
results of operations and cash flows of HMCSC beginning on June 21, 1997 (the
date Host Marriott acquired the stock of the Forum Group) through January 2,
1998. Host Marriott's basis in the assets and liabilities of HMCSC has been
carried over to these financial statements. All material intercompany
transactions and balances between HMCSC and its subsidiaries have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of HMCSC and its
subsidiaries and controlled affiliates. Investments in affiliates over which
HMCSC has the ability to exercise significant influence, but does
F-43
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
not control, are accounted for using the equity method. All material
intercompany transactions and balances have been eliminated.
Fiscal Year
HMCSC's fiscal year ends on the Friday nearest to December 31.
Revenues
Revenues represent house profit from the Communities. House profit reflects
the net revenues flowing to HMCSC as property owner and represents gross
community operating sales less property-level expenses excluding depreciation
and amortization, real and personal property taxes, insurance, management fees
and certain other costs which are classified as operating costs and expenses
in the accompanying statement of operations.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues from health care
services are recorded net of estimated contractual allowances in the
accompanying consolidated financial statements. Management believes that
reserves recorded are adequate to cover any adjustments arising from
retroactive adjustments.
HMCSC has considered the impact of EITF 97-2 on its financial statements and
has determined that it is preferable for HMCSC to include property-level
revenues and operating expenses of its senior living communities in its
statements of operations. HMCSC will adopt EITF 97-2 in the fourth quarter of
1998 and restate prior periods to conform to the new presentation. The effect
of this change will be to increase 1997 revenues and operating costs and
expenses by approximately $74.1 million and would have no impact on operating
profit or net income.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents.
Property and Equipment
Property and equipment is recorded at cost, or if contributed by Host
Marriott, is recorded at Host Marriott's basis. Replacements and improvements
that extend the useful life of property and equipment are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
F-44
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In cases where management is holding for sale a particular Community, HMCSC
assesses impairment based on whether the estimated sales price less cost of
disposal of each individual property to be sold is less than the net book
value. A property is considered to be held for sale when a decision is made to
dispose of the Community. Otherwise, impairment is assessed based on whether
it is probable that undiscounted future cash flows from each Community will be
less than its net book value. If a Community is impaired, its basis is
adjusted to its fair value.
Concentration of Credit Risk
Financial instruments that potentially subject HMCSC to significant
concentration of credit risk consist principally of cash and cash equivalents.
HMCSC maintains cash and cash equivalents with various high credit-quality
financial institutions and limits the amount of credit exposure with any
institution.
Working Capital
Pursuant to the terms of HMCSC's Operating Agreements (see Note 6), HMCSC is
required to provide Marriott International with working capital and supplies
to meet the operating needs of the Communities. Marriott International
converts cash advanced by HMCSC into other forms of working capital consisting
primarily of operating cash, inventories, resident deposits and trade
receivables and payables which are maintained and controlled by Marriott
International. Upon the termination of the Operating Agreements, Marriott
International is required to convert working capital and supplies into cash
and return it to HMCSC. As a result of these conditions, the individual
components of working capital and supplies controlled by Marriott
International are not reflected in the accompanying consolidated balance
sheet.
Deferred Revenue
Monthly fees deferred for the non-refundable portion of the entry fees are
included as deferred revenue in the accompanying balance sheet. These amounts
are recognized as revenue as health care services are performed over the
expected term of the residents' contracts.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards No.
129 "Disclosure of Information About Capital Structure." The adoption of this
statement did not have a material effect on these consolidated financial
statements.
F-45
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. REVENUES
House profit generated by the Communities consist of the following for the
period from June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Community Sales
Routine.......................................................... $ 99,989
Ancillary........................................................ 10,980
--------
Total Community Sales.......................................... 110,969
--------
Department Costs
Routine.......................................................... 64,516
Ancillary........................................................ 9,553
--------
Total Department Costs......................................... 74,069
--------
Department Profit
Routine.......................................................... 35,473
Ancillary........................................................ 1,427
--------
Revenues....................................................... $ 36,900
========
</TABLE>
Community sales consist of routine and ancillary sales. Routine sales are
generated from monthly charges for independent living units and daily charges
for assisted living suites and nursing beds, and are recognized monthly based
on the terms of the residents' agreements. Advance payments received for
services are deferred until the services are provided. Ancillary sales are
generated on a "fee for service" basis for supplementary items requested by
residents, and are recognized as the services are provided.
Total sales include amounts estimated by management to be reimbursable
through Medicare, Medicaid and other third party payor agreements. Medicare
and Medicaid represented 11% and 3%, respectively, of sales for the period
from June 21, 1997 (inception) through January 2, 1998. Reimbursement
arrangements are subject to audit and retroactive adjustment. Provisions are
made for potential adjustments that may result. To the extent those provisions
vary from settlements, sales are charged or credited when the adjustments
become final. Changes in the estimate of amounts reimbursable by third party
payors from prior years resulted in the recognition of $1,689,000 of
additional sales for the period from June 21, 1997 (inception) through January
2, 1998. In management's opinion, any adjustments related to current and prior
years' operations will be immaterial to current and future financial
statements.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 2, 1998 (in
thousands):
<TABLE>
<S> <C>
Land and land improvements...................................... $102,714
Buildings and leasehold improvements............................ 518,056
Furniture and equipment......................................... 23,705
--------
644,475
Less accumulated depreciation and amortization.................. (10,635)
--------
$633,840
========
</TABLE>
F-46
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, LTJ Senior Communities Corporation ("LTJ"), a wholly owned
subsidiary of HMCSC, acquired 49% of the remaining 50% interest in Leisure
Park Venture Limited Partnership (the "Partnership") which owns a 418-unit
retirement community in New Jersey for approximately $23 million, including
the assumption of approximately $15 million of debt. Subsequent to this
acquisition, HMCSC indirectly owns a 99% interest in the Partnership. Marriott
International owns the remaining 1% limited partner interest.
In the first quarter of 1998, LTJ also acquired the Gables of Winchester in
suburban Boston, a 124-unit upscale senior living community, for $21 million
and entered into conditional purchase agreements for two Marriott Brighton
Gardens assisted living communities with the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the first
quarter of 1999, HMCSC may acquire these two 160-unit properties located in
Denver and Colorado Springs, Colorado, for approximately $35 million, if they
achieve certain operating performance criteria. All three of these communities
will be operated by Marriott International under long-term operating
agreements.
5. RESTRICTED CASH
Restricted cash consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Debt service reserve fund........................................ $ 1,528
Fixed asset reserve fund......................................... 4,300
Real estate tax reserve fund..................................... 3,590
Insurance reserve fund........................................... 1,268
-------
$10,686
=======
</TABLE>
The debt service, fixed asset, real estate tax and insurance reserve funds
consist of cash transferred into segregated escrow accounts out of sales
generated by the Communities, pursuant to HMCSC's secured debt agreements.
These funds are periodically disbursed by the collateral agent to pay for debt
service, capital expenditures, insurance premiums and real estate taxes
relating to the secured properties. In some cases, to ensure prompt payment,
HMCSC utilizes its unrestricted cash to pay for capital expenditures,
insurance premiums and real estate taxes and is subsequently reimbursed for
such payments out of funds held in the appropriate escrow account.
6. OPERATING AGREEMENTS
The Communities are subject to operating agreements (the "Operating
Agreements") which provide for Marriott International to operate the
Communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of Marriott
International of up to an additional five to ten years. The Operating
Agreements provide for payment of base management fees generally equal to five
to eight percent of gross sales and incentive management fees generally equal
to zero to 20% of Operating Profit (as defined in the Operating Agreements)
over a priority return to HMCSC. In the event of early termination of the
Operating Agreements, Marriott International will receive additional fees
based on the unexpired term and expected future base and incentive management
fees. HMCSC has the option to terminate certain, but not all, management
agreements if specified performance thresholds are not satisfied. No Operating
Agreement with respect to a single Community is cross-collateralized or cross-
defaulted to any other Operating Agreement, and any single Operating Agreement
may be terminated following a default by HMCSC or Marriott International,
although such termination will not trigger the cancellation of any other
Operating Agreement.
F-47
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Operating Agreements, Marriott International is
required to furnish the Communities with certain services ("Central
Administrative Services") which are provided on a central or regional basis to
all properties in the Marriott Retirement Community System. These services
include the development and operation of computer systems, computer payroll
and accounting services, marketing and public relations services, and such
additional services as may from time-to-time be performed more efficiently on
a central or regional level. The Operating Agreements require payment of
Central Administrative Services fees equal to 2% of gross sales beginning in
the third quarter of 1998.
Marriott International is required under the Operating Agreements to deduct
an amount from gross sales and place the funds into an interest-bearing
reserve account to cover the cost of (a) certain routine repairs and
maintenance to the Communities which are normally capitalized and (b)
replacements and renewals to the Communities' property and improvements. The
annual payment amount (expressed as a percentage of gross sales) generally
will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through
2007, and 3.5% thereafter. The amount contributed for the period June 21, 1997
(inception) through January 2, 1998 was $2,025,000. The Operating Agreements
provide that HMCSC shall provide Marriott International with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
7. AMOUNTS DUE TO MARRIOTT INTERNATIONAL
The components of the amounts due to Marriott International, net, at January
2, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Community operating expenses payable to Marriott International..... $ 7,648
Management fees payable to Marriott International.................. 1,262
Community working capital due to HMCSC............................. (6,093)
Other, net......................................................... 355
-------
Total............................................................ $ 3,172
=======
</TABLE>
F-48
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following at January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Mortgage Debt:
Secured by eight Communities with $232 million of assets, with an
interest rate of 10.01%, maturing through 2020 (balance includes
fair value adjustment of $15.5 million)............................ $137,713
Secured by nine Communities with $110 million of assets, with an in-
terest rate of 9.93%, maturing through 2001 (balance includes fair
value adjustment of $2.6 million).................................. 49,353
Secured by one Community with $29 million of assets, with an average
rate of 7.45%, maturing through 1999 (repaid in 1998).............. 26,403
--------
213,469
--------
Notes payable to Marriott International, with a rate of 9%, maturing
through 2001 (repaid in 1998)........................................ 92,195
--------
Other notes:
Revenue Bonds with a rate of 5.875%, maturing through 2027.......... 14,700
Other notes, with an average rate of 6.6%, maturing through December
2027............................................................... 18,943
Capital lease obligations........................................... 10,627
--------
44,270
--------
Total debt........................................................ $349,934
========
</TABLE>
Debt maturities at January 2, 1998, excluding the unamortized fair value
adjustments of approximately $18 million resulting from recording the
mortgages at their fair value on June 21, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 54,515
1999............................................................. 30,197
2000............................................................. 4,503
2001............................................................. 88,043
2002............................................................. 2,504
Thereafter....................................................... 152,046
--------
$331,808
========
</TABLE>
In conjunction with the acquisition of Forum Group Inc., HMCSC recorded the
debt assumed at its fair value, which exceeded the face value by approximately
$19 million. HMCSC is amortizing this adjustment to interest expense over the
remaining life of the related debt. The amortization for the period from June
21, 1997 (inception) through January 2, 1998 totaled $834,000. Cash paid for
interest for the period from June 21, 1997 (inception) through January 2, 1998
totaled $8,183,000.
In conjunction with the June 21, 1997 acquisition of Forum Group Inc., HMCSC
assumed approximately $197 million in mortgage debt, $11 million in capital
lease obligations (see Note 9), as well as issued $72 million in notes payable
to Marriott International. Subsequent to the acquisition, HMCSC issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. These notes were guaranteed by Host
Marriott. In the second quarter of 1998, Host Marriott repaid the $92 million
in notes payable to Marriott International.
F-49
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1997, in connection with the acquisition of the remaining 50%
interest in the Leisure Park Venture Limited Partnership (see Note 4), HMCSC
assumed approximately $15 million of debt.
The net assets of seventeen of the Communities are subject to mortgage debt
which places restrictions on their assets. The net assets of the Communities
totaled approximately $150 million at January 2, 1998. The indentures
governing these mortgages contain covenants that, among other things, require
maintenance of segregated cash collection of all rents, separate cash reserves
for debt service, property improvements, real estate taxes and insurance,
limit the ability to incur additional indebtedness, issue stock or admit
additional partners, pay dividends or make certain distributions, enter into
or cancel leases, enter into certain transactions with affiliates or sell
certain assets.
During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of the debt was recorded as a
capital contribution to HMCSC, there was no gain or loss on the prepayment.
9. LEASES
HMCSC leases certain property under non-cancelable capital and operating
leases. Future minimum annual rental commitments for all non-cancelable leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998................................................... $ 1,274 $ 278
1999................................................... 1,287 278
2000................................................... 1,300 278
2001................................................... 1,320 278
2002................................................... 1,338 278
Thereafter............................................. 13,672 3,062
------- ------
Total minimum lease payments........................... 20,191 $4,452
======
Less amount representing interest...................... (9,564)
-------
Present value of minimum lease payments................ $10,627
=======
</TABLE>
HMCSC leases two communities under capital leases expiring in 2016. Upon the
expiration of the lease or anytime prior to lease expiration, HMCSC has the
first right of refusal (the "Option") to submit a counter offer to any
acceptable bona fide offer from a third party within 30 days of notice from
the lessor. If HMCSC fails to exercise its Option, then the lessor may proceed
with the sale of the leased property and all assets therein.
HMCSC also has one long-term operating ground lease which expires in 2013.
The operating lease includes three renewal options exercisable in 5 year
increments through the year 2028.
Rent expense for the period from June 21, 1997 (inception) through January
2, 1998 was $141,000.
F-50
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Total deferred tax assets and liabilities as of January 2, 1998 were as
follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets................................................ $ 15,125
Deferred tax liabilities........................................... (73,830)
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of January 2, 1998 was as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $(68,687)
Debt adjustment to fair value at acquisition....................... 7,591
Other, net......................................................... 2,391
--------
Net deferred income tax liability................................ $(58,705)
========
</TABLE>
The provision for income taxes consists of the following for the period from
June 21, 1997 (inception) through January 2, 1998 (in thousands):
<TABLE>
<S> <C>
Current--Federal..................................................... $ (25)
--State........................................................... (5)
-----
(30)
-----
Deferred--Federal.................................................... 238
--State........................................................... 41
-----
279
-----
$249
=====
</TABLE>
A reconciliation of the statutory Federal tax rate to HMCSC's effective
income tax rate for the period from June 21, 1997 (inception) through January
2, 1998 follows:
<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 6.0
----
41.0%
====
</TABLE>
HMCSC is included in the consolidated federal income tax return of Host
Marriott and its affiliates (the "Group") for the period from June 21, 1997
(inception) through January 2, 1998. Tax expense is allocated to HMCSC as a
member of the Group based upon the relative contribution to the Group's
consolidated taxable income/loss and changes in temporary differences. This
allocation method results in federal and net state tax expense allocated for
all periods presented that is substantially equal to the expense that would
have been recognized if HMCSC had filed separate tax returns. HMCSC reimburses
Host Marriott for the allocable share of current taxes payable relating to the
period that HMCSC has been included in Host Marriott's consolidated federal
income tax return.
F-51
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court for the Southern
District of Indiana (the "Indiana Court") against the general partner of one
of HMCSC's subsidiary partnerships, Forum Retirement Partners, L.P. alleging
breach of the partnership agreement, breach of fiduciary duty, fraud, insider
trading and civil conspiracy/aiding and abetting. On February 4, 1998, the
Plaintiff, MSLS, the general partner, Forum Group and HMCSC entered into a
Settlement and Release Agreement (the "Settlement Agreement"), pursuant to
which Host Marriott agreed to purchase, at a price of $4.50 per unit, the
partnership units of each limited partner electing to join in the Settlement
Agreement. HMCSC held 79% of the outstanding limited partner units in the
partnership at that time. HMCSC also agreed to pay as much as an additional
$1.25 per unit to the settling limited partners, under certain conditions, in
the event that HMCSC within three years following the date of settlement
initiates a tender offer for the purchase of units not presently held by HMCSC
or the settling limited partners. On February 5, 1998, the Indiana Court
entered an order approving the dismissal of the Plaintiff's case.
In connection with the Settlement Agreement on March 25, 1998, HMCSC
acquired 1,000,894 limited partner unit shares for approximately $4,504,000.
The purchase price of the shares approximated fair value and accordingly, no
portion of the purchase price has been expensed. As a result of this purchase,
HMCSC's ownership interest in the partnership was increased to approximately
86%.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
HMCSC believes the carrying amount of its financial instruments (excluding
property indebtedness) approximates their fair value due to the relatively
short maturity of these instruments. There is no quoted market value available
for any of HMCSC's financial instruments.
Valuations of debt are determined based on expected future payments
discounted at risk-adjusted rates. The debt was adjusted to its fair value in
conjunction with Host Marriott's acquisition of the Communities on June 21,
1997. As of January 2, 1998, the fair value of debt approximated its carrying
value.
F-52
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 19, 1998
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net...................................... $643,641
Amounts due from Marriott International, net..................... 9,006
Other assets..................................................... 3,523
Restricted cash.................................................. 12,056
Cash and cash equivalents........................................ 19,113
--------
Total assets................................................... $687,339
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt, including $107 million in notes due to Host Marriott Corpo-
ration.......................................................... $321,752
Deferred income taxes............................................ 61,715
Due to Host Marriott Corporation, net............................ 10,580
Accounts payable and other accrued liabilities................... 9,122
Deferred revenue................................................. 1,532
--------
Total liabilities.............................................. 404,701
--------
Shareholder's equity:
Common stock, 100 shares authorized, issued and outstanding, no
par value....................................................... --
Additional paid-in capital....................................... 278,783
Retained earnings................................................ 3,855
--------
Total shareholder's equity..................................... 282,638
--------
Total liabilities and shareholder's equity..................... $687,339
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-53
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 19, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES............................................................... $39,252
-------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.......................................... 9,686
Base management fees to Marriott International......................... 6,068
Property taxes and insurance........................................... 3,080
Other.................................................................. 372
-------
Total operating costs and expenses................................... 19,206
-------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST................ 20,046
Corporate expenses..................................................... (1,616)
Interest expense....................................................... (13,185)
Interest income........................................................ 681
-------
INCOME BEFORE INCOME TAXES............................................. 5,926
Provision for income taxes............................................. (2,429)
-------
NET INCOME............................................................. $ 3,497
=======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-54
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 19, 1998
(UNAUDITED, IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 3,497
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 9,686
Change in amounts due to Marriott International.................... (9,602)
Change in amounts due to Host Marriott Corporation................. 8,986
Equity in earnings of affiliate.................................... (26)
Change in other operating accounts................................. (5,603)
-------
Cash provided by operating activities................................ 6,938
-------
INVESTING ACTIVITIES
Capital expenditures............................................... (2,515)
Increase in capital improvement reserve............................ (1,082)
-------
Cash used in investing activities.................................... (3,597)
-------
FINANCING ACTIVITIES
Repayments of debt................................................. (1,779)
Change in financing reserves....................................... (93)
-------
Cash used in financing activities.................................... (1,872)
-------
Increase in cash and cash equivalents................................ 1,469
Cash and cash equivalents, beginning of period....................... 17,644
-------
Cash and cash equivalents, end of period............................. $19,113
=======
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott Corporation:
Property and equipment........................................... $16,972
Other............................................................ 8,701
Mortgage debt paid by Host Marriott.............................. 26,403
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-55
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. On June 21, 1997, Host Marriott Corporation ("Host Marriott") acquired
all of the outstanding stock of Forum Group Inc. ("Forum Group"), from
Marriott Senior Living Services, Inc. ("MSLS"), a subsidiary of Marriott
International, Inc. ("Marriott International") and concurrently contributed
all of the assets and liabilities of Forum Group, Inc. to HMC Senior
Communities, Inc. ("HMCSC"). In connection with the acquisition, Forum Group
assigned to Marriott International its interest as manager under long-term
operating agreements.
On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's current business operations by spinning-off Host
Marriott's senior living business ("Senior Living") into a separate
corporation, the Senior Living Communities Company and contributing Host
Marriott's hotels and certain other assets and liabilities to a newly formed
Delaware limited partnership, Host Marriott, L.P., whose sole general partner
will be Host Marriott Trust, a newly formed Maryland Real Estate Investment
Trust ("REIT"), collectively the "REIT Conversion". After the proposed REIT
Conversion, HMCSC will lease hotels from Host Marriott, L.P. and Marriott
International will continue to manage the hotels under long term management
agreements.
Consummation of the REIT Conversion is subject to significant contingencies,
including final Board approval, consent of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates and
other third parties. Accordingly, there can be no assurance that the REIT
Conversion will be completed.
The accompanying consolidated financial statements include the historical
accounts of HMCSC, representing 31 senior living communities (the
"Communities") located in 13 states, expected to be spun-off as part of the
REIT Conversion described above.
The accompanying condensed consolidated financial statements have been
prepared by HMCSC without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted. HMCSC
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's audited financial statements for the
period from June 21, 1997 (inception) through January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of June 19, 1998 and the
results of operations and cash flows for the twelve weeks ended June 19, 1998.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
2. Revenues represent house profit from the Communities. House profit
reflects the net revenues flowing to HMCSC as property owner and represents
gross community operating sales less property-level expenses excluding
depreciation and amortization, real and personal property taxes, insurance,
management fees and certain other costs which are classified as operating
costs and expenses.
Resident fees and health care service revenues are generated primarily from
monthly charges for independent living units and daily charges for assisted
living suites and nursing beds, and are recognized monthly based on the terms
of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services
are provided.
A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements
F-56
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are subject to retroactive adjustments based on agency reviews. Revenues and
receivables from health care services are recorded net of estimated
contractual allowances in the accompanying consolidated financial statements.
Management believes that reserves recorded are adequate to cover any
adjustments arising from retroactive adjustments.
House profit generated by the Communities consist of the following for the
twenty-four weeks ended June 19, 1998 (in thousands):
<TABLE>
<S> <C>
Community Sales
Routine............................................................... $99,240
Ancillary............................................................. 10,937
-------
Total Community Sales............................................... 110,177
-------
Department Costs
Routine............................................................... 61,984
Ancillary............................................................. 8,941
-------
Total Department Costs.............................................. 70,925
-------
Department Profit
Routine............................................................... 37,256
Ancillary............................................................. 1,996
-------
Revenues............................................................ $39,252
=======
</TABLE>
HMCSC has considered the input of EITF 97-2 on its financial statements and
has determined that it is preferable for HMCSC to include property-level
revenues and operating expenses of its senior living communities in its
statements of operations. HMCSC will adopt EITF 97-2 in the fourth quarter of
1998 and restate prior periods to conform to the new presentation. The effect
of this change will be to increase twenty-four week revenues and operating
costs and expenses by approximately $71 million and would have no impact on
operating profit or net income.
3. In the first quarter of 1998, HMCSC also acquired the Gables of
Winchester in suburban Boston, a 124-unit upscale senior living community, for
$21 million and entered into conditional purchase agreements for two Marriott
Brighton Gardens assisted living communities from the Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
first quarter of 1999, HMCSC may acquire these two 160-unit properties located
in Denver and Colorado Springs, Colorado, for approximately $35 million, if
they achieve certain operating performance criteria. All three of these
communities will be operated by Marriott International under long-term
operating agreements.
4. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC. In the second quarter of 1998, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International related to
the Communities. Host Marriott now holds a $92 million, 9% note, which is
included as debt in the accompanying condensed consolidated balance sheet.
Combined with the 1997 $14.8 million, 6.375% notes which mature in December
2027, Host Marriott holds a total of approximately $107 million in notes due
from the Senior Living Communities Business.
5. During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of debt was recorded as a capital
contribution to HMCSC.
F-57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Host Marriott L.P.
We have audited the accompanying balance sheet of Host Marriott. L.P. (the
"Partnership"), a Delaware limited partnership as of June 19, 1998. This
balance sheet is the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Partnership as of June 19,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
August 5, 1998
F-58
<PAGE>
HOST MARRIOTT, L.P.
BALANCE SHEET
JUNE 19, 1998
ASSETS
<TABLE>
<S> <C>
Cash..................................................................... $ --
=====
PARTNERS' CAPITAL
General partner.......................................................... $ 1
Limited partner.......................................................... 99
-----
100
Less: Subscription receivable............................................ (100)
-----
$ --
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-59
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO BALANCE SHEET
JUNE 19, 1998
NOTE 1. ORGANIZATION
On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations through the spin-off of Host Marriott's senior living
business ("SLC") and the contribution of Host Marriott's hotels and certain
other assets and liabilities to a newly formed Delaware limited partnership,
Host Marriott, L.P. (the "Operating Partnership") whose sole general partner
will be Host Marriott Trust, a newly formed Maryland Real Estate Investment
Trust ("REIT") that will merge with Host Marriott Corporation, a Delaware
corporation. Host Marriott's contribution of its hotels and certain assets and
liabilities to the Operating Partnership (the "Contribution") in exchange for
units of limited partnership interests in the Operating Partnership will be
accounted for at Host Marriott's historical basis.
The accompanying balance sheet of the Operating Partnership includes its
accounts as of June 19, 1998. Host Marriott Hotels is the predecessor of the
Operating Partnership. The assets and liabilities of the Host Marriott Hotels
will be included in the Contribution by Host Marriott to the Operating
Partnership in connection with its planned conversion to a REIT (the "REIT
Conversion"), anticipated to become effective January 1, 1999.
In June 1998, as part of the REIT Conversion, Host Marriott filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission. This Prospectus/Consent Solicitation Statement describes a
proposal whereby the Operating Partnership will acquire by merger (the
"Mergers") eight public limited partnerships (the "Partnerships") that own or
control 24 full-service hotels in which Host Marriott or its subsidiaries are
general partners. As more fully described in the Prospectus/Consent
Solicitation Statement, limited partners of those Partnerships that
participate in the Mergers will receive either OP Units or, at their election,
unsecured notes due December 15, 2005 issued by the Operating Partnership
("Notes"), in exchange for their partnership interests in such Partnerships.
However, the consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including final
Board of Directors approval, consents of shareholders, partners, bondholders,
lenders and ground lessors of Host Marriott, its affiliates and other third
parties. Accordingly, there can be no assurance that the REIT Conversion or
the Contribution will be completed.
On April 20, 1998, Host Marriott and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the Securities
and Exchange Commission for $2.5 billion in securities, which may include
debt, equity or a combination thereof. Host Marriott anticipates that any net
proceeds from the sale of offered securities will be used for refinancing of
Host Marriott's indebtedness, potential future acquisitions and general
corporate purposes.
On August 5, 1998, HMH Properties, Inc. ("HMH Properties"), an indirect
wholly-owned subsidiary of Host Marriott, which owns 61 of Host Marriott's
hotels, purchased substantially all of its (i) $600 million in 9 1/2% senior
notes due 2005, (ii) $350 million in 9% senior notes due 2007 and (iii) $600
million in 8 7/8% senior notes due 2007 (collectively, the "Old Senior
Notes"). Concurrently with each offer to purchase, HMH Properties solicited
consents (the "1998 Consent Solicitations") from registered holders of the Old
Senior Notes to certain amendments to eliminate or modify substantially all of
the restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued. HMH Properties
simultaneously utilized the Shelf Registration to issue an aggregate of $1.7
billion in senior notes (the "New Senior Notes"). The New Senior Notes were
issued in two series, $500 million of 7 7/8 Series A notes due in 2005 and
$1.2 billion of 7 7/8 Series B notes due in 2008. The 1998 Consent
Solicitations facilitated the merger of HMC Capital Resources Holdings
Corporation ("Capital Resources"), a wholly-owned subsidiary of the Company,
with and into HMH Properties. Capital Resources, the owner of eight of Host
Marriott's hotel properties, was the obligor under the $500 million credit
facility (the "Old Credit Facility").
F-60
<PAGE>
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility") with
a group of commercial banks. The New Credit Facility will initially have a
three year term with two one year extension options. Borrowings under the New
Credit Facility generally bear interest at the Eurodollar rate plus 1.75%. The
interest rate and commitment fee (currently 0.35% on the unused portion of the
New Credit Facility) fluctuate based on certain financial ratios.
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and made
distributions to equityholders of HMH Properties, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT. The
New Credit Facility and the New Senior Notes also contain certain financial
covenants relating to, among other things, maintaining certain levels of
tangible net worth and certain ratios of EBITDA to interest and fixed charges,
total debt to EBITDA, unencumbered assets to unsecured debt, and secured debt
to total debt.
The New Credit Facility replaces the Company's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility were
used by Host Marriott to purchase substantially all of the Old Senior Notes to
repay amounts outstanding under the Old Credit Facility and to make bond
premium and consent payments totaling approximately $178 million. These costs,
along with the write-off of deferred financing fees of approximately $55
million related to the Old Senior Notes and the Old Credit Facility, will be
recorded as a pre-tax extraordinary loss on the extinguishment of debt in the
third quarter of 1998. The New Senior Notes and the New Credit Facility are
guaranteed by Host Marriott and its wholly owned subsidiary, Host Marriott
Hospitality, Inc. and certain subsidiaries of HMH Properties and are secured
by pledges of equity interests in certain subsidiaries of HMH Properties.
F-61
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF THE COMPANY
Given the structure of Host Marriott's Consent Solicitation, the Mergers and
the REIT Conversion may take a variety of different forms. The variations are
dependent in part on the number and identity of the Partnerships that elect to
merge and whether limited partners elect to tender their Partnership Interests
for OP Units or Notes in connection with the REIT Conversion.
There is no minimum condition to participation in the Mergers. In light of
the number of possible variations, the General Partners are not able to
describe all possible combinations of Hotel Partnerships that could compose
the Operating Partnership. However, to assist Limited Partners in analyzing
the Mergers and the REIT Conversion, the General Partners have prepared two
separate sets of unaudited pro forma financial statements to show the impact
of the Mergers and the REIT Conversion assuming the following two scenarios:
. All Partnerships participate and no Notes are issued ("100%
Participation with No Notes Issued")
. All Partnerships participate with Notes issued with respect to 100% of
the OP Units allocable to each Partnership ("100% Participation with
Notes Issued")
The Company does not believe that the presentation of additional scenarios
is relevant to investors. These presentations do not purport to represent what
combination will result from the Mergers and the REIT Conversion, but instead
are designed to illustrate what the composition would have been under the
above scenarios. Furthermore, the unaudited pro forma financial statements do
not purport to represent what the results of operations or cash flows would
actually have been if the Mergers and the REIT Conversion had in fact occurred
on such date or at the beginning of such period or to project the results of
operations or cash flows for any future date or period.
The unaudited pro forma financial statements are based upon available
information and upon certain assumptions, as set forth in the notes to the
unaudited pro forma financial statements, that the Company believes are
reasonable under the circumstances.
The unaudited pro forma statements of operations of the Company reflect the
following transactions for the First Two Quarters 1998 and the fiscal year
ended January 2, 1998 as if such transactions had been completed at the
beginning of each period:
Acquisitions, Dispositions and Other Activities
. 1998 Blackstone Acquisition
. 1998 Bond Refinancing
. 1998 acquisition of, or purchase of controlling interests in, eight
full-service properties
. 1998 purchase of minority interests in two full-service hotels
. 1998 disposition of two full-service properties
. 1997 acquisition of, or purchase of controlling interests in, 18 full-
service properties
. 1997 refinancing or repayment of mortgage debt for three full-service
properties
REIT Conversion Activities
. 1998 deconsolidation of the assets and liabilities contributed to the
Non-Controlled Subsidiary, including the sale of certain furniture and
equipment to the Non-Controlled Subsidiary
. 1998 Mergers
. 1998 acquisition of minority interests in four private Partnerships in
exchange for OP Units
F-62
<PAGE>
. 1998 lease of certain hotel properties to SLC and conversion of revenues
and certain operating expenses to rental income
. 1998 adjustment to remove deferred taxes resulting from the change in
tax status related to the REIT Conversion
. 1998 earnings and profits cash distribution
. 1998 interest income on loans to SLC
The unaudited pro forma balance sheet as of June 19, 1998 reflects all of
the above 1998 transactions except for the acquisition of, or purchase of
controlling interests in, eight full-service properties and the disposition of
two full-service properties which occurred prior to June 19, 1998, and were
already reflected in the historical balance sheet.
Limited partners should bear in mind that the assumptions regarding the
number and identity of participating Partnerships, the number of OP Units to
be issued and price per OP Unit are outside the control of Host Marriott and
have been made for illustrative purposes only. The unaudited pro forma
financial statements and accompanying notes should be read in conjunction with
the historical consolidated financial statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere herein.
F-63
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 19, 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT OP UNITS AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS
AND OTHER ACTIVITIES
--------------------------------------
A B C E F
DEBT NON-
BLACKSTONE REPAYMENT CONTROLLED
HISTORICAL ACQUISITION ACQUISITIONS & REFINANCING SUBSIDIARIES MERGERS
---------- ----------- ------------ ------------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $5,054 $1,667 $ 1 $ -- $(342) $560
Notes and other
receivables,
net............ 137 63 -- -- 63 (3)
Due from
managers....... 94 5 -- -- (2) 14
Investments in
affiliates..... 5 -- -- -- 308 --
Other assets.... 362 -- -- 47 6 32
(55)
82
Receivable from
Lessee for
working
capital........ -- -- -- -- -- --
Cash, cash
equivalents and
short-term
marketable
securities..... 542 (262) (8) 267 (13) 3
------ ------ ---- ------- ----- ----
$6,194 $1,473 $ (7) $ 341 $ 20 $606
------ ------ ---- ------- ----- ----
LIABILITIES AND EQUITY
Debt(K)......... $3,570 $ 600 $-- $(1,550) $ 94 $327
1,692
350
Accounts payable
and accrued
expenses....... 77 -- -- -- (10) 12
Deferred income
taxes.......... 464 -- -- -- (35) --
Other
liabilities.... 517 -- (7) -- (28) (21)
------ ------ ---- ------- ----- ----
Total
liabilities.... 4,628 600 (7) 492 21 318
Convertible
Preferred
Securities..... 550 -- -- -- -- --
Equity
General Partner
and Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding).. 1,016 -- -- (151) (1) --
Limited Partner
interests of
third parties
(on a pro
forma basis
60.4 million
OP Units
outstanding).. -- 873 -- -- -- 288
------ ------ ---- ------- ----- ----
$6,194 $1,473 $ (7) $ 341 $ 20 $606
------ ------ ---- ------- ----- ----
Book value per
OP Unit
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------
G D H I J
ADDITIONAL EARNINGS LEASE DEFERRED
PRIVATE REIT & PROFITS CONVER- TAX PRO
PARTNERSHIPS EXPENSES(1) DISTRIBUTION(2) SION ADJUSTMENT FORMA
------------ ----------- --------------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $ 61 $ -- $ -- $ -- $ -- $7,001
Notes and other
receivables,
net............ -- -- -- -- -- 260
Due from
managers....... -- -- -- (100) -- 11
Investments in
affiliates..... -- -- -- -- -- 313
Other assets.... (11) -- -- -- -- 463
Receivable from
Lessee for
working
capital........ -- -- -- 100 -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... (11) (44) (225) -- -- 249
------------ ----------- --------------- ------- ---------- ------
$ 39 $ (44) $ (225) $ -- $ -- $8,397
------------ ----------- --------------- ------- ---------- ------
LIABILITIES AND EQUITY
Debt(K)......... $-- $ -- $ -- $ -- $ -- $5,083
Accounts payable
and accrued
expenses....... -- -- -- -- -- 79
Deferred income
taxes.......... -- -- -- -- (154) 275
Other
liabilities.... (6) -- -- -- -- 455
------------ ----------- --------------- ------- ---------- ------
Total
liabilities.... (6) -- -- -- (154) 5,892
Convertible
Preferred
Securities..... -- -- -- -- -- 550
Equity
General Partner
and Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding).. -- (44) (225) -- 154 749
Limited Partner
interests of
third parties
(on a pro
forma basis
60.4 million
OP Units
outstanding).. 45 -- -- -- -- 1,206
------------ ----------- --------------- ------- ---------- ------
$ 39 $ (44) $ (225) $ -- $ -- $8,397
------------ ----------- --------------- ------- ---------- ------
Book value per
OP Unit $ 7.39
======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-64
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units:
. Record property and equipment of $1,667 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with a value of $873
million
B. Represents the adjustment to record the 1998 purchase of the remaining
minority interests in the Norfolk Waterside Marriott and the Calgary Marriott:
. Record property and equipment of $1 million
. Record the use of cash of $8 million
. Record a decrease in other liabilities of $7 million related to the
purchase of minority interests
C. Represents the adjustment to record the Bond Refinancing:
. Record the repayment of the $1,550 million in Old Senior Notes
. Record the issuance of $1,700 million in New Senior Notes, net of the
discount of $8 million
. Record the write-off of $55 million in deferred financing fees related
to the Old Senior Notes and the Old Credit Facility
. Record the deferred financing fees of $47 million related to the New
Senior Notes and the New Credit Facility
. Record a draw of $350 million on the New Credit Facility
. Record the net cash activity of the above items as follows:
<TABLE>
<S> <C>
Repayment of the Old Senior Notes.............................. $(1,550)
Issuance of the New Senior Notes, net of the discount of $8
million....................................................... 1,692
Net draw on the New Credit Facility............................ 350
Deferred financing fees related to the New Senior Notes and New
Credit Facility............................................... (47)
Bond tender and consent fees and other expenses................ (178)
-------
Net cash adjustment.......................................... $ 267
=======
</TABLE>
. Record the federal and state tax benefit of $82 million related to the
above activity
. Record the estimated extraordinary loss of $151 million, net of taxes,
related to the Bond Refinancing
D. Represents the estimated payment of an incremental $44 million of non-
recurring REIT Conversion expenses resulting in a decrease in equity to the
Operating Partnership.(1)
E. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiary and to reflect the sale of certain hotel
furniture and equipment to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $342 million, including
$200 million of hotel furniture and equipment sold to the Non-Controlled
Subsidiary
. Record receivable from Non-Controlled Subsidiary for the furniture and
equipment loan of $200 million, and other notes totaling $4 million
. Transfer of a $133 million mortgage note receivable (previously
eliminated in consolidation) to the Non-Controlled Subsidiary
. Record decrease in due from managers of $2 million
. Record investment in subsidiary of $308 million
. Record increase in other assets of $6 million
. Record decrease in cash of $13 million
F-65
<PAGE>
. Record increase in debt of $133 million related to the mortgage
transferred to and due to the Non-Controlled Subsidiary as indicated
above, net of $39 million of debt transferred to the Non-Controlled
Subsidiary. The $133 million mortgage is a 9% callable mortgage note
payable due in 2003.
. Record decrease in accounts payable and accrued expenses of $10 million
. Record decrease in deferred taxes of $35 million
. Record decrease in other liabilities of $28 million
. Record decrease in equity of $1 million
F. Represents the adjustment to record the Mergers:
. Record property and equipment of $560 million
. Record decrease in notes receivable of $3 million
. Record increase in due from managers of $14 million
. Record other assets of $32 million
. Record cash of $3 million
. Record debt of $327 million
. Record accounts payable and accrued expenses of $12 million
. Record decrease in other liabilities of $21 million
. Record the issuance of 14.4 million OP Units totaling approximately $288
million
The purchase price and number of OP Units expected to be issued to the
limited partners of each Partnership is (in millions, except OP Units in
thousands):
<TABLE>
<CAPTION>
INCREASE TO
PURCHASE NUMBER OF PROPERTY
PRICE OP UNITS AND EQUIPMENT
-------- --------- -------------
<S> <C> <C> <C>
Atlanta Marquis................................ $ 24 1,205 $ 24
Desert Springs................................. 37 1,835 36
Hanover........................................ 5 270 5
MHP............................................ 73 3,655 54
MHP II......................................... 84 4,190 78
Chicago Suites................................. 11 560 38
MDAH........................................... 45 2,250 162
PHLP........................................... 9 455 163
---- ------ ----
$288 14,420 $560
==== ====== ====
</TABLE>
The purchase price for minority interests (Atlanta Marquis, Desert Springs,
Hanover, MHP and MHP II) was allocated to property to the extent that the
purchase price exceeded the minority interest liability recorded. The purchase
price for the three partnerships that are presently not consolidated was
allocated in accordance with APB Opinion No. 16 with the debt of each
partnership recorded at estimated fair value, all assets and liabilities,
except for property being recorded at historical carrying values of each
partnership with the residual allocated to property. The amounts allocated to
property are in all cases less than estimated current replacement cost.
G. Represents the adjustment to record the purchase of the remaining
minority interests in four Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 2.3 million OP Units totaling approximately $45
million
F-66
<PAGE>
H. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott./(2)/
I. Represents the adjustment to record the transfer of working capital to
SLC related to the leasing of the Operating Partnership's hotels by decreasing
working capital and recording a receivable from the lessee of $100 million.
J. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $154 million.
K. The Company's pro forma aggregate debt maturities at June 19, 1998,
excluding $8 million of capital lease obligations and the $8 million debt
discount recorded in conjunction with the Bond Refinancing, are (in millions):
<TABLE>
<CAPTION>
<S> <C>
1998................................................................... $ 476
1999................................................................... 134
2000................................................................... 139
2001................................................................... 1,054
2002................................................................... 155
Thereafter............................................................. 3,125
------
$5,083
======
</TABLE>
- --------
(1) The amount of REIT Conversion expenses to be incurred is an estimate and
is not known at this time.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
F-67
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST TWO QUARTERS 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
------------------------------------------------------------
A B D F
1998
BLACKSTONE ACQUISI- BOND
HISTORICAL ACQUISITION TIONS DISPOSITIONS REFINANCING
---------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 652 80 21 (6) --
Equity in earn-
ings (losses)
of affiliates.. (1) -- -- -- --
Other revenues.. 57 -- -- (50) --
----- ----------- ----------- ----------- -----------
Total revenues.. 708 80 21 (56) --
----- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 343 52 11 (3) --
Other........... 10 -- -- -- --
----- ----------- ----------- ----------- -----------
Total operating
costs and ex-
penses......... 353 52 11 (3) --
----- ----------- ----------- ----------- -----------
OPERATING PROF-
IT............. 355 28 10 (53) --
Minority inter-
est............ (30) -- (1) 1 --
Corporate ex-
penses......... (20) -- -- -- --
REIT Conversion
expenses....... (6) -- -- -- --
Interest ex-
pense.......... (151) (24) (1) 1 (9)
Dividends on
Convertible
Preferred Secu-
rities......... (17) -- -- -- --
Interest in-
come........... 26 (4) (7) (1) --
----- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes.......... 157 -- 1 (52) (9)
Benefit (provi-
sion) for in-
come taxes..... (64) -- -- 21 4
----- ----------- ----------- ----------- -----------
Income (loss)
before extraor-
dinary items... $ 93 $ -- $ 1 $ (31) $ (5)
===== =========== =========== =========== ===========
Earnings per OP
Unit...........
Ratio of earn-
ings to fixed
charges........ 2.0x
=====
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------------
G I J K O/M H/L N
NON- EARNINGS OTHER LEASE INCOME
CONTROLLED PRIVATE & PROFITS REIT CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION(2) ADJUSTMENT FORMA
---------- ------- ------------ --------------- ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ -- $ 625 $ -- $ 625
Hotel revenues.. (12) 42 -- -- -- (777) -- --
Equity in earn-
ings (losses)
of affiliates.. 7 -- -- -- -- -- -- 6
Other revenues.. (4) -- -- -- -- -- -- 3
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Total revenues.. (9) 42 -- -- -- (152) -- 634
---------- ------- ------------ --------------- ---------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (6) 25 1 -- -- (131) -- 292
Other........... (5) -- -- -- -- -- -- 5
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Total operating
costs and ex-
penses......... (11) 25 1 -- -- (131) -- 297
---------- ------- ------------ --------------- ---------- ------- ---------- ------
OPERATING PROF-
IT............. 2 17 (1) -- -- (21) -- 337
Minority inter-
est............ 2 17 -- -- -- -- -- (11)
Corporate ex-
penses......... -- -- -- -- -- -- -- (20)
REIT Conversion
expenses....... -- -- -- -- 6 -- -- --
Interest ex-
pense.......... (4) (15) -- -- -- -- -- (203)
Dividends on
Convertible
Preferred Secu-
rities......... -- -- -- -- -- -- -- (17)
Interest in-
come........... (1) 1 -- (2) 2 6 -- 20
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before income
taxes.......... (1) 20 (1) (2) 8 (15) -- 106
Benefit (provi-
sion) for in-
come taxes..... 1 (8) -- 1 (3) 6 37 (5)
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before extraor-
dinary items... $ -- $ 12 $ (1) $ (1) $ 5 $ (9) $ 37 $ 101
========== ======= ============ =============== ========== ======= ========== ======
Earnings per OP
Unit........... $ .38
======
Ratio of earn-
ings to fixed
charges........ 1.5x
======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-68
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B C D
BLACKSTONE 1998 1997
HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 1,093 148 84 89 (23)
Equity in earn-
ings of affili-
ates........... 5 -- -- -- --
Other revenues.. 12 -- -- --
------ ----- ----- ----- -----
Total revenues.. 1,110 148 84 89 (23)
------ ----- ----- ----- -----
OPERATING COSTS AND
EXPENSES
Hotels.......... 649 106 45 42 (10)
Other........... 29 -- -- -- --
------ ----- ----- ----- -----
Total operating
costs and ex-
penses......... 678 106 45 42 (10)
------ ----- ----- ----- -----
OPERATING PROFIT.. 432 42 39 47 (13)
Minority inter-
est............ (32) -- (4) 5 (1)
Corporate ex-
penses......... (45) -- -- -- --
Interest ex-
pense.......... (287) (48) (12) (12) 3
Dividends on Convertible
Preferred
Securities..... (37) -- -- -- --
Interest in-
come........... 52 (7) (19) (15) --
------ ----- ----- ----- -----
Income (loss) before income
taxes.......... 83 (13) 4 25 (11)
Benefit (provi-
sion) for in-
come taxes..... (36) 5 (2) (10) 4
------ ----- ----- ----- -----
Income (loss)
before extraor-
dinary items .. $ 47 $ (8) $ 2 $ 15 $ (7)
====== ===== ===== ===== =====
Earnings per OP
Unit............
Ratio of earn-
ings to fixed
charges......... 1.3x
======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------------------
E/F G I J K M H/L N
DEBT NON- EARNINGS LEASE INCOME
REPAYMENT & CONTROLLED PRIVATE & PROFITS OTHER REIT CONVER- TAX PRO
REFINANCING SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION(2) ADJUSTMENT FORMA
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,164 $ -- $1,164
Hotel revenues.. -- (23) 74 -- -- -- (1,442) -- --
Equity in earn-
ings of affili-
ates........... -- 7 -- -- -- -- -- -- 12
Other revenues.. -- (9) -- -- -- -- -- -- 3
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
Total revenues.. -- (25) 74 -- -- -- (278) -- 1,179
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
OPERATING COSTS AND
EXPENSES
Hotels.......... -- (12) 51 2 -- -- (242) -- 631
Other........... -- (18) -- -- -- -- -- -- 11
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
Total operating
costs and ex-
penses......... -- (30) 51 2 -- -- (242) -- 642
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
OPERATING PROFIT.. -- 5 23 (2) -- -- (36) -- 537
Minority inter-
est............ -- 5 17 1 -- -- -- -- (9)
Corporate ex-
penses......... -- 1 -- -- -- -- -- -- (44)
Interest ex-
pense.......... (48) (8) (25) -- -- -- -- -- (437)
Dividends on Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- (37)
Interest in-
come........... (3) -- 1 -- (4) 9 14 -- 28
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
Income (loss) before income
taxes.......... (51) 3 16 (1) (4) 9 (22) -- 38
Benefit (provi-
sion) for in-
come taxes..... 20 (3) (6) -- 2 (4) 9 19 (2)
----------- ---------- ------- ------------ --------------- ---------- -------- ---------- -------
Income (loss)
before extraor-
dinary items .. $ (31) $ -- $ 10 $ (1) $ (2) $ 5 $ (13) $ 19 $ 36
=========== ========== ======= ============ =============== ========== ======== ========== =======
Earnings per OP
Unit............ $ .14
=======
Ratio of earn-
ings to fixed
charges......... 1.1x
=======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-69
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NO NOTES ISSUED
Revenues reflect house profit from the Company's hotel properties. House
profit reflects the net revenues flowing to the Company as property owner and
represents all gross hotel operating revenue, less all gross property-level
expenses, excluding depreciation, management fees, real and personal property
taxes, ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses. If the REIT Conversion does not
occur, the Company will revise its presentation of revenues to present gross
hotel sales and hotel operating expenses (see Note 1 to the Host Marriott
Hotels combined consolidated financial statements).
A. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the acquisition of the equity and debt interests for the
Blackstone Acquisition.
B. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in, eight full-service properties.
C. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1997 acquisition of, or purchase of
controlling interests in, 18 full-service properties.
D. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense and income taxes for the 1998
sale of the New York Marriott East Side and the Napa Valley Marriott,
including the elimination of the non-recurring gains on the sales totalling
$50 million and related taxes of $20 million in 1998.
E. Represents the adjustment to reduce the interest expense and interest
income associated with the refinancing or payoff of mortgage debt for three
full-service properties (Marriott's Orlando World Center, the Philadelphia
Marriott and the San Francisco Marriott).
F. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income as a result
of the Bond Refinancing. The adjustment excludes the estimated extraordinary
loss of $151 million, net of taxes, related to the Bond Refinancing resulting
from the write-off of deferred financing fees and the payment of bond tender
and consent fees.
G. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses and income taxes to
deconsolidate the Non-Controlled Subsidiary and reflect the Company's share of
income as equity in earnings of affiliate.
H. Represents the adjustment to reduce depreciation expense of $13 million
and $29 million for First Two Quarters 1998 and fiscal year 1997 related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income of $6 million and $14 million for First Two Quarters 1998 and
fiscal year 1997 earned on the 7%, $200 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Company from the
Lessee.
I. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income
taxes associated with the Mergers, including three partnerships not previously
consolidated by the Company.
J. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
K. Represents the adjustment to reduce interest income for the estimated
$225 million cash payment of the earnings and profits distribution to
shareholders of Host Marriott.(1)
F-70
<PAGE>
L. Represents the adjustment to remove hotel revenues and management fees of
$118 million and $213 million for First Two Quarters 1998 and fiscal year
1997, record rental revenues associated with the leasing of certain hotel
properties to SLC and other lessees. Management believes the change to a lease
structure described above will not impact hotel operating results because the
hotel manager and asset management function will remain unchanged.(2)
M. Represents the adjustment to record interest income on the $107 million
in loans to SLC.
N. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
(2) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe final lease amounts will be materially different from the amounts
presented.
F-71
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF CASH FLOWS
FIRST TWO QUARTERS 1998
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND
OTHER ACTIVITIES
-------------------------------------------------
A B D F
BLACKSTONE 1998 BOND
HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 93 $-- $ 1 $ (31) $ (5)
Adjustments to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 114 33 5 -- --
Income taxes.... 45 -- -- -- --
Gains on sales
of total
properties...... (51) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... 1 -- -- -- --
Changes in
operating
accounts......... (23) -- -- -- --
Other assets..... 27 -- -- -- --
----- ---- ---- ----- ------
Cash provided by
(used in)
operations...... 206 33 6 19 (5)
----- ---- ---- ----- ------
INVESTING
ACTIVITIES
Acquisitions..... (358) -- 358 -- --
Cash received
from sale of
assets........... 209 -- -- (209) --
Capital
expenditures..... (109) (11) (3) 2 --
Purchases of
short-term
marketable
securities....... (97) -- -- -- --
Sales of short-
term marketable
securities....... 405 -- -- -- --
Other............ (99) -- -- 21 --
----- ---- ---- ----- ------
Cash provided by
(used in)
investing
activities...... (49) (11) 355 (186) --
----- ---- ---- ----- ------
FINANCING
ACTIVITIES
Issuances of
debt............. 5 -- -- -- 2,042
Scheduled
principal
repayments....... (18) -- -- -- --
Debt
prepayments...... (49) -- -- 35 (1,550)
Transfers to Host
Marriott......... (62) -- -- -- --
Other............ (31) -- -- -- --
----- ---- ---- ----- ------
Cash provided by
(used in)
financing
activities...... (155) -- -- 35 492
----- ---- ---- ----- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 2 $ 22 $361 $(132) $ 487
===== ==== ==== ===== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------------------
G H I J K/L N/O M
NON- EARNINGS
CONTROLLED PRIVATE & PROFITS LEASE OTHER REIT TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) CONVERSION(2) ACTIVITIES ADJUSTMENT FORMA
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $-- $ 12 $ (1) $ (1) $ (9) $ 5 $ 37 $ 101
Adjustments to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (4) 11 1 -- (13) -- -- 147
Income taxes.... -- -- -- -- -- -- -- 45
Gains on sales
of total
properties...... -- -- -- -- -- -- -- (1)
Equity
(earnings)
losses of
affiliates...... -- -- -- -- -- -- -- 1
Changes in
operating
accounts......... -- -- -- -- -- -- -- (23)
Other assets..... -- -- -- -- -- -- -- 27
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
Cash provided by
(used in)
operations...... (4) 23 -- (1) (22) 5 37 297
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
INVESTING
ACTIVITIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (6) -- -- -- -- -- (126)
Purchases of
short-term
marketable
securities....... -- -- -- -- -- -- -- (97)
Sales of short-
term marketable
securities....... -- -- -- -- -- -- -- 405
Other............ -- -- -- -- -- -- -- (78)
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
Cash provided by
(used in)
investing
activities...... 1 (6) -- -- -- -- -- 104
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
FINANCING
ACTIVITIES
Issuances of
debt............. -- -- -- -- -- -- -- 2,047
Scheduled
principal
repayments....... (2) -- -- -- (15) -- -- (35)
Debt
prepayments...... -- -- -- -- -- -- -- (1,564)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (62)
Other............ -- -- -- -- -- -- -- (31)
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
Cash provided by
(used in)
financing
activities...... (2) -- -- -- (15) -- -- 355
---------- ------- ------------ --------------- ------------- ---------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (5) $ 17 $-- $ (1) $(37) $ 5 $ 37 $ 756
========== ======= ============ =============== ============= ========== ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-72
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1997
100% PARTICIPATION WITH NO NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
-----------------------------------------------------------------
A C B D E/F
DEBT
BLACKSTONE 1997 1998 REPAYMENT
HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS & REFINANCING
---------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $ 47 $(8) $ 15 $ 2 $(7) $ (31)
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... 231 65 17 22 (3) --
Income taxes.... (20) -- -- -- -- --
Other........... 73 -- -- -- (2) --
Changes in
operating
accounts........ 101 -- -- -- -- --
----- --- ---- --- --- -------
Cash provided by
(used in)
operations...... 432 57 32 24 (12) (31)
----- --- ---- --- --- -------
INVESTING
ACTIVITIES
Acquisitions.... (359) -- 359 -- -- --
Cash received
from sale of
assets.......... 51 -- -- -- -- --
Purchase of
short-term
marketable
securities...... (354) -- -- -- -- --
Capital
expenditures.... (158) (20) (13) (10) 4 --
Other........... 13 -- -- -- 1 --
----- --- ---- --- --- -------
Cash provided by
(used in)
investing
activities...... (807) (20) 346 (10) 5 --
----- --- ---- --- --- -------
FINANCING
ACTIVITIES
Issuances of
debt............ 857 -- -- -- -- 1,188
Scheduled
principal
payments........ (90) -- -- -- -- --
Debt
prepayments..... (403) -- -- -- -- (1,147)
Transfers to
Host Marriott... (226) -- -- -- -- --
Other........... 27 -- -- -- -- --
----- --- ---- --- --- -------
Cash provided by
(used in)
financing
activities...... 165 -- -- -- -- 41
----- --- ---- --- --- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $(210) $37 $378 $14 $(7) $ 10
===== === ==== === === =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------------------
G H I J N K/L M
NON- EARNINGS
CONTROLLED PRIVATE & PROFITS OTHER REIT LEASE TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES CONVERSION(2) ADJUSTMENT FORMA
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $-- $10 $(1) $(2) $ 5 $(13) $19 $ 36
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... (8) 26 2 -- -- (29) -- 323
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in
operating
accounts........ -- -- -- -- -- -- -- 101
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
operations...... (8) 36 1 (2) 5 (42) 19 511
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
INVESTING
ACTIVITIES
Acquisitions.... -- -- -- -- -- -- -- --
Cash received
from sale of
assets.......... (35) -- -- -- -- -- -- 16
Purchase of
short-term
marketable
securities...... -- -- -- -- -- -- -- (354)
Capital
expenditures.... 2 (11) -- -- -- -- -- (206)
Other........... 33 -- -- -- -- -- -- 47
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
investing
activities...... -- (11) -- -- -- -- -- (497)
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
FINANCING
ACTIVITIES
Issuances of
debt............ (3) -- -- -- -- -- -- 2,042
Scheduled
principal
payments........ (6) (7) -- -- -- (30) -- (133)
Debt
prepayments..... -- -- -- -- -- -- -- (1,550)
Transfers to
Host Marriott... -- -- -- -- -- -- -- (226)
Other........... -- -- -- -- -- -- -- 27
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
financing
activities...... (9) (7) -- -- -- (30) -- 160
---------- ------- ------------ --------------- ---------- ------------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $(17) $18 $ 1 $(2) $ 5 $(72) $19 $ 174
========== ======= ============ =============== ========== ============= ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-73
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF CASH FLOWS
100% PARTICIPATION WITH NO NOTES ISSUED
A) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the Blackstone Acquisition.
B) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, eight full-service properties.
C) Represents the adjustment to record depreciation expense and capital
expenditures for the 1997 acquisition of, or purchase of controlling interests
in, 18 full-service properties. Cash from investing activities has also been
adjusted as if the period's historical acquisitions occurred immediately prior
to the period presented.
D) Represent the adjustment to record the decrease in depreciation expense,
capital expenditures and other investing activities for the sale of the New
York East Side Marriott and the Napa Valley Marriott, including the
elimination of the non-recurring gains on the sales totaling $50 million.
E) Represents the adjustment to reflect the decrease in interest expense
associated with the refinancing or payoff of mortgage debt for three full-
service properties (Marriott Orlando World Center, the Philadelphia Marriott,
and the San Francisco Marriott). Cash from financing activities has also been
adjusted as if the period's historical prepayments and issuances of debt
occurred immediately prior to the period presented.
F) Represents the adjustment to reflect the issuance of the $1.7 billion of
New Senior Notes net of the discount of $8 million, the retirement of the Old
Senior Notes of $1.55 billion and the initial draw on the New Credit Facility
of $372 million, including interest expense and commitment fees.
G) Represents the adjustment to record the removal of depreciation, capital
expenditures, the sale of certain assets and the scheduled principal
amortization of notes to reflect the deconsolidation of the Non-Controlled
Subsidiary.
H) Represents the adjustment to record depreciation expense and capital
expenditures related to the Mergers, including the scheduled principal
amortization of notes.
I) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
J) Represents the adjustment to reflect the decrease in interest income, net
of tax, as a result of the estimated $225 million earnings and profits
distribution.(2)
K) Represents the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.(1)
L) Represents the adjustment to reduce depreciation expense related to the
sale of certain furniture and equipment to the Non-Controlled Subsidiary,
including the scheduled principal amortization of notes.
M) Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
N) Represents the adjustment to record interest income on the $107 million
in loans to SLC.
O) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profit distribution will be based
upon Host's accumulated earnings and profits for tax purposes, which could
be affected by a number of factors (including, for example, actual
operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host).
F-74
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 19, 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT OP UNIT AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS
AND OTHER ACTIVITIES MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------- -------------------------------------------------------------
A B C E F G D H I
EARNINGS
DEBT NON- ADDITIONAL & PROFITS LEASE
BLACKSTONE 1998 REPAYMENT CONTROLLED PRIVATE REIT DISTRIBU- CONVER-
HISTORICAL ACQUISITION ACQUISITIONS & REFINANCING SUBSIDIARY MERGERS PARTNERSHIPS EXPENSES(1) TION(2) SION
---------- ----------- ------------ ------------- ---------- ------- ------------ ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $5,054 $1,667 $ 1 $ -- $(342) $507 $ 61 $ -- $ -- $ --
Notes and other
receivables,
net............ 137 63 -- -- 63 (3) -- -- -- --
Due from
managers....... 94 5 -- -- (2) 15 -- -- -- (100)
Investments in
affiliates..... 5 -- -- -- 308 -- -- -- -- --
Other assets.... 362 -- -- 47 6 32 (11) -- -- --
(55)
82
Receivable from
Lessee for
working
capital........ -- -- -- -- -- -- -- -- -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... 542 (262) (8) 267 (13) 3 (11) (44) (225) --
------ ------ ---- ------- ----- ---- ---- ----- ----- -----
$6,194 $1,473 $ (7) $ 341 $ 20 $554 $ 39 $ (44) $(225) $ --
====== ====== ==== ======= ===== ==== ==== ===== ===== =====
LIABILITIES AND EQUITY
Debt(K)......... $3,570 $ 600 $-- $(1,550) $ 94 $563 $-- $ -- $ -- $ --
1,692
350
Accounts payable
and accrued
expenses....... 77 -- -- -- (10) 12 -- -- -- --
Deferred income
taxes.......... 464 -- -- -- (35) -- -- -- -- --
Other
liabilities.... 517 -- (7) -- (28) (21) (6) -- -- --
------ ------ ---- ------- ----- ---- ---- ----- ----- -----
Total
liabilities.... 4,628 600 (7) 492 21 554 (6) -- -- --
Convertible
Preferred
Securities..... 550 -- -- -- -- -- -- -- -- --
Equity..........
General Partner
and Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding).. 1,016 -- -- (151) (1) -- -- (44) (225) --
Limited Partner
interests of
third parties
(on a pro
forma basis
46.0 million
OP Units
outstanding).. -- 873 -- -- -- -- 45 -- -- --
------ ------ ---- ------- ----- ---- ---- ----- ----- -----
$6,194 $1,473 $ (7) $ 341 $ 20 $554 $ 39 $ (44) $(225) $ --
====== ====== ==== ======= ===== ==== ==== ===== ===== =====
Book value per
OP Unit........
<CAPTION>
J
DEFERRED
TAX PRO
ADJUSTMENT FORMA
---------- ------
<S> <C> <C>
ASSETS
Property and
equipment,
net............ $ -- $6,948
Notes and other
receivables,
net............ -- 260
Due from
managers....... -- 12
Investments in
affiliates..... -- 313
Other assets.... -- 463
Receivable from
Lessee for
working
capital........ -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... -- 249
---------- ------
$ -- $8,345
========== ======
LIABILITIES AND EQUITY
Debt(K)......... $ -- $5,319
Accounts payable
and accrued
expenses....... -- 79
Deferred income
taxes.......... (154) 275
Other
liabilities.... -- 455
---------- ------
Total
liabilities.... (154) 6,128
Convertible
Preferred
Securities..... -- 550
Equity..........
General Partner
and Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding).. 154 749
Limited Partner
interests of
third parties
(on a pro
forma basis
46.0 million
OP Units
outstanding).. -- 918
---------- ------
$ -- $8,345
========== ======
Book value per
OP Unit........ $ 6.67
======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-75
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to record the Blackstone Acquisition of 12
full-service properties (5,520 rooms) and a mortgage note secured by a
thirteenth full-service property including the issuance of 43.7 million OP
Units:
. Record property and equipment of $1,667 million
. Record mortgage note receivable of $63 million
. Record increase in due from managers of $5 million
. Record the use of cash of $262 million
. Record the assumption of mortgage debt of $600 million
. Record the issuance of 43.7 million OP Units with a value of $873 million
B. Represents the adjustment to record the 1998 purchase of the remaining
minority interests in the Norfolk Waterside Marriott and the Calgary Marriott:
. Record property and equipment of $1 million
. Record the use of cash of $8 million
. Record a decrease in other liabilities of $7 million related to the
purchase of minority interests
C. Represents the adjustment to record the Bond Refinancing:
. Record the repayment of the $1,550 million in Old Senior Notes
. Record the issuance of $1,700 million in New Senior Notes, net of the
discount of $8 million
. Record the write-off of $55 million in deferred financing fees related to
the Old Senior Notes and the Old Credit Facility
. Record the deferred financing fees of $47 million related to the New
Senior Notes and the New Credit Facility
. Record a draw of $350 million on the New Credit Facility
. Record the net cash activity of the above items as follows:
<TABLE>
<S> <C>
Repayment of the Old Senior Notes............................... $(1,550)
Issuance of the New Senior Notes, net of the discount of $8 mil-
lion........................................................... 1,692
Net draw on the New Credit Facility............................. 350
Deferred financing fees related to the New Senior Notes and New
Credit Facility................................................ (47)
Bond tender and consent fees and other offering expenses........ (178)
-------
Net cash adjustment........................................... $ 267
=======
</TABLE>
. Record the federal and state tax benefit of $82 million related to above
activity
. Record the estimated extraordinary loss of $151 million, net of taxes,
related to the Bond Refinancing
D. Represents the estimated payment of an incremental $44 million of non-
recurring REIT Conversion expenses resulting in a decrease in equity to the
Operating Partnership.(1)
E. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiary and to reflect the sale of certain hotel
furniture and equipment to the Non-Controlled Subsidiary:
. Record decrease in property and equipment of $342 million, including $200
million of hotel furniture and equipment sold to the Non-Controlled
Subsidiary
. Record receivable from Non-Controlled Subsidiary for the furniture and
equipment loan of $200 million and other notes totaling $4 million
. Transfer of a $133 million mortgage note receivable (previously
eliminated in consolidation) to the Non-Controlled Subsidiary
. Record decrease in due from managers of $2 million
. Record investment in subsidiary of $308 million
F-76
<PAGE>
. Record increase in other assets of $6 million
. Record decrease in cash of $13 million
. Record increase in debt of $133 million related to the mortgage
transferred to and due to the Non-Controlled Subsidiary as indicated
above, net of $39 million of debt transferred to the Non-Controlled
Subsidiary. The $133 million mortgage is a 9% callable mortgage note
payable which matures in 2003.
. Record decrease in accounts payable and accrued expenses of $10 million
. Record decrease in deferred taxes of $35 million
. Record decrease in other liabilities of $28 million
. Record decrease in equity of $ 1 million
F. Represents the adjustment to record the Mergers and issuance of Notes at
the Note Election Amount (the greater of Liquidation Value or 60% of Exchange
Value) to the Limited Partners:
. Record property and equipment of $507 million
. Record decrease in notes receivable of $3 million
. Record increase in due from managers of $15 million
. Record other assets of $32 million
. Record cash of $3 million
. Record debt of $563 million including $236 million of Notes to the
Limited Partners at the Note Election Amount
. Record accounts payable and accrued expenses of $12 million
. Record decrease in other liabilities of $21 million
The value of 7% Notes expected to be issued to the limited partners of each
Partnership is (in millions):
<TABLE>
<CAPTION>
PURCHASE PRICE-- INCREASE TO
VALUE OF PROPERTY AND
NOTES ISSUED EQUIPMENT
---------------- ------------
<S> <C> <C>
Atlanta Marquis................................ $ 14 $ 14
Desert Springs................................. 25 24
Hanover........................................ 4 4
MHP............................................ 65 45
MHPII.......................................... 72 67
Chicago Suites................................. 11 37
MDAH........................................... 40 157
PHLP........................................... 5 159
---- ----
$236 $507
==== ====
</TABLE>
The purchase price for minority interests (Atlanta Marquis, Desert Springs,
Hanover, MHP and MHP II) was allocated to property to the extent that the
purchase price exceeded the minority interest liability recorded. The purchase
price for the three partnerships that are presently not consolidated was
allocated in accordance with APB Opinion Number 16 with the debt of each
partnership recorded at estimated fair value, all assets and liabilities,
except for property being recorded at historical carrying values of each
partnership with the residual allocated to property. The amounts allocated to
property are in all cases less than estimated current replacement cost.
G. Represents the adjustment to record the purchase of the remaining
minority interests in four Private Partnerships:
. Record property and equipment of $61 million
. Record decrease in other assets of $11 million
. Record use of cash of $11 million
. Record decrease in minority interest liabilities of $6 million
. Record the issuance of 2.3 million OP Units totaling approximately $45
million
F-77
<PAGE>
H. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott./(2)/
I. Represents the adjustment to record the transfer of working capital to
SLC related to the leasing of the Operating Partnership's hotels by decreasing
working capital and recording a receivable from the lessee of $100 million.
J. Represents the adjustment to record the effect on deferred taxes for the
change in tax status resulting from the REIT Conversion by decreasing deferred
taxes and increasing equity by $154 million.
K. The Company's pro forma aggregate debt maturities at June 19, 1998,
excluding $8 million of capital lease obligations and the $8 million debt
discount recorded in conjunction with the Bond Refinancing, are (in millions):
<TABLE>
<S> <C>
1998............................................................... $ 476
1999............................................................... 134
2000............................................................... 139
2001............................................................... 1,054
2002............................................................... 155
Thereafter......................................................... 3,361
------
$5,319
======
</TABLE>
- --------
(1) The amount of the REIT Conversion expenses to be incurred is an estimate
and is not known at this time.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
F-78
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST TWO QUARTERS 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
-------------------------------------------------
A B D F
BLACKSTONE 1998 BOND
HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $-- $-- $-- $--
Hotel revenues.. 652 80 21 (6) --
Equity in earn-
ings of affili-
ates........... (1) -- -- -- --
Other revenues.. 57 -- -- (50) --
----- ---- ---- ---- ----
Total revenues.. 708 80 21 (56) --
----- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 343 52 11 (3) --
Other........... 10 -- -- -- --
----- ---- ---- ---- ----
Total operating
costs and ex-
penses......... 353 52 11 (3) --
----- ---- ---- ---- ----
OPERATING PROF-
IT............. 355 28 10 (53) --
Minority inter-
est............ (30) -- (1) 1 --
Corporate ex-
penses......... (20) -- -- -- --
REIT Conversion
expenses....... (6) -- -- -- --
Interest ex-
pense.......... (151) (24) (1) 1 (9)
Dividends on
Convertible
Preferred
Securities..... (17) -- -- -- --
Interest in-
come........... 26 (4) (7) (1) --
----- ---- ---- ---- ----
Income (loss)
before income
taxes.......... 157 -- 1 (52) (9)
Benefit (provi-
sion) for in-
come taxes..... (64) -- -- 21 4
----- ---- ---- ---- ----
Income (loss)
before extraor-
dinary items... $ 93 $-- $ 1 $(31) $ (5)
===== ==== ==== ==== ====
Earnings per OP
Unit...........
Ratio of earn-
ings to fixed
charges........ 2.0x
<CAPTION> =====
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------------------
G I J K O/M H/L M
MERGERS
NON- AND EARNINGS LEASE INCOME
CONTROLLED NOTES PRIVATE & PROFITS OTHER REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION(2) ADJUSTMENT FORMA
---------- -------- ------------ --------------- ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $-- $-- $ -- $ -- $ -- $ 625 $-- $ 625
Hotel revenues.. (12) 42 -- -- -- (777) -- --
Equity in earn-
ings of affili-
ates........... 7 -- -- -- -- -- -- 6
Other revenues.. (4) -- -- -- -- -- -- 3
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Total revenues.. (9) 42 -- -- -- (152) -- 634
---------- -------- ------------ --------------- ---------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (6) 24 1 -- -- (131) -- 291
Other........... (5) -- -- -- -- -- -- 5
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Total operating
costs and ex-
penses......... (11) 24 1 -- -- (131) -- 296
---------- -------- ------------ --------------- ---------- ------- ---------- ------
OPERATING PROF-
IT............. 2 18 (1) -- -- (21) -- 338
Minority inter-
est............ 2 17 -- -- -- -- -- (11)
Corporate ex-
penses......... -- -- -- -- -- -- -- (20)
REIT Conversion
expenses....... -- -- -- -- 6 -- -- --
Interest ex-
pense.......... (4) (23) -- -- -- -- -- (211)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- (17)
Interest in-
come........... (1) 1 -- (2) 2 6 -- 20
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before income
taxes.......... (1) 13 (1) (2) 8 (15) -- 99
Benefit (provi-
sion) for in-
come taxes..... 1 (5) -- 1 (3) 6 34 (5)
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before extraor-
dinary items... $-- $ 8 $ (1) $ (1) $ 5 $ (9) $ 34 $ 94
========== ======== ============ =============== ========== ======= ========== ======
Earnings per OP
Unit........... $ .38
======
Ratio of earn-
ings to fixed
charges........ 1.4x
======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-79
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS, EXCEPT PER OP UNIT AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------------------
A B C D E/F
DEBT
BLACKSTONE 1998 1997 REPAYMENT &
HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
---------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $-- $-- $-- $--
Hotel revenues.. 1,093 148 84 89 (23) --
Equity in
earnings of
affiliates..... 5 -- -- -- -- --
Other revenues.. 12 -- -- -- -- --
------ ---- ---- ---- ---- ----
Total revenues.. 1,110 148 84 89 (23) --
------ ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 649 106 45 42 (10) --
Other........... 29 -- -- -- -- --
------ ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 678 106 45 42 (10) --
------ ---- ---- ---- ---- ----
OPERATING
PROFIT.......... 432 42 39 47 (13) --
Minority
interest........ (32) -- (4) 5 (1) --
Corporate
expenses........ (45) -- -- -- -- --
Interest
expense......... (287) (48) (12) (12) 3 (48)
Dividends on
Convertible
Preferred
Securities...... (37) -- -- -- -- --
Interest income.. 52 (7) (19) (15) -- (3)
------ ---- ---- ---- ---- ----
Income (loss)
before income
taxes........... 83 (13) 4 25 (11) (51)
Benefit
(provision) for
income taxes.... (36) 5 (2) (10) 4 20
------ ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items........... $ 47 $ (8) $ 2 $ 15 $ (7) $(31)
====== ==== ==== ==== ==== ====
Earnings per OP
Unit............
Ratio of earnings
to fixed
charges......... 1.3x
======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
----------------------------------------------------------------------------------------
G I J K M H/L N
NON- MERGERS EARNINGS OTHER LEASE INCOME
CONTROLLED AND NOTES PRIVATE & PROFITS REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION(2) ADJUSTMENT FORMA
---------- --------- ------------ --------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $-- $-- $-- $-- $ 1,164 $-- $1,164
Hotel revenues.. (23) 74 -- -- -- (1,442) -- --
Equity in
earnings of
affiliates..... 7 -- -- -- -- -- -- 12
Other revenues.. (9) -- -- -- -- -- -- 3
---------- --------- ------------ --------------- ---------- -------- ---------- -------
Total revenues.. (25) 74 -- -- -- (278) -- 1,179
---------- --------- ------------ --------------- ---------- -------- ---------- -------
OPERATING COSTS
AND EXPENSES
Hotels.......... (12) 49 2 -- -- (242) -- 629
Other........... (18) -- -- -- -- -- -- 11
---------- --------- ------------ --------------- ---------- -------- ---------- -------
Total operating
costs and
expenses....... (30) 49 2 -- -- (242) -- 640
---------- --------- ------------ --------------- ---------- -------- ---------- -------
OPERATING
PROFIT.......... 5 25 (2) -- -- (36) -- 539
Minority
interest........ 5 17 1 -- -- -- -- (9)
Corporate
expenses........ 1 -- -- -- -- -- -- (44)
Interest
expense......... (8) (42) -- -- -- -- -- (454)
Dividends on
Convertible
Preferred
Securities...... -- -- -- -- -- -- -- (37)
Interest income.. -- 1 -- (4) 9 14 -- 28
---------- --------- ------------ --------------- ---------- -------- ---------- -------
Income (loss)
before income
taxes........... 3 1 (1) (4) 9 (22) -- 23
Benefit
(provision) for
income taxes.... (3) -- -- 2 (4) 9 14 (1)
---------- --------- ------------ --------------- ---------- -------- ---------- -------
Income (loss)
before
extraordinary
items........... $-- $ 1 $ (1) $ (2) $ 5 $ (13) $ 14 $ 22
========== ========= ============ =============== ========== ======== ========== =======
Earnings per OP
Unit............ $ .09
=======
Ratio of earnings
to fixed
charges......... 1.1x
=======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-80
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NOTES ISSUED
Revenues reflect house profit from the Company's hotel properties. House
profit reflects the net revenues flowing to the Company as property owner and
represents all gross hotel operating revenue, less all gross property-level
expenses, excluding depreciation, management fees, real and personal property
taxes, ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses. If the REIT Conversion does not
occur, the Company will revise its presentation of revenues to present gross
hotel sales and hotel operating expenses (see Note 1 to the Host Marriott
Hotel's combined consolidated financial statements).
A. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the acquisition of the equity and debt interests for the
Blackstone Acquisition.
B. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in, eight full-service properties.
C. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1997 acquisition of, or purchase of
controlling interests in, 18 full-service properties.
D. Represents the adjustment to record historical revenues, operating
expenses, minority interest, interest expense and income taxes for the 1998
sale of the New York Marriott East Side and the Napa Valley Marriott,
including the elimination of the non-recurring gains on the sales totalling
$50 million and related taxes of $20 million in 1998.
E. Represents the adjustment to reduce the interest expense and interest
income associated with the refinancing or payoff of mortgage debt for three
full-service properties (Marriott's Orlando World Center, the Philadelphia
Marriott and the San Francisco Marriott).
F. Represents the adjustment to record interest expense and related
amortization of deferred financing fees and reduce interest income as a result
of the Bond Refinancing. The adjustment excludes the estimated extraordinary
loss of $151 million, net of taxes, related to the Bond Refinancing resulting
from the write-off of deferred financing fees and the payment of bond tender
and consent fees.
G. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses and income taxes to
deconsolidate the Non-Controlled Subsidiary and reflect the Company's share of
income as equity in earnings of affiliate.
H. Represents the adjustment to reduce depreciation expense of $13 million
and $29 million for First Two Quarters 1998 and fiscal year 1997 related to
certain furniture and equipment sold to the Non-Controlled Subsidiary, record
interest income of $6 million and $14 million for First Two Quarters 1998 and
fiscal year 1997 earned on the 7%, $200 million in notes from the Non-
Controlled Subsidiary and reduce the lease payment to the Company from the
Lessee.
I. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income
taxes associated with the Mergers, including three partnerships not previously
consolidated by the Company. Interest expense reflects interest on various
mortgage notes and the estimated $236 million in 7% Notes issued in lieu of OP
Units.
J. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.
F-81
<PAGE>
K. Represents the adjustment to reduce interest income for the estimated
$225 million cash payment of the earnings and profits distribution to
shareholders of Host Marriott./(1)/
L. Represents the adjustment to remove hotel revenues and management fees of
$118 million and $213 million for First Two Quarters 1998 and Fiscal 1997 and
record rental revenues associated with the leasing of certain hotel properties
to SLC and other lessees. Management believes the change to a lease structure
described above will not impact hotel operating results because the hotel
manager and asset management function will remain unchanged./(2)/
M. Represents the adjustment to record interest income on the $107 million
in loans to SLC.
N. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host Marriott's accumulated earnings and profits for tax purposes,
which could be affected by a number of factors (including, for example,
actual operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host Marriott).
(2) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
F-82
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FIRST TWO QUARTERS 1998
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
--------------------------------------------------
A B D F
BLACKSTONE 1998 BOND
HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 93 $ -- $ 1 $ (31) $ (5)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 114 33 5 -- --
Income taxes.... 45 -- -- -- --
Gains on sales
of hotel
properties...... (51) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... 1 -- -- -- --
Changes in
operating
accounts......... (23) -- -- -- --
Other assets..... 27 -- -- -- --
----- ----- ---- ----- ------
Cash provided by
(used in)
operations...... 206 33 6 19 (5)
----- ----- ---- ----- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (358) -- 358 -- --
Cash received
from sale of
assets........... 209 -- -- (209) --
Capital
expenditures..... (109) (11) (3) 2 --
Purchases of
short-term
marketable
securities....... (97) -- -- -- --
Sales of short-
term marketable
securities....... 405 -- -- -- --
Other............ (99) -- -- 21 --
----- ----- ---- ----- ------
Cash provided by
(used in)
investing
activities...... (49) (11) 355 (186) --
----- ----- ---- ----- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 5 -- -- -- 2,042
Scheduled
principal
repayments....... (18) -- -- -- --
Debt repayments.. (49) -- -- 35 (1,550)
Transfers to Host
Marriott......... (62) -- -- -- --
Other............ (31) -- -- -- --
----- ----- ---- ----- ------
Cash provided by
(used in)
financing
activities...... (155) -- -- 35 492
----- ----- ---- ----- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 2 $ 22 $361 $(132) $ 487
===== ===== ==== ===== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------
G H I J K/L N/O M
NON- MERGERS EARNINGS LEASE
CONTROLLED & NOTES PRIVATE & PROFITS CONVER- OTHER REIT TAX
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) SION(2) ACTIVITIES ADJUSTMENT PRO FORMA
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $-- $ 8 $ (1) $ (1) $ (9) $ 5 $ 34 $ 94
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (4) 11 1 -- (13) -- -- 147
Income taxes.... -- -- -- -- -- -- -- 45
Gains on sales
of hotel
properties...... -- -- -- -- -- -- -- (1)
Equity
(earnings)
losses of
affiliates...... -- -- -- -- -- -- -- 1
Changes in
operating
accounts......... -- -- -- -- -- -- -- (23)
Other assets..... -- -- -- -- -- -- -- 27
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
operations...... (4) 19 -- (1) (22) 5 34 290
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (6) -- -- -- -- -- (126)
Purchases of
short-term
marketable
securities....... -- -- -- -- -- -- -- (97)
Sales of short-
term marketable
securities....... -- -- -- -- -- -- -- 405
Other............ -- -- -- -- -- -- -- (78)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
investing
activities...... 1 (6) -- -- -- -- -- 104
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
FINANCING ACTIVI-
TIES
Issuances of
debt............. -- -- -- -- -- -- -- 2,047
Scheduled
principal
repayments....... (2) -- -- -- (15) -- -- (35)
Debt repayments.. -- -- -- -- -- -- -- (1,564)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (62)
Other............ -- -- -- -- -- -- -- (31)
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
Cash provided by
(used in)
financing
activities...... (2) -- -- -- (15) -- -- 355
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (5) $ 13 $-- $ (1) $(37) $ 5 $ 34 $ 749
========== ======== ============ =============== ======= ========== ========== =========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-83
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CASH FLOWS
FISCAL YEAR 1997
100% PARTICIPATION WITH NOTES ISSUED
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITIONS, DISPOSITIONS AND OTHER ACTIVITIES
-----------------------------------------------------------------
A C B D E/F
DEBT
BLACKSTONE 1997 1998 REPAYMENTS
HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS & REFINANCING
---------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before ex-
traordinary
items............ $ 47 $(8) $ 15 $ 2 $(7) $ (31)
Adjustment to
reconcile to cash
provided by oper-
ations:
Depreciation and
amortization.... 231 65 17 22 (3) --
Income taxes.... (20) -- -- -- -- --
Other........... 73 -- -- -- (2) --
Changes in oper-
ating accounts... 101 -- -- -- -- --
----- --- ---- --- --- ------
Cash provided by
(used in)
operations...... 432 57 32 24 (12) (31)
----- --- ---- --- --- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (359) -- 359 -- -- --
Cash received
from sale of
assets........... 51 -- -- -- -- --
Purchase of
short-term mar-
ketable securi-
ties............. (354) -- -- -- -- --
Capital expendi-
tures............ (158) (20) (13) (10) 4 --
Other............ 13 -- -- -- 1 --
----- --- ---- --- --- ------
Cash provided by
(used in)
investing
activities....... (807) (20) 346 (10) 5 --
----- --- ---- --- --- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 857 -- -- -- -- 1,188
Scheduled princi-
pal repayments... (90) -- -- -- -- --
Debt prepay-
ments............ (403) -- -- -- -- (1,147)
Transfers to Host
Marriott......... (226) -- -- -- -- --
Other............ 27 -- -- -- -- --
----- --- ---- --- --- ------
Cash provided by
(used in)
financing
activities....... 165 -- -- -- -- 41
----- --- ---- --- --- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(210) $37 $378 $14 $(7) $ 10
===== === ==== === === ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------------
G H I J N K/L M
NON- MERGERS EARNINGS
CONTROLLED & NOTES PRIVATE & PROFITS OTHER REIT LEASE TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES CONVERSION(2) ADJUSTMENT FORMA
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before ex-
traordinary
items............ $ -- $ 1 $(1) $(2) $5 $(13) $14 $ 22
Adjustment to
reconcile to cash
provided by oper-
ations:
Depreciation and
amortization.... (8) 23 2 -- -- (29) -- 320
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in oper-
ating accounts... -- 15 -- -- -- -- -- 116
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
operations...... (8) 39 1 (2) 5 (42) 14 509
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... (35) -- -- -- -- -- -- 16
Purchase of
short-term mar-
ketable securi-
ties............. -- -- -- -- -- -- -- (354)
Capital expendi-
tures............ 2 (11) -- -- -- -- -- (206)
Other............ 33 -- -- -- -- -- -- 47
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
investing
activities....... -- (11) -- -- -- -- -- (497)
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
FINANCING ACTIVI-
TIES
Issuances of
debt............. (3) -- -- -- -- -- -- 2,042
Scheduled princi-
pal repayments... (6) (7) -- -- -- (30) -- (133)
Debt prepay-
ments............ -- -- -- -- -- -- -- (1,550)
Transfers to Host
Marriott......... -- -- -- -- -- -- -- (226)
Other............ -- -- -- -- -- -- -- 27
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
Cash provided by
(used in)
financing
activities....... (9) (7) -- -- -- (30) -- 160
---------- -------- ------------ --------------- ---------- ------------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(17) $21 $ 1 $(2) $5 $(72) $14 $ 172
========== ======== ============ =============== ========== ============= ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-84
<PAGE>
NOTES TO UNAUDITED CASH FLOW STATEMENTS
100% PARTICIPATION WITH NOTES ISSUED
A) Represents the adjustment to record the depreciation expense and
estimated capital expenditures for the Blackstone Acquisition.
B) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, eight full-service properties.
C) Represents the adjustment to record depreciation expense and capital
expenditures for the 1997 acquisition of, or purchase of controlling interests
in, 18 full service properties. Cash flows from investing activities has also
been adjusted as if the period's historical acquisitions occurred immediately
prior to the period presented.
D) Represent the adjustment to record the decrease in depreciation expense,
capital expenditures and other investing activities for the sale of the New
York East Side Marriott and the Napa Valley Marriott, including the
elimination of the non-recurring gains on the sales totaling $50 million.
E) Represents the adjustment to reflect the decrease in interest expense
associated with the refinancing or payoff of mortgage debt for three full-
service properties (Marriott Orlando World Center, the Philadelphia Marriott,
and the San Francisco Marriott). Cash from financing activities has also been
adjusted as if the periods historical prepayments and issuances of debt
occurred immediately prior to the period presented.
F) Represents the adjustment to reflect the issuance of the $1.7 billion of
New Senior Notes net of the discount of $8 million, the retirement of the Old
Senior Notes of $1.55 billion and the initial draw on the New Credit Facility
of $372 million, including interest expense and commitment fees.
G) Represents the adjustment to record the removal of depreciation, capital
expenditures, the sale of certain assets and the scheduled principal
amortization of notes to reflect the deconsolidation of the Non-Controlled
Subsidiary.
H) Represents the adjustment to record depreciation expense and capital
expenditures related to the Merger, including the scheduled principal
amortization of notes.
I) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
J) Represents the adjustment to reflect the decrease in interest income, net
of tax, as a result of the estimated $225 million earnings and profits
distribution./(2)/
K) Represent the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees./(1)/
L) Represents the adjustment to reduce depreciation expense related to the
sale of certain furniture and equipment to the Non-Controlled Subsidiary,
including the scheduled principal amortization of notes.
M) Represents the adjustment to the income tax provision to reflect the REIT
conversion.
N) Represents the adjustment to record interest income on the $107 million
in loans to SLC.
O) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
(2) The amount of the earnings and profits distribution is an estimate only,
and is subject to a number of contingencies and uncertainties at this
time. The amount of the earnings and profits distribution will be based
upon Host's accumulated earnings and profits for tax purposes, which could
be affected by a number of factors (including, for example, actual
operating results prior to REIT Conversion, extraordinary capital
transactions, including those in connection with the REIT Conversion, and
any adjustment resulting from routine ongoing audits of Host).
F-85
<PAGE>
PRO FORMA FINANCIAL STATEMENTS OF SLC
The unaudited pro forma condensed consolidated statements of operations of
SLC reflect the following transactions for the First Two Quarters 1998 and for
the fiscal year ended January 2, 1998, as if such transactions had been
completed at the beginning of each of the periods:
. 1997 acquisition of Forum Group Inc. (the "Forum Acquisition") and one
additional senior living community
. 1998 refinancing of a $92 million note payable to Marriott International
with a $92 million note payable to Host Marriott
. 1998 retirement of $26 million of debt through a capital contribution
from Host Marriott
. 1998 acquisition of one senior living community
. 1998 acquisition of minority interests in certain consolidated
subsidiaries of SLC through contributions from Host Marriott
. 1998 spin off of SLC from Host Marriott and the concurrent lease of
hotels from Host Marriott
. 1998 adoption of EITF 97-2 to reflect the change in presentation of
revenues to present property-level sales and operating expenses
. Adjustment to corporate expenses as if SLC were operated on a stand alone
basis.
The adjustments to the unaudited pro forma balance sheet of SLC reflect the
lease of substantially all of Host Marriott's hotels in conjunction with the
REIT Conversion.
In 1998, SLC acquired one senior living community for $21 million. Also,
during 1998, Host Marriott prepaid approximately $26 million of SLC's mortgage
debt and repaid $92 million of unsecured debt to Marriott International. The
prepayment was recorded as a capital contribution to SLC and the $92 million
was repaid in exchange for a $92 million note due to Host Marriott with
similar terms.
In 1997, Host Marriott Corporation acquired 29 senior living communities
from Marriott International and concurrently contributed all of the assets and
liabilities obtained in the Forum Acquisition to SLC. In addition, during
1997, SLC acquired 49% of the remaining 50% interest in Leisure Park Venture
Limited Partnership which owns a 418-unit retirement community in New Jersey
for approximately $23 million, including the assumption of approximately $15
million in debt. SLC currently owns 99% of the partnership.
The unaudited pro forma financial statements present the financial position
and the results of operations of SLC as if the transactions described above
were completed. These presentations do not purport to represent what SLC's
results of operations would actually have been if the transactions described
above had in fact occurred on such date or at the beginning of such period or
to project SLC's results of operations for any future date or period.
The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that SLC believes are reasonable under the circumstances and
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto for HMC Senior Communities, Inc.
F-86
<PAGE>
SLC
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 19, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
LEASE
HISTORICAL CONVERSION PRO FORMA
---------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Property and equipment, net................. $643,641 $ -- $643,641
Amounts due from Marriott International..... 9,006 -- 9,006
Other assets................................ 3,523 100,000(A) 103,523
Restricted cash............................. 12,056 -- 12,056
Cash and cash equivalents................... 19,113 -- 19,113
-------- -------- --------
Total assets.............................. $687,339 $100,000 $787,339
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt, including $107 million in notes due to
Host Marriott Corporation.................. $321,752 $ -- $321,752
Deferred income taxes....................... 61,715 -- 61,715
Due to Host Marriott Corporation, net....... 10,580 100,000(A) 110,580
Accounts payable and other accrued liabili-
ties....................................... 9,122 -- 9,122
Deferred revenue............................ 1,532 -- 1,532
-------- -------- --------
Total liabilities......................... 404,701 100,000 504,701
-------- -------- --------
Shareholder's equity
Common stock, 100 shares authorized, issued
and outstanding ........................... -- -- --
Additional paid-in capital.................. 278,783 -- 278,783
Retained earnings........................... 3,855 -- 3,855
-------- -------- --------
Total shareholder's equity................ 282,638 -- 282,638
-------- -------- --------
Total liabilities and shareholder's equi-
ty....................................... $687,339 $100,000 $787,339
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
F-87
<PAGE>
SLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST TWO QUARTERS 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
C D E F G
DEBT CORPORATE LEASE ADOPTION OF
HISTORICAL REFINANCING ACQUISITIONS EXPENSES CONVERSION(/1/) EITF 97-2 PRO FORMA
---------- ----------- ------------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Hotel revenues......... $ -- $-- $-- $ -- $777,370 $1,130,103 $1,907,473
Senior living community
revenues.............. 39,252 -- 85 -- -- 71,008 110,345
-------- ---- ---- ------- -------- ---------- ----------
Total revenues......... 39,252 -- 85 -- 777,370 1,201,111 2,017,818
-------- ---- ---- ------- -------- ---------- ----------
Expenses
Hotel operating costs.. -- -- -- -- 118,000 1,130,103 1,248,103
Hotel lease expense.... -- -- -- -- 645,370 -- 645,370
Senior living community
operating costs....... 19,206 -- 49 -- -- 71,008 90,263
-------- ---- ---- ------- -------- ---------- ----------
19,206 -- 49 -- 763,370 1,201,111 1,983,736
-------- ---- ---- ------- -------- ---------- ----------
Operating profit ....... 20,046 -- 36 -- 14,000 -- 34,082
Corporate expenses...... (1,616) -- -- (8,384) -- -- (10,000)
Interest expense........ (13,185) 101 253 -- -- -- (12,831)
Interest income......... 681 -- 6 -- -- -- 687
-------- ---- ---- ------- -------- ---------- ----------
Income (loss) before
income taxes........... 5,926 101 295 (8,384) 14,000 -- 11,938
Benefit (provision) for
income taxes........... (2,430) (41) (121) 3,437 (5,740) -- (4,895)
-------- ---- ---- ------- -------- ---------- ----------
Income (loss) before
extraordinary item..... $ 3,496 $ 60 $174 $(4,947) $ 8,260 $ -- $ 7,043
======== ==== ==== ======= ======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-88
<PAGE>
SLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
B C D E F G
FORUM DEBT CORPORATE LEASE ADOPTION OF
HISTORICAL ACQUISITION REFINANCING ACQUISITIONS EXPENSES CONVERSION(/1/) EITF 97-2 PRO FORMA
---------- ----------- ----------- ------------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Hotel revenue......... $ -- $ -- $-- $ -- $ -- $1,442,511 $2,336,497 $3,779,008
Senior living
community revenues... 36,900 32,842 -- 7,219 -- -- 135,827 212,788
------- ------- ---- ------ -------- ---------- ---------- ----------
Total revenues........ 36,900 32,842 -- 7,219 -- 1,442,511 2,472,324 3,991,796
------- ------- ---- ------ -------- ---------- ---------- ----------
Expenses
Hotel operating
costs................ -- -- -- -- -- 213,000 2,336,497 2,549,497
Hotel lease expense... -- -- -- -- -- 1,208,511 -- 1,208,511
Senior living
community operating
costs................ 20,929 17,988 -- 4,413 -- -- 135,827 179,157
------- ------- ---- ------ -------- ---------- ---------- ----------
20,929 17,988 -- 4,413 -- 1,421,511 2,472,324 3,937,165
------- ------- ---- ------ -------- ---------- ---------- ----------
Operating profit ...... 15,971 14,854 -- 2,806 -- 21,000 -- 54,631
Corporate expenses..... (2,304) (2,098) -- 745 (14,343) -- -- (18,000)
Interest expense....... (13,396) (9,921) 230 115 -- -- -- (22,972)
Interest income........ 336 598 -- -- -- -- -- 934
------- ------- ---- ------ -------- ---------- ---------- ----------
Income (loss) before
income taxes.......... 607 3,433 230 3,666 (14,343) 21,000 -- 14,593
Benefit (provision) for
income taxes.......... (249) (1,408) (94) (1,503) 5,881 (8,610) -- (5,983)
------- ------- ---- ------ -------- ---------- ---------- ----------
Income (loss) before
extraordinary item.... $ 358 $ 2,025 $136 $2,163 $ (8,462) $ 12,390 $ -- $ 8,610
======= ======= ==== ====== ======== ========== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-89
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF SLC
A. Represents the adjustment to record the transfer of hotel working capital
to SLC related to the leasing of the Company's hotels by increasing working
capital and recording a payable to the Company of $100 million.
B. Represents the adjustment to reflect the historical revenues, operating
expenses, corporate expenses, interest expense and interest income for the
Forum Acquisition as if such acquisition occurred at the beginning of 1997
(actual acquisition date was June 20, 1997).
C. Represents the adjustment to record the reduction of interest expense
from 9% to 8.5% related to the refinancing of $92 million of SLC's debt.
D. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses, interest expense and interest income related to
the acquisition of one senior living community and minority interests in
certain consolidated subsidiaries of SLC in 1998, and the acquisition of one
senior living community in 1997.
E. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when SLC is operated as a stand alone company
subsequent to the REIT Conversion.
F. Represents the adjustment to record the hotel revenues, hotel expenses
and lease expense associated with the leasing of certain hotel properties from
the Company./(1)/
G. Represents the adjustment to reflect SLC's anticipated adoption of EITF
97-2 in the fourth quarter of 1998 by recording property-level sales and
operating expenses. The adjustment has no impact on operating profit or net
income.
- --------
(1) Lease amounts reflect estimates as the leases have not been finalized,
however, the negotiations are substantially complete. The Company does not
believe that the final lease amounts will be materially different from the
amounts presented.
F-90
<PAGE>
APPENDIX A
FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HOST MARRIOTT,
L.P.
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I DEFINED TERMS.................................................. 1
ARTICLE II ORGANIZATIONAL MATTERS........................................ 15
Section 2.1 Organization............................................ 15
Section 2.2 Name.................................................... 15
Section 2.3 Registered Office and Agent; Principal Office........... 16
Section 2.4 Term.................................................... 16
ARTICLE III PURPOSE...................................................... 16
Section 3.1 Purpose and Business.................................... 16
Section 3.2 Powers.................................................. 16
ARTICLE IV CAPITAL CONTRIBUTIONS AND ISSUANCES OF PARTNERSHIP INTERESTS.. 17
Section 4.1 Capital Contributions of the Partners; Restatement of
Capital Accounts on the Date Hereof..................... 17
Section 4.2 Issuances of Partnership Interests...................... 17
Section 4.3 No Preemptive Rights.................................... 18
Section 4.4 Other Contribution Provisions........................... 19
Section 4.5 No Interest on Capital.................................. 19
ARTICLE V DISTRIBUTIONS.................................................. 19
Section 5.1 Requirement and Characterization of Distributions....... 19
Section 5.2 Amounts Withheld........................................ 21
Section 5.3 Distributions Upon Liquidation.......................... 21
Section 5.4 Revisions to Reflect Issuance of Partnership Interests.. 21
ARTICLE VI ALLOCATIONS................................................... 21
Section 6.1 Allocations For Capital Account Purposes................ 21
Section 6.2 Revisions to Allocations to Reflect Issuance of
Partnership Interests................................... 22
ARTICLE VII MANAGEMENT AND OPERATIONS OF BUSINESS........................ 22
Section 7.1 Management.............................................. 22
Section 7.2 Certificate of Limited Partnership...................... 25
Section 7.3 Title to Partnership Assets............................. 25
Section 7.4 Reimbursement of the General Partner.................... 25
Section 7.5 Outside Activities of the General Partner; Relationship
of Shares to Units; Funding Debt........................ 27
Section 7.6 Transactions with Affiliates............................ 28
Section 7.7 Indemnification......................................... 28
Section 7.8 Liability of the General Partner........................ 30
Section 7.9 Other Matters Concerning the General Partner............ 30
Section 7.10 Reliance by Third Parties............................... 31
Section 7.11 Restrictions on General Partner's Authority............. 31
Section 7.12 Loans by Third Parties.................................. 32
ARTICLE VIII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.................. 32
Section 8.1 Limitation of Liability................................. 32
Section 8.2 Management of Business.................................. 32
Section 8.3 Outside Activities of Limited Partners.................. 32
Section 8.4 Return of Capital....................................... 33
Section 8.5 Rights of Limited Partners Relating to the Partnership.. 33
Section 8.6 Unit Redemption Right................................... 34
</TABLE>
A-2
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS........................ 36
Section 9.1 Records and Accounting.................................. 36
Section 9.2 Fiscal Year............................................. 36
Section 9.3 Reports................................................. 36
ARTICLE X TAX MATTERS.................................................... 37
Section 10.1 Preparation of Tax Returns.............................. 37
Section 10.2 Tax Elections........................................... 37
Section 10.3 Tax Matters Partner..................................... 37
Section 10.4 Organizational Expenses................................. 38
Section 10.5 Withholding............................................. 38
ARTICLE XI TRANSFERS AND WITHDRAWALS..................................... 39
Section 11.1 Transfer................................................ 39
Section 11.2 Transfers of Partnership Interests of General Partner... 39
Section 11.3 Limited Partners' Rights to Transfer.................... 40
Section 11.4 Substituted Limited Partners............................ 41
Section 11.5 Assignees............................................... 41
Section 11.6 General Provisions...................................... 42
ARTICLE XII RESTRICTION ON OWNERSHIP OF UNITS............................ 43
Section 12.1 Definitions............................................. 43
Section 12.2 Ownership Limitation on Units........................... 44
Section 12.3 Exceptions to the Ownership Limitation.................. 46
Section 12.4 Transfer of Units in Trust.............................. 46
Section 12.5 Enforcement............................................. 48
Section 12.6 Non-Waiver.............................................. 48
ARTICLE XIII ADMISSION OF PARTNERS....................................... 48
Section 13.1 Admission of a Successor General Partner................ 48
Section 13.2 Admission of Additional Limited Partners................ 48
Section 13.3 Amendment of Agreement and Certificate of Limited
Partnership............................................. 49
ARTICLE XIV DISSOLUTION AND LIQUIDATION.................................. 49
Section 14.1 Dissolution............................................. 49
Section 14.2 Winding Up.............................................. 50
Section 14.3 Compliance with Timing Requirements of Regulations...... 50
Section 14.4 Rights of Limited Partners.............................. 51
Section 14.5 Notice of Dissolution................................... 51
Section 14.6 Cancellation of Certificate of Limited Partnership...... 51
Section 14.7 Reasonable Time for Winding Up.......................... 51
Section 14.8 Waiver of Partition..................................... 51
Section 14.9 Liability of Liquidator................................. 51
ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS.................. 52
Section 15.1 Amendments.............................................. 52
Section 15.2 Meetings of the Partners................................ 53
ARTICLE XVI GENERAL PROVISIONS........................................... 53
Section 16.1 Addresses and Notice.................................... 53
Section 16.2 Titles and Captions..................................... 54
Section 16.3 Pronouns and Plurals.................................... 54
Section 16.4 Further Action.......................................... 54
Section 16.5 Binding Effect.......................................... 54
</TABLE>
A-3
<PAGE>
<TABLE>
<C> <S> <C>
Section 16.6 Creditors................................................ 54
Section 16.7 Waiver................................................... 54
Section 16.8 Counterparts............................................. 54
Section 16.9 Applicable Law........................................... 54
Section 16.10 Invalidity of Provisions................................. 54
Section 16.11 Power of Attorney........................................ 55
Section 16.12 Entire Agreement......................................... 55
Section 16.13 No Rights as Shareholders................................ 56
Section 16.14 Limitation to Preserve REIT Status....................... 56
EXHIBIT A PARTNERS AND PARTNERSHIP INTERESTS
EXHIBIT B CAPITAL ACCOUNT MAINTENANCE
EXHIBIT C SPECIAL ALLOCATION RULES
EXHIBIT D NOTICE OF REDEMPTION
EXHIBIT E VALUE OF CONTRIBUTED PROPERTY
</TABLE>
A-4
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HOST MARRIOTT, L.P.
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of , 1998, is entered into by and among Host Marriott Trust, a Maryland
real estate investment trust, as the General Partner of Host Marriott, L.P.
(the "Partnership"), and the parties appearing on Exhibit A attached hereto,
as Limited Partners, together with any other Persons who become Partners of
the Partnership as provided herein.
WHEREAS, the Partnership was formed on April 15, 1998, and, on April 15,
1998 the Partnership adopted an agreement of limited partnership, which
agreement was amended and restated on August 6, 1998 (as so amended and
restated, the "Prior Agreement");
WHEREAS, the General Partner has been admitted to the partnership as an
additional General Partner pursuant to the terms of the Prior Agreement;
WHEREAS, HMC Real Estate LLC, a Delaware limited liability company and the
General Partner of the Partnership, has assigned its General Partnership
Interest to the General Partner effective as of the date hereof;
WHEREAS, [Host Marriott Hospitality LLC, a Delaware limited liability
company] and the initial Limited Partner, has assigned its Limited Partnership
Interest to the General Partner pursuant to the terms of the Prior Agreement;
and
WHEREAS, the Partners desire to (i) continue the business of the Partnership
pursuant to this Agreement, (ii) to admit certain Persons as Limited Partners
of the Partnership and (iii) reflect the withdrawal of the initial General
Partner and initial Limited Partner from the Partnership in their capacities
as such;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend and restate the
Prior Agreement in its entirety and agree to continue the Partnership as a
limited partnership under the Delaware Revised Uniform Limited Partnership
Act, as amended from time to time, as follows:
ARTICLE I
Defined Terms
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this
Agreement.
"704(c) Value" of any Contributed Property means the fair market value of
such property at the time of contribution as determined by the General Partner
using such reasonable method of valuation as it may adopt; provided, however,
subject to Exhibit B, the General Partner shall, in its sole and absolute
discretion, use such method as it deems reasonable and appropriate to allocate
the aggregate of the 704(c) Value of Contributed Properties in a single or
integrated transaction among each separate property on a basis proportional to
its respective fair market value. The 704(c) Values of the Contributed
Properties contributed to the Partnership as of the date hereof are set forth
on Exhibit E.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 13.2 hereof and who is shown as such on
the books and records of the Partnership.
A-5
<PAGE>
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii)
decreased by the items described in Regulations Sections 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6). The
foregoing definition of Adjusted Capital Account is intended to comply with
the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
"Adjusted Capital Account Deficit" means, with respect to any Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account as of the
end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Exhibit B.
"Adjustment Date" has the meaning set forth in Section 4.2.B.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner, trustee or members of the
Immediate Family of such Person or any Person referred to in clauses (i),
(ii), and (iii) above. For purposes of this definition, "control," when used
with respect to any Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling"
and "controlled" have meanings correlative to the foregoing. Notwithstanding
the foregoing, neither (i) a corporation whose common stock is listed on a
national securities exchange or authorized for inclusion on the Nasdaq
National Market, or any subsidiary thereof, or (ii) Blackstone Real Estate
Advisors II L.P. or any of its Affiliates, shall be an "Affiliate" of the
General Partner Entity or any Affiliate thereof unless a Person (or Persons if
such Persons would be treated as part of the same group for purposes of
Section 13(d) or 13(g) of the Securities Exchange Act of 1934) directly or
indirectly owns twenty percent (20%) or more of the outstanding common stock
of the General Partner Entity and such other corporation.
"Agreed Value" means (i) in the case of any Contributed Property contributed
to the Partnership as of the date hereof, the amount set forth on Exhibit E as
the Agreed Value of such Property; (ii) in the case of any other Contributed
Property, the 704(c) Value of such property as of the time of its contribution
to the Partnership, reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed; and (iii) in the case of any property distributed to a Partner by
the Partnership, the Partnership's Carrying Value of such property at the time
such property is distributed, reduced by any indebtedness either assumed by
such Partner upon such distribution or to which such property is subject at
the time of distribution as determined under Section 752 of the Code and the
regulations thereunder.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
"Appraised Value" means, with respect to any hotel, the value set forth in
the appraisal of such hotel utilized by the General Partner in determining the
number of Units to be issued to any Limited Partner.
"Assignee" means a Person to whom one or more Units have been transferred in
a manner permitted under this Agreement, but who has not become a Substituted
Limited Partner, and who has the rights set forth in Section 11.5.
"Available Cash" means, with respect to any period for which such
calculation is being made:
(a) all cash revenues and funds received by the Partnership from whatever
source (excluding the proceeds of any Capital Contribution to the extent
determined by the General Partner) plus the amount of
A-6
<PAGE>
any reduction (including, without limitation, a reduction resulting because
the General Partner determines such amounts are no longer necessary) in
reserves of the Partnership, which reserves are referred to in clause
(b)(iv) below;
(b) less the sum of the following (except to the extent made with the
proceeds of any Capital Contribution):
(i) all interest, principal and other debt payments made during such
period by the Partnership,
(ii) all cash expenditures (including capital expenditures) made by
the Partnership during such period,
(iii) investments in any entity (including loans made thereto) to the
extent that such investments are permitted under this Agreement and are
not otherwise described in clauses (b)(i) or (ii), and
(iv) the amount of any increase in reserves established during such
period which the General Partner determines is necessary or appropriate
in its sole and absolute discretion.
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements
made or reserves established, after commencement of the dissolution and
liquidation of the Partnership.
"Book-Tax Disparities" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all
of its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained
pursuant to Exhibit B and the hypothetical balance of such Partner's Capital
Account computed as if it had been maintained strictly in accordance with
federal income tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on which
commercial banks in the City of New York are authorized or required by law to
close.
"Capital Account" means the Capital Account maintained for a Partner
pursuant to Exhibit B. The initial Capital Account balance for each Partner
who is a Partner on the date hereof shall be the amount set forth opposite
such Partner's name on Exhibit A hereto.
"Capital Contribution" means, with respect to any Partner, any cash, cash
equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Section
4.1 or 4.2.
"Carrying Value" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property reduced (but not below
zero) by all Depreciation with respect to such Contributed Property or
Adjusted Property, as the case may be, charged to the Partners' Capital
Accounts and (ii) with respect to any other Partnership property, the adjusted
basis of such property for federal income tax purposes, all as of the time of
determination. The Carrying Value of any property shall be adjusted from time
to time in accordance with Exhibit B, and to reflect changes, additions
(including capital improvements thereto) or other adjustments to the Carrying
Value for dispositions and acquisitions of Partnership properties, as deemed
appropriate by the General Partner.
"Cash Amount" means an amount of cash equal to the Value on the Valuation
Date of the Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to the
Partnership filed in the office of the Secretary of State of the State of
Delaware, as amended from time to time in accordance with the terms hereof and
the Act.
"Class A" has the meaning set forth in Section 5.1.C.
A-7
<PAGE>
"Class A Share" has the meaning set forth in Section 5.1.C.
"Class A Unit" means any Unit that is not specifically designated by the
General Partner as being of another specified class of Units.
"Class B" has the meaning set forth in Section 5.1.C.
"Class B Share" has the meaning set forth in Section 5.1.C.
"Class B Unit" means a Unit that is specifically designated by the General
Partner as being a Class B Unit.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder.
Any reference herein to a specific section or sections of the Code shall be
deemed to include a reference to any corresponding provision of future law.
"Common Shares" means the common shares of beneficial ownership (or other
comparable equity interests) of the General Partner Entity.
"Consent" means the consent or approval of a proposed action by a Partner
given in accordance with Section 15.2.
"Consent of the Outside Limited Partners" means the Consent of Limited
Partners (excluding for this purpose any Limited Partnership Interests held
(i) by the General Partner or the General Partner Entity, (ii) any Person of
which the General Partner or the General Partner Entity directly or indirectly
owns or controls more than fifty percent (50%) of the voting interests, (iii)
any Person directly or indirectly owning or controlling more than fifty
percent (50%) of the outstanding voting interests of the General Partner or
the General Partner Entity and (iv) any Person of which a Person described in
clause (iii) directly or indirectly owns or controls more than fifty percent
(50%) of the voting interest) holding Percentage Interests that are more than
fifty percent (50%) of the aggregate Percentage Interest of all Limited
Partners holding Limited Partnership Interests then entitled to vote thereon
and who are not excluded for the purposes hereof.
"Contributed Property" means each property or other asset contributed to the
Partnership, in such form as may be permitted by the Act, but excluding cash
contributed or deemed contributed to the Partnership. Once the Carrying Value
of a Contributed Property is adjusted pursuant to Exhibit B, such property
shall no longer constitute a Contributed Property for purposes of Exhibit B,
but shall be deemed an Adjusted Property for such purposes.
"Conversion Factor" means 1.0; provided that, if the General Partner Entity
(i) declares or pays a dividend on its outstanding Shares in Shares or makes a
distribution to all holders of its outstanding Shares in Shares, (ii)
subdivides its outstanding Shares or (iii) combines its outstanding Shares
into a smaller number of Shares, the Conversion Factor shall be adjusted by
multiplying the Conversion Factor by a fraction, the numerator of which shall
be the number of Shares issued and outstanding on the record date for such
dividend, distribution, subdivision or combination (assuming for such purposes
that such dividend, distribution, subdivision or combination has occurred as
of such time) and the denominator of which shall be the actual number of
Shares (determined without the above assumption) issued and outstanding on the
record date for such dividend, distribution, subdivision or combination; and
provided further that if an entity shall cease to be the General Partner
Entity (the "Predecessor Entity") and another entity shall become the General
Partner Entity (the "Successor Entity"), the Conversion Factor shall be
adjusted by multiplying the Conversion Factor by a fraction, the numerator of
which is the Value of one Share of the Predecessor Entity, determined as of
the date when the Successor Entity becomes the General Partner Entity, and the
denominator of which is the Value of one Share of the Successor Entity,
determined as of that same date. (For purposes of the second provision in the
preceding sentence, if any shareholders of the Predecessor Entity will receive
consideration in connection with the transaction in which the Successor Entity
becomes the General Partner Entity, the numerator in the fraction described
above for determining the adjustment to the Conversion Factor (that is, the
Value of one Share of the Predecessor Entity) shall be the sum of the greatest
amount of cash and the fair market value (as determined in
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good faith by the General Partner) of any securities and other consideration
that the holder of one Share in the Predecessor Entity could have received in
such transaction (determined without regard to any provisions governing
fractional shares). Any adjustment to the Conversion Factor shall become
effective immediately after the effective date of the event retroactive to the
record date, if any, for the event giving rise thereto, it being intended that
(x) adjustments to the Conversion Factor are to be made to avoid unintended
dilution or anti-dilution as a result of transactions in which Shares are
issued, redeemed or exchanged without a corresponding issuance, redemption or
exchange of Units and (y) if a Specified Redemption Date shall fall between
the record date and the effective date of any event of the type described
above, that the Conversion Factor applicable to such redemption shall be
adjusted to take into account such event.
"Convertible Funding Debt" has the meaning set forth in Section 7.5.F.
"Debt" means, as to any Person, as of any date of determination, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) all amounts owed by such Person to banks
or other Persons in respect of reimbursement obligations under letters of
credit, surety bonds and other similar instruments guaranteeing payment or
other performance of obligations by such Person, (iii) all indebtedness for
borrowed money or for the deferred purchase price of property or services
secured by any lien on any property owned by such Person, to the extent
attributable to such Person's interest in such property, even though such
Person has not assumed or become liable for the payment thereof, and (iv)
obligations of such Person incurred in connection with entering into a lease
which, in accordance with generally accepted accounting principles, should be
capitalized.
"Declaration of Trust" means the Declaration of Trust of the General Partner
filed with the State Department of Assessments and Taxation in the State of
Maryland on , 1998, as amended or restated from time to time.
"Deemed Partnership Interest Value" means, as of any date with respect to
any class of Partnership Interests, the Deemed Value of the Partnership
Interest of such class multiplied by the applicable Partner's Percentage
Interest of such class.
"Deemed Value of the Partnership Interest" means, as of any date with
respect to any class of Partnership Interests, (a) if the common shares of
beneficial interest (or other comparable equity interests) of the General
Partner Entity are Publicly Traded (i) the total number of shares of
beneficial interest (or other comparable equity interest) of the General
Partner Entity corresponding to such class of Partnership Interest (as
provided for in Section 4.2.A) issued and outstanding as of the close of
business on such date (excluding any treasury shares) multiplied by the Value
of a share of such beneficial interest (or other comparable equity interest)
on such date divided by (ii) the Percentage Interest of the General Partner
Entity, held directly or indirectly through another entity, in such class of
Partnership Interests on such date, and (b) otherwise, the aggregate Value of
such class of Partnership Interests determined as set forth in the fourth and
fifth sentences of the definition of Value. For purposes of clause (a) of the
preceding sentence, "Value" means the average of the daily market price of
such corresponding shares of beneficial interest (or other comparable equity
interests) of the General Partner Entity for such number of consecutive
trading days or the Business Day immediately preceding the date with respect
to which Value must be determined (which number of days or the Business Day
shall be determined by the General Partner in its sole discretion), with the
market price for each such trading day being the closing price, regular way,
on such day, or if no such sale takes place on such day, the average of the
closing bid and asked prices on such day. Notwithstanding any of the
foregoing, with respect to any class or series of Partnership Interests that
is entitled to a preference as compared to the class of Partnership Interests
corresponding to common shares of beneficial interests (or other comparable
equity interests) of the General Partner Entity, "Value" means the stated
liquidation preference or value of such class or series of Partnership
Interests provided in the instrument establishing such class or series of
Partnership Interests (unless otherwise provided in such instrument).
"Depreciation" means, for each fiscal year, an amount equal to the federal
income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the
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Carrying Value of an asset differs from its adjusted basis for federal income
tax purposes at the beginning of such year or other period, Depreciation shall
be an amount which bears the same ratio to such beginning Carrying Value as
the federal income tax depreciation, amortization, or other cost recovery
deduction for such year bears to such beginning adjusted tax basis; provided,
however, that if the federal income tax depreciation, amortization, or other
cost recovery deduction for such year is zero, Depreciation shall be
determined with reference to such beginning Carrying Value using any
reasonable method selected by the General Partner.
"Distribution Period" has the meaning set forth in Section 5.1.C.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan Investor" means (i) a Plan, (ii) a trust which was established
pursuant to a Plan, or a nominee for such trust or Plan, or (iii) an entity
whose underlying assets include assets of a Plan by reason of such Plan's
investment in such entity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Funding Debt" means the incurrence of any Debt by or on behalf of the
General Partner Entity for the purpose of providing funds to the Partnership.
"General Partner" means Host Marriott Trust, a Maryland real estate
investment trust, or any of its successors as a general partner of the
Partnership.
"General Partner Entity" means the General Partner; provided, however, that
if (i) the common shares of beneficial interest (or other comparable equity
interests) of the General Partner (i.e., the Shares that would otherwise
correspond to the Class A Units) are at any time not Publicly Traded and (ii)
the common shares of beneficial interest (or other comparable equity
interests) of an entity that owns, directly or indirectly, fifty percent (50%)
or more of the common shares of beneficial interest (or other comparable
equity interests) of the General Partner are Publicly Traded, the term
"General Partner Entity" shall refer to such entity whose common shares of
beneficial interest (or other comparable equity securities) are Publicly
Traded. If both requirements set forth in clauses (i) and (ii) above are not
satisfied, then the term "General Partner Entity" shall mean the General
Partner.
"General Partner Payment" has the meaning set forth in Section 16.14.
"General Partnership Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest. A General Partnership
Interest may be expressed as a number of Units.
"Immediate Family" means, with respect to any natural Person, such natural
Person's spouse, parents, descendants, nephews, nieces, brothers and sisters.
"Incapacity" or "Incapacitated" means, (i) as to any individual Partner,
death, total physical disability or entry by a court of competent jurisdiction
adjudicating such Partner incompetent to manage his or her Person or estate,
(ii) as to any corporation which is a Partner, the filing of a certificate of
dissolution, or its equivalent, for the corporation or the revocation of its
charter, (iii) as to any partnership or limited liability company which is a
Partner, the dissolution and commencement of winding up of the partnership or
limited liability company, (iv) as to any estate which is a Partner, the
distribution by the fiduciary of the estate's entire interest in the
Partnership, (v) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee) or (vi)
as to any Partner, the bankruptcy of such Partner. For purposes of this
definition, bankruptcy of a Partner shall be deemed to have occurred when (i)
the Partner commences a voluntary proceeding seeking liquidation,
reorganization or other relief under any bankruptcy, insolvency or other
similar law now or hereafter in effect, (ii) the Partner is adjudged as
bankrupt or insolvent, or a final and nonappealable order for relief under any
bankruptcy, insolvency or similar law now or hereafter in effect has been
entered against the Partner, (iii) the
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Partner executes and delivers a general assignment for the benefit of the
Partner's creditors, (iv) the Partner files an answer or other pleading
admitting or failing to contest the material allegations of a petition filed
against the Partner in any proceeding of the nature described in clause (ii)
above, (v) the Partner seeks, consents to or acquiesces in the appointment of
a trustee, receiver or liquidator for the Partner or for all or any
substantial part of the Partner's properties, (vi) any proceeding seeking
liquidation, reorganization or other relief under any bankruptcy, insolvency
or other similar law now or hereafter in effect has not been dismissed within
one hundred twenty (120) days after the commencement thereof, (vii) the
appointment without the Partner's consent or acquiescence of a trustee,
receiver of liquidator has not been vacated or stayed within ninety (90) days
of such appointment or (viii) an appointment referred to in clause (vii) is
not vacated within ninety (90) days after the expiration of any such stay.
"Indemnitee" means (i) any Person made a party to a proceeding by reason of
its status as (A) the General Partner, (B) a Limited Partner and Affiliates
thereof or (C) a trustee, director or officer of the Partnership or the
General Partner and (ii) such other Persons (including Affiliates of the
General Partner, a Limited Partner or the Partnership) as the General Partner
may designate from time to time (whether before or after the event giving rise
to potential liability), in its sole and absolute discretion.
"Initial Holding Period" means the period commencing on the date hereof and
ending on the date on which the Unit Redemption Right first becomes available
under Section 8.6.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States.
"Limited Partner" means any Person named as a Limited Partner of the
Partnership in Exhibit A, as such Exhibit may be amended from time to time, or
any Substituted Limited Partner or Additional Limited Partner, in such
Person's capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means a Partnership Interest of a Limited
Partner of the Partnership representing a fractional part of the Partnership
Interests of all Limited Partners and includes any and all benefits to which
the holder of such a Partnership Interest may be entitled as provided in this
Agreement, together with all obligations of such Person to comply with the
terms and provisions of this Agreement. A Limited Partnership Interest may be
expressed as a number of Units.
"Liquidating Event" has the meaning set forth in Section 14.1.
"Liquidator" has the meaning set forth in Section 14.2.A.
"Marriott International" means Marriott International, Inc., a Delaware
corporation.
"Net Income" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain for such taxable period over the
Partnership's items of loss and deduction for such taxable period. The items
included in the calculation of Net Income shall be determined in accordance
with Exhibit B. If an item of income, gain, loss or deduction that has been
included in the initial computation of Net Income is subjected to the special
allocation rules in Exhibit C, Net Income or the resulting Net Loss, whichever
the case may be, shall be recomputed without regard to such item.
"Net Loss" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction for such taxable period over the
Partnership's items of income and gain for such taxable period. The items
included in the calculation of Net Loss shall be determined in accordance with
Exhibit B. If an item of income, gain, loss or deduction that has been
included in the initial computation of Net Loss is subjected to the special
allocation rules in Exhibit C, Net Loss or the resulting Net Income, whichever
the case may be, shall be recomputed without regard to such item.
"New Securities" mean (i) any rights, options, warrants or convertible or
exchangeable securities having the right to subscribe for or purchase shares
of beneficial interest (or other comparable equity interest) of the
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General Partner, excluding grants under any Share Option Plan, or (ii) any
Debt issued by the General Partner that provides any of the rights described
in clause (i).
"Nonrecourse Built-in Gain" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit C if
such properties were disposed of in a taxable transaction in full satisfaction
of such liabilities and for no other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations Section
1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year
shall be determined in accordance with the rules of Regulations Section 1.704-
2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(2).
"Notice of Redemption" means a Notice of Redemption substantially in the
form of Exhibit D.
"OpCo" means [insert the name of a taxable corporation that would, among
other things, directly or indirectly, (i) lease hotel properties from the
Partnership and its subsidiaries, (ii) own the "senior living services"
business currently owned by HMC Senior Communities, Inc., (iii) contract for
the operation of the properties under management agreements with third party
managers and (iv) pay the Partnership rent that will qualify as "rents from
real property" under Section 856(d) of the Code in the case of Host Marriott
Trust, and as "real property rent" under Section 7704(d) of the Code in the
case of the Partnership].
"Partner" means the General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Regulations Section
1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with
respect to a Partner Nonrecourse Debt for a Partnership Year shall be
determined in accordance with the rules of Regulations Section 1.704- 2(i)(2).
"Partnership" means the limited partnership formed under the Act upon the
terms and conditions set forth in this Agreement, or any successor to such
limited partnership.
"Partnership Interest" means a Limited Partnership Interest or the General
Partnership Interest and includes any and all rights and benefits to which the
holder of such a Partnership Interest may be entitled as provided in this
Agreement, together with all obligations of such Person to comply with the
terms and provisions of this Agreement. A Partnership Interest may be
expressed as a number of Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net
increase or decrease in Partnership Minimum Gain, for a Partnership Year shall
be determined in accordance with the rules of Regulations Section 1.704- 2(d).
"Partnership Record Date" means the record date established by the General
Partner either (i) for the distribution of Available Cash pursuant to Section
5.1 hereof, which record date shall be the same as the record date established
by the General Partner Entity for a distribution to its shareholders of some
or all of its portion of such distribution, or (ii) if applicable, for
determining the Partners entitled to vote on or consent to any proposed action
for which the consent or approval of the Partners is sought pursuant to
Section 15.2 hereof.
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"Partnership Year" means the fiscal year of the Partnership, which shall end
on the Friday falling closest to December 31 of each year.
"Percentage Interest" means, as to a Partner holding a class of Partnership
Interests, its interest in such class, determined by dividing the Units of
such class owned by such Partner by the total number of Units of such class
then outstanding as specified in Exhibit A, as such exhibit may be amended
from time to time, multiplied by the aggregate Percentage Interest allocable
to such class of Partnership Interests. If the Partnership shall at any time
have outstanding more than one class of Partnership Interests, the Percentage
Interest attributable to each class of Partnership Interests shall be
determined as set forth in Section 4.2.B.
"Person" means an individual, corporation, limited liability company,
partnership, estate, trust (including a trust qualified under Sections 401(a)
or 501(c)(17) of the Code), a portion of a trust permanently set aside for or
to be used exclusively for the purposes described in Section 642(c) of the
Code, association, private foundation within the meaning of Section 509(a) of
the Code, joint stock company or other entity and also includes a group as
that term is used for purposes of Section 13(d)(3) of the Exchange Act.
"Plan" means (i) an employee benefit plan subject to Title I of ERISA or
(ii) a plan as defined in Section 4975(e) of the Code.
"Predecessor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Publicly Traded" means listed or admitted to trading on the New York Stock
Exchange, the American Stock Exchange or another national securities exchange
or designated for quotation on the Nasdaq National Market, or any successor to
any of the foregoing.
"Qualified REIT Subsidiary" means any Subsidiary of the General Partner that
is a "qualified REIT subsidiary" within the meaning of Section 856(i) of the
Code.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents the recapture
of deductions previously taken with respect to such property or asset.
"Redeeming Partner" has the meaning set forth in Section 8.6.A.
"Redemption Amount" means either the Cash Amount or the Shares Amount, as
determined by the General Partner, in its sole and absolute discretion;
provided that, if the Shares are not Publicly Traded at the time a Redeeming
Partner exercises its Unit Redemption Right, the Redemption Amount shall be
paid only in the form of the Cash Amount unless the Redeeming Partner, in its
sole and absolute discretion, consents to payment of the Redemption Amount in
the form of the Shares Amount. A Redeeming Partner shall have no right,
without the General Partner's consent, in its sole and absolute discretion, to
receive the Redemption Amount in the form of the Shares Amount.
"Regulation" or "Regulations" means the Income Tax Regulations promulgated
under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the Code.
"REIT Requirements" have the meaning set forth in Section 5.1.A.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax
Disparities.
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"Safe Harbor" has the meaning set forth in Section 11.6.F.
"Securities Act" means the Securities Act of 1933, as amended.
"Share" means a share of beneficial interest (or other comparable equity
interest) of the General Partner Entity. Shares may be issued in one or more
classes or series in accordance with the terms of the Declaration of Trust
(or, if the General Partner is not the General Partner Entity, the
organizational documents of the General Partner Entity). If there is more than
one class or series of Shares, the term "Shares" shall, as the context
requires, be deemed to refer to the class or series of Shares that correspond
to the class or series of Partnership Interests for which the reference to
Shares is made. When used with reference to Class A Units or Class B Units
(including, without limitation, for purposes of the definition of "Conversion
Factor"), the term "Shares" refers to common shares of beneficial interest (or
other comparable equity interest) of the General Partner Entity.
"Shares Amount" means a number of Shares equal to the product of the number
of Units offered for redemption by a Redeeming Partner times the Conversion
Factor; provided that, if at any time the General Partner Entity issues to all
holders of such class of Shares rights, options, warrants or convertible or
exchangeable securities entitling such holders to subscribe for or purchase
Shares or any other securities or property (collectively, the "rights"), then
the Shares Amount shall also include such rights that a holder of that number
of Shares would have been entitled to receive had it owned such Shares at the
time such rights were issued.
"Share Option Plan" means any equity incentive plan of the General Partner,
the Partnership and/or any Affiliate of the Partnership.
"Specified Redemption Date" means, except as otherwise provided in any
agreement between the Partnership and any Partner, the tenth Business Day
after receipt by the General Partner of a Notice of Redemption; provided that,
if the Shares are not Publicly Traded, the Specified Redemption Date means the
thirtieth Business Day after receipt by the General Partner of a Notice of
Redemption.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, trust, partnership or joint venture, or other entity of
which a majority of (i) the voting power of the voting equity securities or
(ii) the outstanding equity interests is owned, directly or indirectly, by
such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 11.4.
"Successor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Terminating Capital Transaction" means any sale or other disposition of all
or substantially all of the assets of the Partnership for cash or a related
series of transactions that, taken together, result in the sale or other
disposition of all or substantially all of the assets of the Partnership for
cash.
"Termination Transaction" has the meaning set forth in Section 11.2.B.
"Unit" means a fractional, undivided share of the Partnership Interests of
all Partners issued pursuant to Sections 4.1 and 4.2, and includes Class A
Units, Class B Units and any other classes or series of Units established
after the date hereof. The number of Units outstanding and the Percentage
Interests in the Partnership represented by such Units are set forth in
Exhibit A, as such Exhibit may be amended from time to time. The ownership of
Units shall be evidenced by a certificate in a form approved by the General
Partner.
"Unit Redemption Right" has the meaning set forth in Section 8.6.
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (i) the fair market value
of such property (as determined under Exhibit B) as of such date, over (ii)
the Carrying Value of such property (prior to any adjustment to be made
pursuant to Exhibit B) as of such date.
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"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (i) the Carrying Value of
such property (prior to any adjustment to be made pursuant to Exhibit B) as of
such date, over (ii) the fair market value of such property (as determined
under Exhibit B) as of such date.
"Valuation Date" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first
Business Day thereafter.
"Value" means, with respect to any outstanding Shares of the General Partner
Entity that are Publicly Traded, the average of the daily market price for the
ten consecutive trading days immediately preceding the date with respect to
which value must be determined. The market price for each such trading day
shall be the closing price, regular way, on such day, or if no such sale takes
place on such day, the average of the closing bid and asked prices on such
day. If the outstanding Shares of the General Partner Entity are Publicly
Traded and the Shares Amount includes rights that a holder of Shares would be
entitled to receive, then the Value of such rights shall be determined by the
General Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate. If the
Shares of the General Partner Entity are not Publicly Traded, the Value of the
Shares Amount per Unit offered for redemption (which will be the Cash Amount
per Unit offered for redemption payable pursuant to Section 8.6.A) means the
amount that a holder of one Unit would receive if each of the assets of the
Partnership were to be sold for its fair market value on the Specified
Redemption Date, the Partnership were to pay all of its outstanding
liabilities, and the remaining proceeds were to be distributed to the Partners
in accordance with the terms of this Agreement. Such Value shall be determined
by the General Partner, acting in good faith and based upon a commercially
reasonable estimate of the amount that would be realized by the Partnership if
each asset of the Partnership (and each asset of each partnership, limited
liability company, trust, joint venture or other entity in which the
Partnership owns a direct or indirect interest) were sold to an unrelated
purchaser in an arms' length transaction where neither the purchaser nor the
seller were under economic compulsion to enter into the transaction (without
regard to any discount in value as a result of the Partnership's minority
interest in any property or any illiquidity of the Partnership's interest in
any property). In connection with determining the Deemed Value of the
Partnership Interest for purposes of determining the number of additional
Units issuable upon a Capital Contribution funded by an underwritten public
offering or an arm's length private placement of shares of beneficial interest
(or other comparable equity interest) of the General Partner, the Value of
such shares shall be the public offering or arm's length private placement
price per share of such class of beneficial interest (or other comparable
equity interest) sold.
ARTICLE II
Organizational Matters
SECTION 2.1 ORGANIZATION
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth in the Prior
Agreement. The Partners hereby agree to continue the business of the
Partnership upon the terms and conditions set forth in this Agreement. Except
as expressly provided herein to the contrary, the rights and obligations of
the Partners and the administration and termination of the Partnership shall
be governed by the Act. The Partnership Interest of each Partner shall be
personal property for all purposes.
SECTION 2.2 NAME
The name of the Partnership is Host Marriott, L.P. The Partnership's
business may be conducted under any other name or names deemed advisable by
the General Partner, including the name of the General Partner or any
Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary
for the purposes of complying with the laws of any jurisdiction that so
requires. The General Partner in its sole and absolute discretion may change
the name of the Partnership at
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any time and from time to time and shall notify the Limited Partners of such
change in the next regular communication to the Limited Partners.
SECTION 2.3 REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE
The address of the registered office of the Partnership in the State of
Delaware shall be located at 1013 Centre Road, County of New Castle,
Wilmington, Delaware 19805, and the registered agent for service of process on
the Partnership in the State of Delaware at such registered office shall be
The Prentice-Hall Corporation System, Inc. The principal office of the
Partnership shall be 10400 Fernwood Road, Bethesda, Maryland 20817-1109, or
such other place as the General Partner may from time to time designate by
notice to the Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of Delaware as the General
Partner deems advisable.
SECTION 2.4 TERM
The term of the Partnership commenced on April 15, 1998, the date the
Certificate was filed in the office of the Secretary of State of the State of
Delaware in accordance with the Act, and shall continue until December 31,
2098, unless it is dissolved sooner pursuant to the provisions of Article XIV
or as otherwise provided by law.
ARTICLE III
Purpose
SECTION 3.1 PURPOSE AND BUSINESS
The purpose and nature of the business to be conducted by the Partnership is
(i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act; provided, however, that such
business shall be limited to and conducted in such a manner as to permit the
General Partner Entity at all times to be classified as a REIT, unless the
General Partner Entity ceases to qualify or is not qualified as a REIT for any
reason or reasons not related to the business conducted by the Partnership,
(ii) to enter into any corporation, partnership, joint venture, trust, limited
liability company or other similar arrangement to engage in any of the
foregoing or the ownership of interests in any entity engaged, directly or
indirectly, in any of the foregoing and (iii) to do anything necessary or
incidental to the foregoing. In connection with the foregoing, the Partners
acknowledge that the status of the General Partner Entity as a REIT inures to
the benefit of all the Partners and not solely to the General Partner Entity
or its Affiliates.
SECTION 3.2 POWERS
The Partnership is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein
and for the protection and benefit of the Partnership, including, without
limitation, full power and authority, directly or through its ownership
interest in other entities, to enter into, perform and carry out contracts of
any kind, borrow money and issue evidences of indebtedness, whether or not
secured by mortgage, deed of trust, pledge or other lien, acquire, own,
manage, improve and develop real property, and lease, sell, transfer and
dispose of real property; provided, however, that the Partnership shall not
take, or refrain from taking, any action which, in the judgment of the General
Partner, in its sole and absolute discretion, (i) could adversely affect the
ability of the General Partner Entity to continue to qualify as a REIT, (ii)
could subject the General Partner Entity to any additional taxes under Section
857 or Section 4981 of the Code or (iii) could violate any law or regulation
of any governmental body or agency having jurisdiction over the General
Partner or its securities, unless such action (or inaction) shall have been
specifically consented to by the General Partner in writing.
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ARTICLE IV
Capital Contributions and Issuances of Partnership Interests
SECTION 4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS; RESTATEMENT OF CAPITAL
ACCOUNTS ON THE DATE HEREOF
HMC Real Estate Corporation and Christopher G. Townsend as predecessors to
HMC Real Estate LLC and [Host Marriott Hospitality LLC], respectively,
previously made Capital Contributions to the Partnership. Pursuant to the Act
and the Prior Agreement, HMC Real Estate LLC has assigned its General
Partnership Interest to the General Partner and [Host Marriott Hospitality
LLC] has assigned its Limited Partnership Interest to the General Partner. On
the date hereof, the Partners made the Capital Contributions described in
Exhibit E. On the date hereof the Partnership shall be recapitalized so that
the Partners shall own Units in the amounts set forth in Exhibit A and shall
have a Percentage Interest in the Partnership as set forth in Exhibit A, which
Percentage Interest shall be adjusted in Exhibit A from time to time by the
General Partner to the extent necessary to reflect accurately redemptions,
Capital Contributions, the issuance of additional Units or similar events
having an effect on a Partner's Percentage Interest. To the extent the
Partnership acquires any property by the merger of any other Person into the
Partnership, Persons who receive Partnership Interests in exchange for their
interests in the Person merging into the Partnership shall become Partners and
shall be deemed to have made Capital Contributions as provided in the
applicable merger agreement (or if not so provided, as determined by the
General Partner in its sole discretion) and as set forth in Exhibit A. A
number of Units held by the General Partner equal to one tenth of one percent
(0.1%) of all outstanding Units (as of the date hereof) shall be the General
Partnership Interest of the General Partner. All other Units held by the
General Partner shall be deemed to be Limited Partnership Interests and shall
be held by the General Partner in its capacity as a Limited Partner in the
Partnership. Except as provided in Sections 7.5 and 10.5 hereof, the Partners
shall have no obligation to make any additional Capital Contributions or
provide any additional funding to the Partnership (whether in the form of
loans, repayments of loans or otherwise). No Partner shall have any obligation
to restore any deficit that may exist in its Capital Account, either upon a
liquidation of the Partnership or otherwise.
SECTION 4.2 ISSUANCES OF PARTNERSHIP INTERESTS
A. General. The General Partner is hereby authorized to cause the
Partnership from time to time to issue to Partners (including the General
Partner and its Affiliates) or other Persons (including, without limitation,
in connection with the contribution of property to the Partnership) Units or
other Partnership Interests in one or more classes, or in one or more series
of any of such classes, with such designations, preferences and relative,
participating, optional or other special rights, powers and duties, including
rights, powers and duties senior to Limited Partnership Interests, all as
shall be determined, subject to applicable Delaware law, by the General
Partner in its sole and absolute discretion, including, without limitation,
(i) the allocations of items of Partnership income, gain, loss, deduction and
credit to each such class or series of Partnership Interests, (ii) the right
of each such class or series of Partnership Interests to share in Partnership
distributions and (iii) the rights of each such class or series of Partnership
Interests upon dissolution and liquidation of the Partnership; provided that,
except in connection with the issuance of Units on the date hereof, no such
Units or other Partnership Interests shall be issued to (w) the General
Partner, (x) the General Partner Entity or (y) any Person that owns, directly
or indirectly, fifty percent (50%) or more of the common shares of beneficial
interest (or other comparable equity interests) of the General Partner Entity
unless either (a) the Partnership Interests are issued in connection with the
grant, award or issuance of Shares or other equity interests in the General
Partner Entity having designations, preferences and other rights such that the
economic interests attributable to such Shares or other equity interests are
substantially the same as the designations, preferences and other rights
(except voting rights) of the Partnership Interests issued to the General
Partner in accordance with this Section 4.2.A or (b) the additional
Partnership Interests are issued to all Partners holding Partnership Interests
in the same class in proportion to their respective Percentage Interests in
such classes (considering the Class A Units and Class B Units as one class for
such purposes). If the Partnership issues Partnership Interests pursuant to
this Section 4.2.A, the General Partner shall make such revisions to this
Agreement (including but not limited to the revisions described in Section
5.4, Section 6.2 and Section 8.6) as it deems necessary to reflect the
issuance of such Partnership Interests.
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B. Percentage Interest Adjustments in the Case of Capital Contributions for
Units. Upon the acceptance of additional Capital Contributions in exchange for
Units and if the Partnership shall have outstanding more than one class of
Partnership Interests, the Percentage Interest attributable to the additional
Units issued by the Partnership shall be equal to a fraction, the numerator of
which is equal to the aggregate amount of cash, if any, plus the Agreed Value
of Contributed Property, if any, contributed with respect to such additional
Units and the denominator of which is equal to the sum of (i) the Deemed Value
of the Partnership Interests for all outstanding classes (computed as of the
Business Day immediately preceding the date on which the additional Capital
Contributions are made (an "Adjustment Date")) plus (ii) the aggregate amount
of cash, if any, plus the Agreed Value of Contributed Property, if any,
contributed to the Partnership on such Adjustment Date in respect of such
additional Units. For purposes of foregoing, Class A Units and Class B Units
shall be considered one class. The Percentage Interest of each other Partner
holding Partnership Interests not making a full pro rata Capital Contribution
shall be adjusted to a fraction the numerator of which is equal to the sum of
(a) the Deemed Partnership Interest Value of such Limited Partner (computed as
of the Business Day immediately preceding the Adjustment Date) plus (b) the
amount of additional Capital Contributions (such amount being equal to the
amount of cash, if any, plus the Agreed Value of Contributed Property, if any,
so contributed), if any, made by such Partner to the Partnership in respect of
such Partnership Interest as of such Adjustment Date and the denominator of
which is equal to the sum of (I) the Deemed Value of the Partnership Interests
of all outstanding classes (computed as of the Business Day immediately
preceding such Adjustment Date) plus (II) the aggregate amount of the
additional Capital Contributions contributed to the Partnership on such
Adjustment Date in respect of such additional Partnership Interests. For
purposes of calculating a Partner's Percentage Interest pursuant to this
Section 4.2.B, cash Capital Contributions by a General Partner will be deemed
to equal the cash contributed by such General Partner plus (A) in the case of
cash contributions funded by an offering of any equity interests in or other
securities of the General Partner, the offering costs attributable to the cash
contributed to the Partnership, and (B) in the case of Units issued pursuant
to Section 7.5.E, an amount equal to the difference between the Value of the
Shares sold pursuant to any Share Option Plan and the net proceeds of such
sale.
C. Classes of Units. From and after the date hereof, subject to Section
4.2.A above, the Partnership shall have two classes of Units entitled "Class A
Units" and "Class B Units." Either Class A Units or Class B Units, at the
election of the General Partner, in its sole and absolute discretion, may be
issued to newly admitted Partners in exchange for the contribution by such
Partners of cash, real estate partnership interests, stock, notes or other
assets or consideration; provided, that all Units issued to Partners on the
Closing Date shall be Class A Units; and, provided further, that any Unit that
is not specifically designated by the General Partner as being of a particular
class shall be deemed to be a Class A Unit. Each Class B Unit shall be
converted automatically into a Class A Unit on the day immediately following
the Partnership Record Date for the Distribution Period (as defined in Section
5.1.C) in which such Class B Unit was issued, without the requirement for any
action by either the Partnership or the Partner holding the Class B Unit.
Except as otherwise expressly provided in this Agreement, holders of Class A
Units and Class B Units shall be entitled to vote the Partnership Interests
represented by such Units on all matters as to which the vote or consent of
the Partners is required.
D. Certain Restrictions on Issuances of Units or Other Partnership
Interests. Notwithstanding the foregoing, in no event may the General Partner
cause the Partnership to issue to Partners (including the General Partner and
its Affiliates) or other Persons any Units or other Partnership Interests (i)
if such issuance would cause the Partnership Interests of "benefit plan
investors" to become "significant," as those terms are used in 29 C.F.R.
(S)2510.3-101(f), or any successor regulation thereto, or would cause the
Partnership to become, with respect to any employee benefit plan subject to
Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA)
or, with respect to any plan defined in Section 4975(e) of the Code, a
"disqualified person" (as defined in Section 4975(e) of the Code), or (ii) if
such issuance would, in the opinion of counsel to the Partnership, cause any
portion of the assets of the Partnership to constitute assets of any ERISA
Plan Investor pursuant to 29 C.F.R. (S)2510.3-101, or any successor regulation
thereto.
SECTION 4.3 NO PREEMPTIVE RIGHTS
Except to the extent expressly granted by the Partnership pursuant to
another agreement, no Person shall have any preemptive, preferential or other
similar right with respect to (i) additional Capital Contributions or loans to
the Partnership or (ii) issuance or sale of any Units or other Partnership
Interests.
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SECTION 4.4 OTHER CONTRIBUTION PROVISIONS
If any Partner is admitted to the Partnership and is given a Capital Account
in exchange for services rendered to the Partnership, such transaction shall
be treated by the Partnership and the affected Partner as if the Partnership
had compensated such Partner in cash, and the Partner had contributed such
cash to the capital of the Partnership.
SECTION 4.5 NO INTEREST ON CAPITAL
No Partner shall be entitled to interest on its Capital Contributions or its
Capital Account.
ARTICLE V
Distributions
SECTION 5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS
A. General. The Partnership shall distribute at least quarterly an amount
equal to one hundred percent (100%) of Available Cash of the Partnership
during such quarter or shorter period to the Partners who are Partners on the
Partnership Record Date with respect to such quarter or shorter period as
provided in Sections 5.1.B, 5.1.C and 5.1.D. Notwithstanding anything to the
contrary contained herein, in no event may a Partner receive a distribution of
Available Cash with respect to a Unit for a quarter or shorter period if such
Partner is entitled to receive a distribution with respect to a Share for
which such Unit has been redeemed or exchanged. Unless otherwise expressly
provided for herein or in an agreement at the time a new class of Partnership
Interests is created in accordance with Article IV hereof, no Partnership
Interest shall be entitled to a distribution in preference to any other
Partnership Interest. The General Partner shall make such reasonable efforts,
as determined by it in its sole and absolute discretion and consistent with
the qualification of the General Partner Entity as a REIT, to distribute
Available Cash (a) to Limited Partners so as to preclude any such distribution
or portion thereof from being treated as part of a sale of property of the
Partnership by a Limited Partner under Section 707 of the Code or the
Regulations thereunder; provided that, the General Partner and the Partnership
shall not have liability to a Limited Partner under any circumstances as a
result of any distribution to a Limited Partner being so treated, and (b) to
the General Partner in an amount sufficient to enable the General Partner
Entity to pay shareholder dividends that will (1) satisfy the requirements for
qualification as a REIT under the Code and the Regulations (the "REIT
Requirements") of, and (2) avoid any federal income or excise tax liability
for, the General Partner Entity.
B. Method. (i) Each holder of Partnership Interests that is entitled to any
preference in distribution shall be entitled to a distribution in accordance
with the rights of any such class of Partnership Interests (and, within such
class, pro rata in proportion to the respective Percentage Interests in such
class on such Partnership Record Date); and
(ii) To the extent there is Available Cash remaining after the payment of
any preference in distribution in accordance with the foregoing clause (i),
with respect to Partnership Interests that are not entitled to any preference
in distribution, pro rata to each such class in accordance with the terms of
such class as set forth in this Agreement or otherwise established by the
General Partner pursuant to Section 4.2 (and, within each such class, pro rata
in proportion to the respective Percentage Interests in such class on such
Partnership Record Date).
C. Distributions When Class B Units Are Outstanding. If for any quarter or
shorter period with respect to which a distribution is to be made (a
"Distribution Period") Class B Units are outstanding on the Partnership Record
Date for such Distribution Period, the General Partner shall allocate the
Available Cash with respect to such Distribution Period available for
distribution with respect to the Class A Units and Class B Units collectively
between the Partners who are holders of Class A Units ("Class A") and the
Partners who are holders of Class B Units ("Class B") as follows:
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(1) Class A shall receive that portion of the Available Cash (the "Class
A Share") determined by multiplying the amount of Available Cash by the
following fraction:
A x Y
------------
(A x Y)+(B x X)
(2) Class B shall receive that portion of the Available Cash (the "Class
B Share") determined by multiplying the amount of Available Cash by the
following fraction:
B x X
------------
(A x Y)+(B x X)
(3) For purposes of the foregoing formulas, (i) "A" equals the number of
Class A Units outstanding on the Partnership Record Date for such
Distribution Period; (ii) "B" equals the number of Class B Units
outstanding on the Partnership Record Date for such Distribution Period;
(iii) "Y" equals the number of days in the Distribution Period; and (iv)
"X" equals the number of days in the Distribution Period for which the
Class B Units were issued and outstanding.
The Class A Share shall be distributed pro rata among Partners holding Class
A Units on the Partnership Record Date for the Distribution Period in
accordance with the number of Class A Units held by each Partner on such
Partnership Record Date; provided that, in no event may a Partner receive a
distribution of Available Cash with respect to a Class A Unit if a Partner is
entitled to receive a distribution with respect to a Share for which such
Class A Unit has been redeemed or exchanged. The Class B Share shall be
distributed pro rata among the Partners holding Class B Units on the
Partnership Record Date for the Distribution Period in accordance with the
number of Class B Units held by each Partner on such Partnership Record Date.
In no event shall any Class B Units be entitled to receive any distribution of
Available Cash for any Distribution Period ending prior to the date on which
such Class B Units are issued.
D. Distributions When Class B Units Have Been Issued on Different Dates. If
Class B Units which have been issued on different dates are outstanding on the
Partnership Record Date for any Distribution Period, then the Class B Units
issued on each particular date shall be treated as a separate series of Units
for purposes of making the allocation of Available Cash for such Distribution
Period among the holders of Units (and the formula for making such allocation,
and the definitions of variables used therein, shall be modified accordingly).
Thus, for example, if two series of Class B Units are outstanding on the
Partnership Record Date for any Distribution Period, the allocation formula
for each series, "Series B\\1\\" and "Series B\\2\\" would be as follows:
(1) Series B\\1\\ shall receive that portion of the Available Cash
determined by multiplying the amount of Available Cash by the following
fraction:
B\\1\\ x X\\1\\
-------------------------
(A x Y)+(B\\1\\ x X\\1\\ )+(B\\2\\ x X\\2\\ )
(2) Series B\\2\\ shall receive that portion of the Available Cash
determined by multiplying the amount of Available Cash by the following
fraction:
B\\2\\ x X\\2\\
-------------------------
(A x Y)+(B\\1\\ x X\\1\\ )+(B\\2\\ x X\\2\\ )
(3) For purposes of the foregoing formulas the definitions set forth in
Section 5.1.C.3 remain the same except that (i) "B\\1\\" equals the number of
Units in Series B\\1\\ outstanding on the Partnership Record Date for such
Distribution Period; (ii) "B\\2\\" equals the number of Units in Series B\\2\\
outstanding on the Partnership Record Date for such Distribution Period;
(iii) "X\\1\\" equals the number of days in the Distribution Period for which
the Units in Series B\\1\\ were issued and outstanding; and (iv) "X\\2\\"
equals the number of days in the Distribution Period for which the Units in
Series B\\2\\ were issued and outstanding.
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SECTION 5.2 AMOUNTS WITHHELD
All amounts withheld pursuant to the Code or any provisions of any state or
local tax law and Section 10.5 with respect to any allocation, payment or
distribution to the General Partner, the Limited Partners or Assignees shall
be treated as amounts distributed to the General Partner, Limited Partners or
Assignees, as the case may be, pursuant to Section 5.1 for all purposes under
this Agreement.
SECTION 5.3 DISTRIBUTIONS UPON LIQUIDATION
Proceeds from a Terminating Capital Transaction shall be distributed to the
Partners in accordance with Section 14.2.A.
SECTION 5.4 REVISIONS TO REFLECT ISSUANCE OF PARTNERSHIP INTERESTS
If the Partnership issues Partnership Interests to the General Partner or
any Additional Limited Partner pursuant to Article IV hereof, the General
Partner shall make such revisions to this Article V and Exhibit A as it deems
necessary to reflect the issuance of such additional Partnership Interests
without the requirement for any other consents or approvals of any other
Partner.
ARTICLE VI
Allocations
SECTION 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit B) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
A. Net Income. After giving effect to the special allocations set forth in
Section 1 of Exhibit C, Net Income shall be allocated (i) first, to the
General Partner to the extent that Net Losses previously allocated to the
General Partner pursuant to the last sentence of Section 6.1.B exceed Net
Income previously allocated to the General Partner pursuant to this clause (i)
of Section 6.1.A, (ii) second, to the holders of any Partnership Interests
that are entitled to any preference in distribution in accordance with the
rights of any such class of Partnership Interests until each such Partnership
Interest has been allocated, on a cumulative basis pursuant to this clause
(ii), Net Income equal to the amount of distributions received which are
attributable to the preference of such class of Partnership Interests (and,
within such class, pro rata in proportion to the respective Percentage
Interests in such class as of the last day of the period for which such
allocation is being made) and (iii) third, with respect to Partnership
Interests that are not entitled to any preference in the allocation of Net
Income, pro rata to each such class in accordance with the terms of such class
as set forth in this Agreement or otherwise established by the General Partner
pursuant to Section 4.2 (and, within such class, pro rata in proportion to the
respective Percentage Interests in such class as of the last day of the period
for which such allocation is being made).
B. Net Losses. After giving effect to the special allocations set forth in
Section 1 of Exhibit C, Net Losses shall be allocated (i) first, to the
holders of any Partnership Interests that are entitled to any preference in
distribution in accordance with the rights of any such class of Partnership
Interests to the extent that any prior allocations of Net Income to such class
of Partnership Interests pursuant to Section 6.1.A (ii) exceed, on a
cumulative basis, distributions with respect to such Partnership Interests
pursuant to clause (i) of Section 5.1.B (and, within such class, pro rata in
proportion to the respective Percentage Interests in such class as of the last
day of the period for which such allocation is being made) and (ii) second,
with respect to classes of Partnership Interests that are not entitled to any
preference in distribution, pro rata to each such class in accordance with the
terms of such class as set forth in this Agreement or otherwise established by
the General Partner pursuant to Section 4.2 (and, within such class, pro rata
in proportion to the respective Percentage Interests in such class as of the
last day of the period for which such allocation is being made); provided that
Net Losses shall not be allocated to any Limited Partner pursuant to this
Section 6.1.B to the extent that such allocation would cause such Limited
Partner to have an Adjusted Capital Account Deficit (or increase any existing
Adjusted Capital Account Deficit) at the end of such taxable year (or portion
thereof). All Net Losses in excess of the limitations set forth in this
Section 6.1.B shall be allocated to the General Partner.
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C. Allocation of Nonrecourse Debt. For purposes of Regulation Section
1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership
in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii)
the total amount of Nonrecourse Built-in Gain shall be allocated by the
General Partner by taking into account the facts and circumstances relating to
each Partner's respective interest in the profits of the Partnership. For this
purpose, the General Partner shall have the sole and absolute discretion in
any fiscal year to allocate such excess Nonrecourse Liabilities among the
Partners in any manner permitted under Code Section 752 and the Regulations
thereunder.
D. Recapture Income. Any gain allocated to the Partners upon the sale or
other taxable disposition of any Partnership asset shall, to the extent
possible after taking into account other required allocations of gain pursuant
to Exhibit C, be characterized as Recapture Income in the same proportions and
to the same extent as such Partners have been allocated any deductions
directly or indirectly giving rise to the treatment of such gains as Recapture
Income.
SECTION 6.2 REVISIONS TO ALLOCATIONS TO REFLECT ISSUANCE OF PARTNERSHIP
INTERESTS
If the Partnership issues Partnership Interests to the General Partner or
any Additional Limited Partner pursuant to Article IV hereof, the General
Partner shall make such revisions to this Article VI and Exhibit A as it deems
necessary to reflect the terms of the issuance of such Partnership Interests,
including making preferential allocations to Classes of Partnership Interests
that are entitled thereto. Such revisions shall not require the consent or
approval of any other Partner.
ARTICLE VII
Management And Operations Of Business
SECTION 7.1 MANAGEMENT
A. Powers of the General Partner. Except as otherwise expressly provided in
this Agreement, all management powers over the business and affairs of the
Partnership are and shall be exclusively vested in the General Partner, and no
Limited Partner shall have any right to participate in or exercise control or
management power over the business and affairs of the Partnership. The General
Partner may not be removed by the Limited Partners with or without cause
(unless the Shares of the General Partner Entity corresponding to Class A
Units are not Publicly Traded, in which case the General Partner may be
removed with or without cause by Consent of Limited Partners holding
Percentage Interests that are more than fifty percent (50%) of the aggregate
Percentage Interest represented by all Limited Partnership Interests then
entitled to vote thereon (including for this purpose any such Limited
Partnership Interests held by the General Partner)). In addition to the powers
now or hereafter granted a general partner of a limited partnership under
applicable law or which are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to Section 7.11,
shall have full power and authority to do all things deemed necessary or
desirable by it to conduct the business of the Partnership, to exercise all
powers set forth in Section 3.2 and to effectuate the purposes set forth in
Section 3.1, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and borrowing
money to permit the Partnership to make distributions to its Partners in
such amounts as are required under Section 5.1.A or will permit the General
Partner Entity (so long as the General Partner Entity qualifies as a REIT)
to avoid the payment of any federal income tax (including, for this
purpose, any excise tax pursuant to Section 4981 of the Code) and to make
distributions to its shareholders sufficient to permit the General Partner
Entity to maintain its REIT status), the assumption or guarantee of, or
other contracting for, indebtedness and other liabilities, the issuance of
evidences of indebtedness (including the securing of same by mortgage, deed
of trust or other lien or encumbrance on the Partnership's assets) and the
incurring of any obligations the General Partner Entity deems necessary for
the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
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(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership
(including the exercise or grant of any conversion, option, privilege or
subscription right or other right available in connection with any assets
at any time held by the Partnership) or the merger or other combination of
the Partnership with or into another entity on such terms as the General
Partner deems proper;
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement and on any terms it sees fit, including, without limitation, the
financing of the conduct of the operations of the General Partner, the
Partnership or any of the Partnership's Subsidiaries, the lending of funds
to other Persons (including, without limitation, the Partnership's
Subsidiaries) and the repayment of obligations of the Partnership and its
Subsidiaries and any other Person in which the Partnership has an equity
investment and the making of capital contributions to its Subsidiaries;
(5) the management, operation, leasing, landscaping, repair, alteration,
demolition or improvement of any real property or improvements owned by the
Partnership or any Subsidiary of the Partnership or any Person in which the
Partnership has made a direct or indirect equity investment;
(6) the negotiation, execution, and performance of any contracts,
conveyances or other instruments that the General Partner considers useful
or necessary to the conduct of the Partnership's operations or the
implementation of the General Partner's powers under this Agreement,
including contracting with contractors, developers, consultants,
accountants, legal counsel, other professional advisors and other agents
and the payment of their expenses and compensation out of the Partnership's
assets;
(7) the mortgage, pledge, encumbrance or hypothecation of any assets of
the Partnership, and the use of the assets of the Partnership (including,
without limitation, cash on hand) for any purpose consistent with the terms
of this Agreement and on any terms it sees fit, including, without
limitation, the financing of the conduct or the operations of the General
Partner or the Partnership, the lending of funds to other Persons
(including, without limitation, any Subsidiaries of the Partnership) and
the repayment of obligations of the Partnership, any of its Subsidiaries
and any other Person in which it has an equity investment;
(8) the distribution of Partnership cash or other Partnership assets in
accordance with this Agreement;
(9) the holding, managing, investing and reinvesting of cash and other
assets of the Partnership;
(10) the collection and receipt of revenues and income of the
Partnership;
(11) the selection, designation of powers, authority and duties and the
dismissal of employees of the Partnership (including, without limitation,
employees having titles such as "president," "vice president," "secretary"
and "treasurer") and agents, outside attorneys, accountants, consultants
and contractors of the Partnership and the determination of their
compensation and other terms of employment or hiring;
(12) the maintenance of such insurance for the benefit of the Partnership
and the Partners as it deems necessary or appropriate;
(13) the formation of, or acquisition of an interest (including non-
voting interests in entities controlled by Affiliates of the Partnership or
third parties) in, and the contribution of property to, any further limited
or general partnerships, joint ventures, limited liability companies or
other relationships that it deems desirable (including, without limitation,
the acquisition of interests in, and the contributions of funds or property
to, or making of loans to, its Subsidiaries and any other Person in which
it has an equity investment from time to time, or the incurrence of
indebtedness on behalf of such Persons or the guarantee of the obligations
of such Persons); provided that, as long as the General Partner has
determined to continue to qualify as a REIT, the Partnership may not engage
in any such formation, acquisition or contribution that would cause the
General Partner to fail to qualify as a REIT;
(14) the control of any matters affecting the rights and obligations of
the Partnership, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution or abandonment of any
claim, cause of action, liability, debt or damages due or owing to or from
the Partnership, the commencement or defense of suits, legal proceedings,
administrative proceedings, arbitrations or other forms of dispute
resolution, the representation of the Partnership in all suits or legal
proceedings,
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administrative proceedings, arbitrations or other forms of dispute
resolution, the incurring of legal expense and the indemnification of any
Person against liabilities and contingencies to the extent permitted by
law;
(15) the determination of the fair market value of any Partnership
property distributed in kind, using such reasonable method of valuation as
the General Partner may adopt;
(16) the exercise, directly or indirectly, through any attorney-in-fact
acting under a general or limited power of attorney, of any right,
including the right to vote, appurtenant to any assets or investment held
by the Partnership;
(17) the exercise of any of the powers of the General Partner enumerated
in this Agreement on behalf of or in connection with any Subsidiary of the
Partnership or any other Person in which the Partnership has a direct or
indirect interest, individually or jointly with any such Subsidiary or
other Person;
(18) the exercise of any of the powers of the General Partner enumerated
in this Agreement on behalf of any Person in which the Partnership does not
have any interest pursuant to contractual or other arrangements with such
Person;
(19) the making, executing and delivering of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties, indemnities,
waivers, releases or other legal instruments or agreements in writing
necessary or appropriate in the judgment of the General Partner for the
accomplishment of any of the powers of the General Partner enumerated in
this Agreement;
(20) the distribution of cash to acquire Units held by a Limited Partner
in connection with a Limited Partner's exercise of its Unit Redemption
Right under Section 8.6; and
(21) the amendment and restatement of Exhibit A to reflect accurately at
all times the Capital Contributions and Percentage Interests of the
Partners as the same are adjusted from time to time to the extent necessary
to reflect redemptions, Capital Contributions, the issuance of Units, the
admission of any Additional Limited Partner or any Substituted Limited
Partner or otherwise, which amendment and restatement, notwithstanding
anything in this Agreement to the contrary, shall not be deemed an
amendment of this Agreement, as long as the matter or event being reflected
in Exhibit A otherwise is authorized by this Agreement.
B. No Approval by Limited Partners. Except as provided in Section 7.11, each
of the Limited Partners agrees that the General Partner is authorized to
execute, deliver and perform the above-mentioned agreements and transactions
on behalf of the Partnership without any further act, approval or vote of the
Partners, notwithstanding any other provision of this Agreement, the Act or
any applicable law, rule or regulation, to the full extent permitted under the
Act or other applicable law. The execution, delivery or performance by the
General Partner or the Partnership of any agreement authorized or permitted
under this Agreement shall not constitute a breach by the General Partner of
any duty that the General Partner may owe the Partnership or the Limited
Partners or any other Persons under this Agreement or of any duty stated or
implied by law or equity.
C. Insurance. At all times from and after the date hereof, the General
Partner may cause the Partnership to obtain and maintain (i) casualty,
liability and other insurance on the properties of the Partnership and (ii)
liability insurance for the Indemnitees hereunder and (iii) such other
insurance as the General Partner, in its sole and absolute discretion,
determines to be necessary.
D. Working Capital and Other Reserves. At all times from and after the date
hereof, the General Partner may cause the Partnership to establish and
maintain working capital reserves in such amounts as the General Partner, in
its sole and absolute discretion, deems appropriate and reasonable from time
to time, including upon liquidation of the Partnership under Article XIII.
E. No Obligation to Consider Tax Consequences of Limited Partners. In
exercising its authority under this Agreement, the General Partner may, but
shall be under no obligation to, take into account the tax consequences to any
Partner (including the General Partner) of any action taken (or not taken) by
any of them.
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The General Partner is acting on behalf of the Partnership's Limited Partners
and its shareholders collectively. The General Partner and the Partnership
shall not have liability to a Limited Partner for monetary damages or
otherwise for losses sustained, liabilities incurred or benefits not derived
by such Limited Partner in connection with such decisions, provided that the
General Partner has acted in good faith and pursuant to its authority under
this Agreement.
SECTION 7.2 CERTIFICATE OF LIMITED PARTNERSHIP
The initial General Partner has previously filed the Certificate with the
Secretary of State of Delaware. To the extent that such action is determined
by the General Partner to be reasonable and necessary or appropriate, the
General Partner shall file amendments to and restatements of the Certificate
and do all the things to maintain the Partnership as a limited partnership (or
a partnership in which the limited partners have limited liability) under the
laws of the State of Delaware and each other state, the District of Columbia
or other jurisdiction in which the Partnership may elect to do business or own
property. Subject to the terms of Section 8.5.A(4), the General Partner shall
not be required, before or after filing, to deliver or mail a copy of the
Certificate or any amendment thereto to any Limited Partner. The General
Partner shall use all reasonable efforts to cause to be filed such other
certificates or documents as may be reasonable and necessary or appropriate
for the formation, continuation, qualification and operation of a limited
partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware and any other state, the District of
Columbia or other jurisdiction in which the Partnership may elect to do
business or own property.
SECTION 7.3 TITLE TO PARTNERSHIP ASSETS
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partners, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner or one or more nominees, as the General
Partner may determine, including Affiliates of the General Partner. The
General Partner hereby declares and warrants that any Partnership assets for
which legal title is held in the name of the General Partner or any nominee or
Affiliate of the General Partner shall be held by that entity for the use and
benefit of the Partnership in accordance with the provisions of this
Agreement. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which legal
title to such Partnership assets is held.
SECTION 7.4 REIMBURSEMENT OF THE GENERAL PARTNER
A. No Compensation. Except as provided in this Section 7.4 and elsewhere in
this Agreement (including the provisions of Articles V and VI regarding
distributions, payments and allocations to which it may be entitled), the
General Partner shall not receive payment from the Partnership or otherwise be
compensated for its services as general partner of the Partnership.
B. Responsibility for Partnership and General Partner Expenses. The
Partnership shall be responsible for and shall pay all expenses relating to
the Partnership's organization, the ownership of its assets and its operations
and the Partnership shall be responsible for and shall pay or reimburse all
expenses and discharge all liabilities of any nature whatsoever that the
General Partner may incur (including, without limitation, expenses related to
the operations of the General Partner and to the management and administration
of any Subsidiaries of the General Partner permitted under Section 7.5.A or
the Partnership or Subsidiaries of the Partnership, such as auditing expenses
and filing fees); provided that, (i) the amount of any such reimbursement
shall be reduced by (x) any interest earned by the General Partner with
respect to bank accounts or other instruments or accounts held by it on behalf
of the Partnership as permitted in Section 7.5.A (which interest is considered
to belong to the Partnership and shall be paid over to the Partnership to the
extent not applied to reimburse the General Partner for expenses hereunder);
and (y) any amount derived by the General Partner from any investments
permitted in Section 7.5.A; (ii) the Partnership shall not be responsible for
any taxes that the General Partner would not have been required to pay if it
qualified as a REIT for federal income tax purposes or any taxes imposed on
the
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General Partner by reason of its failure to distribute to its shareholders an
amount equal to its taxable income; (iii) the Partnership shall not be
responsible for expenses or liabilities incurred by the General Partner in
connection with any business or assets of the General Partner other than its
ownership of Partnership Interests or operation of the business of the
Partnership or ownership of interest in Qualified REIT Subsidiaries to the
extent permitted in Section 7.5.A; and (iv) the Partnership shall not be
responsible for any expenses or liabilities of the General Partner that are
excluded from the scope of the indemnification provisions of Section 7.7.A by
reason of the provisions of clause (i), (ii) or (iii) thereof. The General
Partner shall determine in good faith the amount of expenses incurred by it
related to the ownership of Partnership Interests or operation of, or for the
benefit of, the Partnership. If certain expenses are incurred that are related
both to the ownership of Partnership Interests or operation of, or for the
benefit of the Partnership and to the ownership of other assets (other than
Qualified REIT Subsidiaries as permitted under Section 7.7.A) or the operation
of other businesses, such expenses will be allocated to the Partnership and
such other entities (including the General Partner) owning such other assets
or businesses in such a manner as the General Partner in its sole and absolute
discretion deems fair and reasonable. Such reimbursements shall be in addition
to any reimbursement to the General Partner pursuant to Section 10.3.C and as
a result of indemnification pursuant to Section 7.7. All payments and
reimbursements hereunder shall be characterized for federal income tax
purposes as expenses of the Partnership incurred on its behalf, and not as
expenses of the General Partner.
C. Partnership Interest Issuance Expenses. The General Partner shall also be
reimbursed for all expenses it incurs relating to any issuance of Partnership
Interests, Shares, Debt of the Partnership or Funding Debt of the General
Partner or rights, options, warrants or convertible or exchangeable securities
pursuant to Article IV (including, without limitation, all costs, expenses,
damages and other payments resulting from or arising in connection with
litigation related to any of the foregoing), all of which expenses are
considered by the Partners to constitute expenses of, and for the benefit of,
the Partnership.
D. Purchases of Shares by the General Partner. If the General Partner
exercises its rights under the Declaration of Trust to purchase Shares or
otherwise elects to purchase from its shareholders Shares in connection with a
share repurchase or similar program or for the purpose of delivering such
Shares to satisfy an obligation under any dividend reinvestment or equity
purchase program adopted by the General Partner, any employee equity purchase
plan adopted by the General Partner or any similar obligation or arrangement
undertaken by the General Partner in the future, the purchase price paid by
the General Partner for those Shares and any other expenses incurred by the
General Partner in connection with such purchase shall be considered expenses
of the Partnership and shall be reimbursable to the General Partner, subject
to the conditions that: (i) if those Shares subsequently are to be sold by the
General Partner, the General Partner shall pay to the Partnership any proceeds
received by the General Partner for those Shares (provided that a transfer of
Shares for Units pursuant to Section 8.6 would not be considered a sale for
such purposes), and (ii) if such Shares are not retransferred by the General
Partner within thirty (30) days after the purchase thereof, the General
Partner shall cause the Partnership to cancel a number of Units (rounded to
the nearest whole Unit) held by the General Partner equal to the product
attained by multiplying the number of those Shares by a fraction, the
numerator of which is one and the denominator of which is the Conversion
Factor, which Units shall be treated as having been redeemed by the
Partnership for the payment made by the Partnership to the General Partner
with respect to the corresponding Shares.
E. Reimbursement not a Distribution. Except as set forth in the succeeding
sentence, if and to the extent any reimbursement made pursuant to this Section
7.4 is determined for federal income tax purposes not to constitute a payment
of expenses of the Partnership, the amount so determined shall constitute a
guaranteed payment with respect to capital within the meaning of Section
707(c) of the Code, shall be treated consistently therewith by the Partnership
and all Partners and shall not be treated as a distribution for purposes of
computing the Partners' Capital Accounts. Amounts deemed paid by the
Partnership to the General Partner in connection with the redemption of Units
pursuant to clause (ii) of subparagraph (D) above shall be treated as a
distribution for purposes of computing the Partner's Capital Accounts.
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SECTION 7.5 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER; RELATIONSHIP OF SHARES
TO UNITS; FUNDING DEBT
A. General. Without the Consent of the Outside Limited Partners, the General
Partner shall not, directly or indirectly, enter into or conduct any business
other than in connection with the ownership, acquisition and disposition of
Partnership Interests as a General Partner or Limited Partner and the
management of the business of the Partnership and such activities as are
incidental thereto. Without the Consent of the Outside Limited Partners, the
assets of the General Partner shall be limited to Partnership Interests and
permitted debt obligations of the Partnership (as contemplated by Section
7.5.F), so that Shares and Units are completely fungible except as otherwise
specifically provided herein; provided, that the General Partner shall be
permitted to hold such bank accounts or similar instruments or accounts in its
name as it deems necessary to carry out its responsibilities and purposes as
contemplated under this Agreement and its organizational documents (provided
that accounts held on behalf of the Partnership to permit the General Partner
to carry out its responsibilities under this Agreement shall be considered to
belong to the Partnership and the interest earned thereon shall, subject to
Section 7.4.B, be applied for the benefit of the Partnership); and, provided
further, that the General Partner shall be permitted to acquire, directly or
through a Qualified REIT Subsidiary or limited liability company, up to a one
percent (1%) equity interest in any partnership or limited liability company
at least ninety-nine percent (99%) of the equity of which is owned, directly
or indirectly, by the Partnership so that for every $1 distributed to the
General Partner or its Subsidiary at least $99 is distributed to the
Partnership. The General Partner and any of its Affiliates may acquire Limited
Partnership Interests and shall be entitled to exercise all rights of a
Limited Partner relating to such Limited Partnership Interests.
B. Repurchase of Shares. If the General Partner exercises its rights under
the Declaration of Trust to purchase Shares or otherwise elects to purchase
from its shareholders Shares, then the General Partner shall cause the
Partnership to purchase from the General Partner that number of Units of the
appropriate class equal to the product obtained by multiplying the number of
Shares purchased by the General Partner times a fraction, the numerator of
which is one and the denominator of which is the Conversion Factor, on the
same terms and for the same aggregate price that the General Partner purchased
such Shares.
C. Forfeiture of Shares. If the Partnership or the General Partner acquires
Shares as a result of the forfeiture of such Shares under a restricted share,
share bonus or any other similar share plan, then the General Partner shall
cause the Partnership to cancel, without payment of any consideration to the
General Partner, that number of Units equal to the number of Shares so
acquired, and, if the Partnership acquired such Shares, it shall transfer such
Shares to the General Partner for cancellation.
D. Issuances of Shares. After the date hereof, the General Partner shall not
grant, award or issue any additional Shares (other than Shares issued pursuant
to Section 8.6 hereof or pursuant to a dividend or distribution (including any
share split) of Shares to all of its shareholders that results in an
adjustment to the Conversion Factor pursuant to clause (i), (ii) or (iii) of
the definition thereof), other equity securities of the General Partner, New
Securities or Convertible Funding Debt unless (i) the General Partner shall
cause, pursuant to Section 4.2.A hereof, the Partnership to issue to the
General Partner Partnership Interests or rights, options, warrants or
convertible or exchangeable securities of the Partnership having designations,
preferences and other rights, all such that the economic interests are
substantially the same as those of such additional Shares, other equity
securities, New Securities or Convertible Funding Debt, as the case may be,
and (ii) the General Partner transfers to the Partnership, as an additional
Capital Contribution, the proceeds from the grant, award or issuance of such
additional Shares, other equity securities, New Securities or Convertible
Funding Debt, as the case may be, or from the exercise of rights contained in
such additional Shares, other equity securities, New Securities or Convertible
Funding Debt, as the case may be. Without limiting the foregoing, the General
Partner is expressly authorized to issue additional Shares, other equity
securities, New Securities or Convertible Funding Debt, as the case may be,
for less than fair market value, and the General Partner is expressly
authorized, pursuant to Section 4.2.A hereof, to cause the Partnership to
issue to the General Partner corresponding Partnership Interests (for example,
and not by way of limitation, the issuance of Shares and corresponding Units
pursuant to a share purchase plan providing for purchases of Shares, either by
employees or shareholders, at a discount from fair market value or pursuant to
employee share options that have an exercise price that is less than the fair
market
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value of the Shares, either at the time of issuance or at the time of
exercise), as long as (a) the General Partner concludes in good faith that
such issuance is in the interests of the General Partner and the Partnership
and (b) the General Partner transfers all proceeds from any such issuance or
exercise to the Partnership as an additional Capital Contribution.
E. Share Option Plan. If at any time or from time to time, the General
Partner sells Shares pursuant to any Share Option Plan, the General Partner
shall transfer the net proceeds of the sale of such Shares to the Partnership
as an additional Capital Contribution in exchange for an amount of additional
Units equal to the number of Shares so sold divided by the Conversion Factor.
F. Funding Debt. The General Partner may incur a Funding Debt, including,
without limitation, a Funding Debt that is convertible into Shares or
otherwise constitutes a class of New Securities ("Convertible Funding Debt"),
subject to the condition that the General Partner lend to the Partnership the
net proceeds of such Funding Debt; provided, that Convertible Funding Debt
shall be issued pursuant to Section 7.5.D above; and, provided further, that
the General Partner shall not be obligated to lend the net proceeds of any
Funding Debt to the Partnership in a manner that would be inconsistent with
the General Partner's ability to remain qualified as a REIT. If the General
Partner enters into any Funding Debt, the loan to the Partnership shall be on
comparable terms and conditions, including interest rate, repayment schedule,
costs and expenses and other financial terms, as are applicable with respect
to or incurred in connection with such Funding Debt.
SECTION 7.6 TRANSACTIONS WITH AFFILIATES
A. Transactions with Certain Affiliates. Except as expressly permitted by
this Agreement with respect to any non-arms'-length transaction with an
Affiliate, the Partnership shall not, directly or indirectly, sell, transfer
or convey any property to, or purchase any property from, or borrow funds
from, or lend funds to, any Partner or any Affiliate of the Partnership or the
General Partner that is not also a Subsidiary of the Partnership, except
pursuant to transactions that are on terms that are fair and reasonable and no
less favorable to the Partnership than would be obtained from an unaffiliated
third party.
B. Conflict Avoidance. The General Partner is expressly authorized to enter
into, in the name and on behalf of the Partnership, a noncompetition
arrangement and other conflict avoidance agreements with various Affiliates of
the Partnership and the General Partner, and OpCo and Marriott International
and any Affiliates thereof on such terms as the General Partner, in its sole
and absolute discretion, believes is advisable.
C. Benefit Plans Sponsored by the Partnership. The General Partner, in its
sole and absolute discretion and without the approval of the Limited Partners,
may propose and adopt on behalf of the Partnership employee benefit plans
funded by the Partnership for the benefit of employees of the General Partner,
the Partnership, Subsidiaries of the Partnership or any Affiliate of any of
them.
SECTION 7.7 INDEMNIFICATION
A. General. The Partnership shall indemnify each Indemnitee to the fullest
extent provided by the Act from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including, without
limitation, attorneys' fees and other legal fees and expenses), judgments,
fines, settlements and other amounts arising from or in connection with any
and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, incurred by the Indemnitee and relating to
the Partnership or the General Partner or the operation of, or the ownership
of property by, any of them as set forth in this Agreement in which any such
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established by a final determination of a court of
competent jurisdiction that: (i) the act or omission of the Indemnitee 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
Indemnitee actually received an improper personal benefit in money, property
or services or (iii) in the case of any criminal proceeding, the Indemnitee
had reasonable cause to believe that the act or omission was unlawful. Without
limitation, the foregoing indemnity shall extend to any
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liability of any Indemnitee, pursuant to a loan guarantee, contractual
obligation for any indebtedness or other obligation or otherwise, for any
indebtedness of the Partnership or any Subsidiary of the Partnership
(including, without limitation, any indebtedness which the Partnership or any
Subsidiary of the Partnership has assumed or taken subject to), and the
General Partner is hereby authorized and empowered, on behalf of the
Partnership, to enter into one or more indemnity agreements consistent with
the provisions of this Section 7.7 in favor of any Indemnitee having or
potentially having liability for any such indebtedness. The termination of any
proceeding by judgment, order or settlement does not create a presumption that
the Indemnitee did not meet the requisite standard of conduct set forth in
this Section 7.7.A. The termination of any proceeding by conviction or upon a
plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, creates a rebuttable presumption that the
Indemnitee acted in a manner contrary to that specified in this Section 7.7.A
with respect to the subject matter of such proceeding. Any indemnification
pursuant to this Section 7.7 shall be made only out of the assets of the
Partnership, and any insurance proceeds from the liability policy covering the
General Partner and any Indemnitee, and neither the General Partner nor any
Limited Partner shall have any obligation to contribute to the capital of the
Partnership or otherwise provide funds to enable the Partnership to fund its
obligations under this Section 7.7.
B. Advancement of Expenses. Reasonable expenses incurred or expected to be
incurred by an Indemnitee shall be paid or reimbursed by the Partnership in
advance of the final disposition of any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative made or
threatened against an Indemnitee upon receipt by the Partnership of (i) a
written affirmation by the Indemnitee of the Indemnitee's good faith belief
that the standard of conduct necessary for indemnification by the Partnership
as authorized in this Section 7.7.A has been met and (ii) a written
undertaking by or on behalf of the Indemnitee to repay the amount if it shall
ultimately be determined that the standard of conduct has not been met.
C. No Limitation of Rights. The indemnification provided by this Section 7.7
shall be in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partnership, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided
in a written agreement pursuant to which such Indemnitee is indemnified.
D. Insurance. The Partnership may purchase and maintain insurance on behalf
of the Indemnitees and such other Persons as the General Partner shall
determine against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such Indemnitee or Person against such liability under the
provisions of this Agreement.
E. Benefit Plan Fiduciary. For purposes of this Section 7.7, (i) excise
taxes assessed on an Indemnitee, or for which the Indemnitee is otherwise
found liable, in connection with an ERISA Plan Investor pursuant to applicable
law shall constitute fines within the meaning of this Section 7.7 and (ii)
actions taken or omitted by the Indemnitee in connection with an ERISA Plan
Investor in the performance of its duties shall be deemed to be for a purpose
which is not opposed to the best interests of the Partnership.
F. No Personal Liability for Partners. In no event may an Indemnitee subject
any of the Partners to personal liability by reason of the indemnification
provisions set forth in this Agreement.
G. Interested Transactions. An Indemnitee shall not be denied
indemnification in whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the
terms of this Agreement.
H. Benefit. The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their employees, officers, directors, trustees, heirs,
successors, assigns and administrators and shall not be deemed to create any
rights for the benefit of any other Persons. Any amendment, modification or
repeal of this Section 7.7, or any provision hereof, shall be prospective only
and shall not in any way affect the limitation on the Partnership's
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liability to any Indemnitee under this Section 7.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or related to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
I. Indemnification Payments Not Distributions. If and to the extent any
payments to the General Partner pursuant to this Section 7.7 constitute gross
income to the General Partner (as opposed to the repayment of advances made on
behalf of the Partnership), such amounts shall constitute guaranteed payments
within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners, and shall not be
treated as distributions for purposes of computing the Partners' Capital
Accounts.
J. Exception to Indemnification. Notwithstanding anything to the contrary in
this Agreement, the General Partner shall not be entitled to indemnification
hereunder for any loss, claim, damage, liability or expense for which the
General Partner is obligated to indemnify the Partnership under any other
agreement between the General Partner and the Partnership.
SECTION 7.8 LIABILITY OF THE GENERAL PARTNER
A. General. Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership, any Partners or any Assignees 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 unless the General Partner acted, or
failed to act, in bad faith and the act or omission was material to the matter
giving rise to the loss, liability or benefit not derived.
B. Obligation to Consider Interests of General Partner Entity. The Limited
Partners expressly acknowledge that the General Partner, in considering
whether to dispose of any of the Partnership assets, shall take into account
the tax consequences to the General Partner Entity of any such disposition and
shall have no liability whatsoever to the Partnership or any Limited Partner
for decisions that are based upon or influenced by such tax consequences.
C. No Obligation to Consider Separate Interests of Limited Partners or
Shareholders. The Limited Partners expressly acknowledge that the General
Partner is acting on behalf of the Partnership and the General Partner's
shareholders collectively, that the General Partner is under no obligation to
consider the separate interests of the Limited Partners (including, without
limitation, the tax consequences to Limited Partners or Assignees) in deciding
whether to cause the Partnership to take (or decline to take) any actions, and
that the General Partner shall not be liable for monetary damages for losses
sustained, liabilities incurred or benefits not derived by Limited Partners in
connection with such decisions, provided that the General Partner has acted in
good faith and pursuant to its authority under this Agreement.
D. Actions of Agents. Subject to its obligations and duties as General
Partner set forth in Section 7.1.A, the General Partner may exercise any of
the powers granted to it by this Agreement and perform any of the duties
imposed upon it hereunder either directly or by or through its agents. The
General Partner shall not be responsible for any misconduct or negligence on
the part of any such agent appointed by the General Partner in good faith.
E. Effect of Amendment. Notwithstanding any other provision contained
herein, any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
SECTION 7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNER
A. Reliance on Documents. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order,
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bond, debenture or other paper or document believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties.
B. Reliance on Advisors. The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisers selected by it, and any act taken or omitted to be
taken in reliance upon the opinion of such Persons as to matters which the
General Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or omitted
in good faith and in accordance with such opinion.
C. Action Through Agents. The General Partner shall have the right, in
respect of any of its powers or obligations hereunder, to act through any of
its duly authorized officers and a duly appointed attorney or attorneys-in-
fact. Each such attorney shall, to the extent provided by the General Partner
in the power of attorney, have full power and authority to do and perform all
and every act and duty which is permitted or required to be done by the
General Partner hereunder.
D. Actions to Maintain REIT Status or Avoid Taxation of the General Partner
Entity. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership
undertaken in the good faith belief that such action or omission is necessary
or advisable in order (i) to protect the ability of the General Partner Entity
to continue to qualify as a REIT or (ii) to allow the General Partner Entity
to avoid incurring any liability for taxes under Section 857 or 4981 of the
Code, is expressly authorized under this Agreement and is deemed approved by
all of the Limited Partners.
SECTION 7.10 RELIANCE BY THIRD PARTIES
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any other
Partner or Person, to encumber, sell or otherwise use in any manner any and
all assets of the Partnership, to enter into any contracts on behalf of the
Partnership and to take any and all actions on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner as if the
General Partner were the Partnership's sole party in interest, both legally
and beneficially. Each Limited Partner hereby waives any and all defenses or
other remedies which may be available against such Person to contest, negate
or disaffirm any action of the General Partner in connection with any such
dealing, in each case except to the extent that such action does or purports
to impose liability on the Limited Partner. In no event shall any Person
dealing with the General Partner or its representatives be obligated to
ascertain that the terms of this Agreement have been complied with or to
inquire into the necessity or expedience of any act or action of the General
Partner or its representatives. Each and every certificate, document or other
instrument executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (i) at the time of the execution
and delivery of such certificate, document or instrument, this Agreement was
in full force and effect, (ii) the Person executing and delivering such
certificate, document or instrument was duly authorized and empowered to do so
for and on behalf of the Partnership, and (iii) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
SECTION 7.11 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY
A. Consent Required. The General Partner may not take any action in
contravention of an express prohibition or limitation of this Agreement
without the written Consent of (i) all Partners adversely affected or (ii)
such lower percentage of the Limited Partnership Interests as may be
specifically provided for under a provision of this Agreement or the Act. THE
PRECEDING SENTENCE SHALL NOT APPLY TO ANY LIMITATION OR PROHIBITION IN THIS
AGREEMENT THAT EXPRESSLY AUTHORIZES THE GENERAL PARTNER TO TAKE ACTION (EITHER
IN ITS DISCRETION OR IN SPECIFIED CIRCUMSTANCES) SO LONG AS THE GENERAL
PARTNER ACTS WITHIN THE SCOPE OF SUCH AUTHORITY.
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B. Sale of All Assets of the Partnership. Except as provided in Article XIV
and subject to the provisions of Section 7.11.C, the General Partner may not,
directly or indirectly, cause the Partnership to sell, exchange, transfer or
otherwise dispose of all or substantially all of the Partnership's assets in a
single transaction or a series of related transactions (including by way of
merger (including a triangular merger), consolidation or other combination
with any other Persons) without the Consent of Partners holding Percentage
Interests that are more than fifty percent (50%) of the aggregate Percentage
Interest represented by all Partnership Interests then entitled to vote
thereon (including for this purpose any such Partnership Interests held by the
General Partner).
C. Voting Rights of Limited Partners During the Initial Holding Period.
(1) During the Initial Holding Period, if a vote of the shareholders of
the General Partner is required, then (i) a sale of all or substantially
all of the assets of the Partnership, (ii) a merger involving the
Partnership and (iii) any issuance of Units in connection with an issuance
of Common Shares representing 20% or more of the outstanding Common Shares
of the General Partner which would require shareholder approval under the
rules of the New York Stock Exchange, would require the approval of a
majority of all outstanding Units (or, in the case of clause (iii), a
majority of the Units that are voted, provided that at least a majority of
the Units are voted), including Units held by the General Partner, voting
as a single class with the General Partner voting its Units in the same
proportion as its shareholders vote.
(2) During the Initial Holding Period, any taxable sale or sales of
hotels representing more than 10% of the aggregate Appraised Value of the
hotels of any partnership the interests in which were contributed to the
Partnership in exchange for Units would require, in addition to any other
approval requirements, the approval of a majority of all outstanding Units
held by Persons who formerly were limited partners of such partnership,
voting as a separate class.
SECTION 7.12 LOANS BY THIRD PARTIES
The Partnership may incur Debt, or enter into similar credit, guarantee,
financing or refinancing arrangements for any purpose (including, without
limitation, in connection with any acquisition of property) with any Person
that is not the General Partner upon such terms as the General Partner
determines appropriate (subject to Section 7.6); provided that, the
Partnership shall not incur any Debt that is recourse to the General Partner,
except to the extent otherwise agreed to by such General Partner in its sole
discretion.
ARTICLE VIII
Rights And Obligations Of Limited Partners
SECTION 8.1 LIMITATION OF LIABILITY
The Limited Partners shall have no liability under this Agreement except as
expressly provided in this Agreement, including Section 10.5 and Section 14.3,
or under the Act.
SECTION 8.2 MANAGEMENT OF BUSINESS
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of
the General Partner, the Partnership or any of their Affiliates, in their
capacity as such) shall take part in the operation, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
SECTION 8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS
Subject to Section 7.5 hereof, and subject to any agreements entered into
pursuant to Section 7.6.C hereof and to any other agreements entered into by a
Limited Partner or its Affiliates with the Partnership or a
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Subsidiary, any Limited Partner (other than the General Partner) and any
officer, director, employee, agent, trustee, Affiliate or shareholder of any
Limited Partner shall be entitled to and may have business interests and
engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct or indirect
competition with the Partnership. Neither the Partnership nor any Partners
shall have any rights by virtue of this Agreement in any business ventures of
any Limited Partner or Assignee. None of the Limited Partners nor any other
Person shall have any rights by virtue of this Agreement or the partnership
relationship established hereby in any business ventures of any other Person
(other than the General Partner to the extent expressly provided herein), and
such Person (other than the General Partner) shall have no obligation pursuant
to this Agreement to offer any interest in any such business ventures to the
Partnership, any Limited Partner or any such other Person, even if such
opportunity is of a character which, if presented to the Partnership, any
Limited Partner or such other Person, could be taken by such Person.
SECTION 8.4 RETURN OF CAPITAL
Except pursuant to the right of redemption set forth in Section 8.6, no
Limited Partner shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Partnership as provided herein. No
Limited Partner or Assignee shall have priority over any other Limited Partner
or Assignee either as to the return of Capital Contributions (except as
permitted by Section 4.2.A) or, except to the extent provided by Exhibit C or
as permitted by Sections 4.2.A, 5.1.B(i), 6.1.A(ii) and 6.1.B(i), or otherwise
expressly provided in this Agreement, as to profits, losses, distributions or
credits.
SECTION 8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP
A. General. In addition to other rights provided by this Agreement or by the
Act, and except as limited by Section 8.5.D, each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon written demand with a statement
of the purpose of such demand and at such Limited Partner's own expense:
(1) to obtain a copy of the most recent annual and quarterly reports
filed with the Securities and Exchange Commission by the General Partner
Entity pursuant to the Exchange Act;
(2) to obtain a copy of the Partnership's federal, state and local income
tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement, the Certificate and the
Declaration of Trust and all amendments thereto, together with executed
copies of all powers of attorney pursuant to which this Agreement, the
Certificate, the Declaration of Trust and all amendments thereto have been
executed; and
(5) to obtain true and full information regarding the amount of cash and
a description and statement of any other property or services contributed
by each Partner and which each Partner has agreed to contribute in the
future, and the date on which each became a Partner.
B. Notice of Conversion Factor. The Partnership shall promptly notify each
Limited Partner (i) upon request of the then current Conversion Factor and
(ii) of any changes to the Conversion Factor.
C. Notice of Extraordinary Transaction of the General Partner Entity. The
General Partner Entity shall not make any extraordinary distributions of cash
or property to its shareholders or effect a merger (including, without
limitation, a triangular merger), consolidation or other combination with or
into another Person, a sale of all or substantially all of its assets or any
other similar extraordinary transaction without providing written notice to
the Limited Partners of its intention to make such distribution or effect such
merger, consolidation, combination, sale or other extraordinary transaction at
least twenty (20) Business Days prior to the record date to determine equity
holders eligible to receive such distribution or to vote upon the approval of
such merger,
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sale or other extraordinary transaction (or, if no such record date is
applicable, at least twenty (20) Business Days before consummation of such
merger, sale or other extraordinary transaction), which notice shall describe
in reasonable detail the action to be taken. This provision for such notice
shall not be deemed (i) to permit any transaction that otherwise is prohibited
by this Agreement or requires a Consent of the Partners or (ii) to require a
Consent of the Limited Partners to a transaction that does not otherwise
require Consent under this Agreement. Each Limited Partner agrees, as a
condition to the receipt of: the notice pursuant hereto, to keep confidential
the information set forth therein until such time as the General Partner
Entity has made public disclosure thereof and to use such information during
such period of confidentiality solely for purposes of determining whether to
exercise the Unit Redemption Right; provided, however, that a Limited Partner
may disclose such information to its attorney, accountant and/or financial
advisor for purposes of obtaining advice with respect to such exercise so long
as such attorney, accountant and/or financial advisor agrees to receive and
hold such information subject to this confidentiality requirement.
D. Confidentiality. Notwithstanding any other provision of this Section 8.5,
the General Partner may keep confidential from the Limited Partners, for such
period of time as the General Partner determines in its sole and absolute
discretion to be reasonable, any information that (i) the General Partner
reasonably believes to be in the nature of trade secrets or other information
the disclosure of which the General Partner in good faith believes is not in
the best interests of the Partnership or could damage the Partnership or its
business or (ii) the Partnership is required by law or by agreements with
unaffiliated third parties to keep confidential, provided that this Section
8.5.D shall not affect the twenty (20) Business Day requirements set forth in
Section 8.5.C above.
SECTION 8.6 UNIT REDEMPTION RIGHT
A. General. (i) Subject to Section 8.6.C, Section 8.6.D and Section 8.6.E,
at any time on or after one year following the date of the initial issuance
thereof (which, in the event of the transfer of a Unit, shall be deemed to be
the date that the Unit was issued to the original recipient thereof for
purposes of this Section 8.6), the holder of a Unit (if other than the General
Partner or the General Partner Entity or any Subsidiary of either the General
Partner or the General Partner Entity) shall have the right (the "Unit
Redemption Right") to require the Partnership to redeem such Unit, with such
redemption to occur on the Specified Redemption Date and at a redemption price
equal to and in the form of the Cash Amount to be paid by the Partnership. Any
such Unit Redemption Right shall be exercised pursuant to a Notice of
Redemption delivered to the Partnership (with a copy to the General Partner)
by the Limited Partner who is exercising the Unit Redemption Right (the
"Redeeming Partner"). A Limited Partner may exercise the Unit Redemption Right
from time to time, without limitation as to frequency, with respect to part or
all of the Units that it owns, as selected by the Limited Partner, provided
that, a Limited Partner may not exercise the Unit Redemption Right for less
than one thousand (1,000) Units unless such Redeeming Partner then holds less
than one thousand (1,000) Units, in which event the Redeeming Partner must
exercise the Unit Redemption Right for all of the Units held by such Redeeming
Partner, and provided further that, with respect to a Limited Partner which is
an entity, such Limited Partner may exercise the Unit Redemption Right for
less than one thousand (1,000) Units without regard to whether or not such
Limited Partner is exercising: the Unit Redemption Right for all of the Units
held by such Limited Partner as long as such Limited Partner is exercising the
Unit Redemption Right on behalf of one or more of its equity owners in respect
of one hundred percent (100%) of such equity owners' interests in such Limited
Partner. For purposes hereof, a Class A Unit issued upon conversion of a Class
B Unit shall be deemed to have been issued when the Class B Unit was issued.
(ii) The Redeeming Partner shall have no right with respect to any Units so
redeemed to receive any distributions paid in respect of a Partnership Record
Date occurring after the Specified Redemption Date of such Units.
(iii) The Assignee of any Limited Partner may exercise the rights of such
Limited Partner pursuant to this Section 8.6, and such Limited Partner shall
be deemed to have assigned such rights to such Assignee and shall be bound by
the exercise of such rights by such Limited Partner's Assignee. In connection
with any exercise of such rights by such Assignee on behalf of such Limited
Partner, the Cash Amount shall be paid by the Partnership directly to such
Assignee and not to such Limited Partner.
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(iv) If the General Partner provides notice to the Limited Partners,
pursuant to Section 8.5.C hereof, the Unit Redemption Right shall be
exercisable, without regard to whether the Units have been outstanding for any
specified period, during the period commencing on the date on which the
General Partner provides such notice and ending on the record date to
determine shareholders eligible to receive such distribution or to vote upon
the approval of such merger, sale or other extraordinary transaction (or, if
no such record date is applicable, at least twenty (20) Business Days before
the consummation of such merger, sale or other extraordinary transaction). If
this subparagraph (iv) applies, the Specified Redemption Date is the date on
which the Partnership and the General Partner receive notice of exercise of
the Unit Redemption Right, rather than ten (10) Business Days after receipt of
the notice of redemption.
B. General Partner Assumption of Right. (i) If a Limited Partner has
delivered a Notice of Redemption, the General Partner may, in its sole and
absolute discretion (subject to the limitations on ownership and transfer of
Shares set forth in the Declaration of Trust) and upon providing written
notice to the Limited Partners at least three (3) Business Days in advance,
elect to assume directly and satisfy a Unit Redemption Right by paying to the
Redeeming Partner either the Cash Amount or the Shares Amount, as the General
Partner determines in its sole and absolute discretion (provided that, payment
of the Redemption Amount in the form of Shares shall be in Shares registered
for resale under Section 12 of the Exchange Act and listed for trading on the
exchange or national market on which the Shares are Publicly Traded, AND THE
ISSUANCE OF SHARES UPON REDEMPTION SHALL BE REGISTERED UNDER THE SECURITIES
ACT OR, AT THE ELECTION OF THE GENERAL PARTNER, RESALE OF THE SHARES ISSUED
UPON REDEMPTION SHALL BE REGISTERED (SO LONG AS THE REDEEMING PARTNER PROVIDES
ALL INFORMATION REQUIRED FOR SUCH REGISTRATION), and, provided further that,
if the Shares are not Publicly Traded at the time a Redeeming Partner
exercises its Unit Redemption Right, the Redemption Amount shall be paid only
in the form of the Cash Amount unless the Redeeming Partner, in its sole and
absolute discretion, consents to payment of the Redemption Amount in the form
of the Shares Amount), on the Specified Redemption Date, whereupon the General
Partner shall acquire the Units offered for redemption by the Redeeming
Partner and shall be treated for all purposes of this Agreement as the owner
of such Units. Unless the General Partner, in its sole and absolute
discretion, shall exercise its right to assume directly and satisfy the Unit
Redemption Right, the General Partner shall not have any obligation to the
Redeeming Partner or to the Partnership with respect to the Redeeming
Partner's exercise of the Unit Redemption Right. If the General Partner shall
exercise its right to satisfy the Unit Redemption Right in the manner
described in the first sentence of this Section 8.6.B and shall fully perform
its obligations in connection therewith, the Partnership shall have no right
or obligation to pay any amount to the Redeeming Partner with respect to such
Redeeming Partner's exercise of the Unit Redemption Right, and each of the
Redeeming Partner, the Partnership and the General Partner shall, for federal
income tax purposes, treat the transaction between the General Partner and the
Redeeming Partner as a sale of the Redeeming Partner's Units to the General
Partner. Nothing contained in this Section 8.6.B shall imply any right of the
General Partner to require any Limited Partner to exercise the Unit Redemption
Right afforded to such Limited Partner pursuant to Section 8.6.A.
(ii) If the General Partner determines to pay the Redeeming Partner the
Redemption Amount in the form of Shares, the total number of Shares to be paid
to the Redeeming Partner in exchange for the Redeeming Partner's Units shall
be the applicable Shares Amount. If this amount is not a whole number of
Shares, the Redeeming Partner shall be paid (i) that number of Shares which
equals the nearest whole number less than such amount plus (ii) an amount of
cash which the General Partner determines, in its reasonable discretion, to
represent the fair value of the remaining fractional Share which would
otherwise be payable to the Redeeming Partner.
(iii) Each Redeeming Partner agrees to execute such documents as the General
Partner may reasonably require in connection with the issuance of Shares upon
exercise of the Unit Redemption Right.
(iv) Any Shares issued in accordance with this Section 8.6.B will be duly
and validly authorized and will be validly issued, fully paid and
nonassessable and will not be subject to any preemptive rights.
C. Exceptions to Exercise of Unit Redemption Right. Notwithstanding the
provisions of Sections 8.6.A and 8.6.B, a Partner shall not be entitled to
exercise the Unit Redemption Right pursuant to Section 8.6.A if (but
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only as long as) the delivery of Shares to such Partner on the Specified
Redemption Date would be (i) prohibited under those portions of the
Declaration of Trust relating to restrictions on ownership and transfer of
Shares or (ii) prohibited under applicable federal or state securities laws or
regulations (in each case regardless of whether the General Partner would in
fact assume and satisfy the Unit Redemption Right).
D. No Liens on Units Delivered for Redemption. Each Limited Partner
covenants and agrees with the General Partner that all Units delivered for
redemption shall be delivered to the Partnership or the General Partner, as
the case may be, free and clear of all liens, and, notwithstanding anything
contained herein to the contrary, neither the General Partner nor the
Partnership shall be under any obligation to acquire Units which are or may be
subject to any liens. Each Limited Partner further agrees that, if any state
or local property transfer tax is payable as a result of the transfer of its
Units to the Partnership or the General Partner, such Limited Partner shall
assume and pay such transfer tax.
E. Additional Partnership Interests; Modification of Holding Period. If the
Partnership issues Partnership Interests to any Additional Limited Partner
pursuant to Article IV, the General Partner shall make such revisions to this
Section 8.6 as it determines are necessary to reflect the issuance of such
Partnership Interests (including setting forth any restrictions on the
exercise of the Unit Redemption Right with respect to such Partnership
Interests which differ from those set forth in this Agreement), provided that
no such revisions shall materially adversely affect the rights of any other
Limited Partner to exercise its Unit Redemption Rights without that Limited
Partner's prior written consent. In addition, the General Partner may, with
respect to any holder or holders of Units, at any time and from time to time,
as it shall determine in its sole discretion, reduce or waive the length of
the period prior to which such holder or holders may not exercise the Unit
Redemption Right.
ARTICLE IX
Books, Records, Accounting and Reports
SECTION 9.1 RECORDS AND ACCOUNTING
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including, without limitation, all books and records
necessary to provide to the Limited Partners any information, lists and copies
of documents required to be provided pursuant to Section 9.3. Any records
maintained by or on behalf of the Partnership in the regular course of its
business may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, micrographics or any other information storage device, provided
that the records so maintained are convertible into clearly legible written
form within a reasonable period of time. The books of the Partnership shall be
maintained, for financial and tax reporting purposes, on an accrual basis in
accordance with generally accepted accounting principles.
SECTION 9.2 FISCAL YEAR
The fiscal year of the Partnership shall end on the Friday falling closest
to December 31 of each year.
SECTION 9.3 REPORTS
A. Annual Reports. As soon as practicable, but in no event later than the
date on which the General Partner Entity mails its annual report to its equity
holders, the General Partner shall cause to be mailed to each Limited Partner
an annual report, as of the close of the most recently ended Partnership Year,
containing financial statements of the Partnership and its Subsidiaries, or of
the General Partner Entity if such statements are prepared solely on a
consolidated basis with the Partnership, for such Partnership Year, presented
in accordance with generally accepted accounting principles, such statements
to be audited by a nationally recognized firm of independent public
accountants selected by the General Partner Entity.
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B. Quarterly Reports. If and to the extent that the General Partner Entity
mails quarterly reports to its shareholders, as soon as practicable, but in no
event later than the date on such reports are mailed, the General Partner
Entity shall cause to be mailed to each Limited Partner a report containing
unaudited financial statements, as of the last day of such fiscal quarter, of
the Partnership, or of the General Partner Entity if such statements are
prepared solely on a consolidated basis with the Partnership, and such other
information as may be required by applicable law or regulation, or as the
General Partner determines to be appropriate.
C. General Partner Entity Communications to Equity Holders. The General
Partner shall cause to be mailed to each Limited Partner a copy of each
written report, proxy statement or other communication sent to holders of
Shares. Such materials will be sent to each Limited Partner on the same date
on which they are first sent to holders of Shares.
ARTICLE X
Tax Matters
SECTION 10.1 PREPARATION OF TAX RETURNS
The General Partner shall arrange for the preparation and timely filing of
all returns of Partnership income, gains, deductions, losses and other items
required of the Partnership for federal and state income tax purposes and
shall use all reasonable efforts to furnish, within ninety (90) days of the
close of each taxable year, the tax information reasonably required by Limited
Partners for federal and state income tax reporting purposes.
SECTION 10.2 TAX ELECTIONS
Except as otherwise provided herein, the General Partner shall, in its sole
and absolute discretion, determine whether to make any available election
pursuant to the Code (including, without limitation, the election under
Section 754 of the Code). The General Partner shall have the right to seek to
revoke any such election upon the General Partner's determination in its sole
and absolute discretion that such revocation is in the best interests of the
Partners.
SECTION 10.3 TAX MATTERS PARTNER
A. General. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6223(c)(3) of
the Code, upon receipt of notice from the IRS of the beginning of an
administrative proceeding with respect to the Partnership, the tax matters
partner shall furnish the IRS with the name, address, taxpayer identification
number and profit interest of each of the Limited Partners and any Assignees;
provided, however, that such information is provided to the Partnership by the
Limited Partners.
B. Powers. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any
administrative or judicial proceedings for the adjustment of Partnership
items required to be taken into account by a Partner for income tax
purposes (such administrative proceedings being referred to as a "tax
audit" and such judicial proceedings being referred to as "judicial
review"), and in the settlement agreement the tax matters partner may
expressly state that such agreement shall bind all Partners, except that
such settlement agreement shall not bind any Partner (i) who (within the
time prescribed pursuant to the Code and Regulations) files a statement
with the IRS providing that the tax matters partner shall not have the
authority to enter into a settlement agreement on behalf of such Partner or
(ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the
Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of
the Code);
(2) if a notice of a final administrative adjustment at the Partnership
level of any item required to be taken into account by a Partner for tax
purposes (a "final adjustment") is mailed to the tax matters partner, to
seek judicial review of such final adjustment, including the filing of a
petition for readjustment with the
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Tax Court or the filing of a complaint for refund with the United States
Claims Court or the District Court of the United States for the district in
which the Partnership's principal place of business is located;
(3) to intervene in any action brought by any other Partner for judicial
review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS at
any time and, if any part of such request is not allowed by the IRS, to
file an appropriate pleading (petition or complaint) for judicial review
with respect to such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to be taken
into account by a Partner for tax purposes, or an item affected by such
item; and
(6) to take any other action on behalf of the Partners of the Partnership
in connection with any tax audit or judicial review proceeding to the
extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax matters
partner in connection with any such proceeding, except to the extent required
by law, is a matter in the sole and absolute discretion of the tax matters
partner and the provisions relating to indemnification of the General Partner
set forth in Section 7.7 shall be fully applicable to the tax matters partner
in its capacity as such.
C. Reimbursement. The tax matters partner shall receive no compensation for
its services. All third-party costs and expenses incurred by the tax matters
partner in performing its duties as such (including legal and accounting fees
and expenses) shall be borne by the Partnership. Nothing herein shall be
construed to restrict the Partnership from engaging an accounting firm and/or
law firm to assist the tax matters partner in discharging its duties
hereunder, so long as the compensation paid by the Partnership for such
services is reasonable.
SECTION 10.4 ORGANIZATIONAL EXPENSES
The Partnership shall elect to deduct expenses, if any, incurred by it in
organizing the Partnership ratably over a sixty (60) month period as provided
in Section 709 of the Code.
SECTION 10.5 WITHHOLDING
Each Limited Partner hereby authorizes the Partnership to withhold from or
pay on behalf of or with respect to such Limited Partner any amount of
federal, state, local, or foreign taxes that the General Partner determines
that the Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by
the Partnership pursuant to Section 1441, 1442, 1445 or 1446 of the Code. Any
amount paid on behalf of or with respect to a Limited Partner shall constitute
a loan by the Partnership to such Limited Partner, which loan shall be repaid
by such Limited Partner within fifteen (15) days after notice from the General
Partner that such payment must be made unless (i) the Partnership withholds
such payment from a distribution which would otherwise be made to the Limited
Partner or (ii) the General Partner determines, in its sole and absolute
discretion, that such payment may be satisfied out of the available funds of
the Partnership which would, but for such payment, be distributed to the
Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or
(ii) shall be treated as having been distributed to such Limited Partner. Each
Limited Partner hereby unconditionally and irrevocably grants to the
Partnership a security interest in such Limited Partner's Partnership Interest
to secure such Limited Partner's obligation to pay to the Partnership any
amounts required to be paid pursuant to this Section 10.5. If a Limited
Partner fails to pay any amounts owed to the Partnership pursuant to this
Section 10.5 when due, the General Partner may, in its sole and absolute
discretion, elect to make the payment to the Partnership on behalf of such
defaulting Limited Partner, and in such event shall be deemed to have loaned
such amount to such defaulting Limited Partner and shall succeed to all rights
and remedies of the Partnership as against such defaulting Limited Partner
(including, without limitation, the right to receive distributions). Any
amounts payable by a Limited Partner hereunder shall bear interest at the base
rate on corporate loans at large United States money center commercial banks,
as published from time to time in The
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Wall Street Journal, plus four (4) percentage points (but not higher than the
maximum lawful rate under the laws of the State of Maryland) from the date
such amount is due (i.e., fifteen (15) days after demand) until such amount is
paid in full. Each Limited Partner shall take such actions as the Partnership
or the General Partner shall request to perfect or enforce the security
interest created hereunder.
ARTICLE XI
Transfers and Withdrawals
SECTION 11.1 TRANSFER
A. Definition. The term "transfer," when used in this Article XI with
respect to a Partnership Interest or a Unit, shall be deemed to refer to a
transaction by which a General Partner purports to assign all or any part of
its General Partnership Interest to another Person or by which a Limited
Partner purports to assign all or any part of its Limited Partnership Interest
to another Person, and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by law or
otherwise. The term "transfer" when used in this Article XI does not include
any redemption or repurchase of Units by the Partnership from a Partner or
acquisition of Units from a Limited Partner by the General Partner pursuant to
Section 8.6 or otherwise. No part of the interest of a Limited Partner shall
be subject to the claims of any creditor, any spouse for alimony or support,
or to legal process, and may not be voluntarily or involuntarily alienated or
encumbered except as may be specifically provided for in this Agreement.
B. General. No Partnership Interest shall be transferred, in whole or in
part, except in accordance with the terms and conditions set forth in this
Article XI. Any transfer or purported transfer of a Partnership Interest not
made in accordance with this Article XI shall be null and void.
SECTION 11.2 TRANSFERS OF PARTNERSHIP INTERESTS OF GENERAL PARTNER
A. General. The General Partner may not transfer any of its Partnership
Interest (including both its General Partnership Interest and its Limited
Partnership Interest) except in connection with a transaction described in
Section 11.2.B or as otherwise expressly permitted under this Agreement, nor
shall the General Partner withdraw as General Partner except in connection
with a transaction described in Section 11.2.B.
B. Specific Transactions Prohibited. The General Partner Entity shall not
engage in any merger (including a triangular merger), consolidation or other
combination with or into another Person (other than any transaction following
the consummation of which the shareholders of the surviving entity are
substantially identical to the shareholders of the General Partner Entity),
sale of all or substantially all of its assets or any reclassification,
recapitalization or change of outstanding Shares (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination as described in the definition of "Conversion Factor")
("Termination Transaction"), unless (i) the Termination Transaction has been
approved by the Consent of Partners holding Percentage Interests that are more
than fifty percent (50%) of the aggregate Percentage Interest represented by
all Partnership Interests then entitled to vote thereon (including for this
purpose any such Partnership Interests held by the General Partner), (ii)
following such merger or other consolidation, substantially all of the assets
of the surviving entity consist of Units and (iii) in connection with which
all Limited Partners either will receive, or will have the right to receive,
for each Unit an amount of cash, securities, or other property equal to the
product of the Conversion Factor and the greatest amount of cash, securities
or other property paid to a holder of Shares, if any, corresponding to such
Unit in consideration of one such Share at any time during the period from and
after the date on which the Termination Transaction is consummated; provided
that, if, in connection with the Termination Transaction, a purchase, tender
or exchange offer shall have been made to and accepted by the holders of more
than sixty-six and two-thirds percent (66 2/3%) of the outstanding Shares, or
such other percentage required for the approval of mergers under the charter
documents of the General Partner Entity, each holder of Units shall receive,
or shall have the right to receive without any right of Consent set forth
above in this subsection B, the greatest amount of cash, securities, or other
property which such holder would have
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received had it exercised the Unit Redemption Right and received Shares in
exchange for its Units immediately prior to the expiration of such purchase,
tender or exchange offer and had thereupon accepted such purchase, tender or
exchange offer. The General Partner shall not enter into an agreement or other
arrangement providing for or facilitating the creation of a General Partner
Entity other than the General Partner, unless the successor General Partner
Entity executes and delivers a counterpart to this Agreement in which such
General Partner Entity agrees to be fully bound by all of the terms and
conditions contained herein that are applicable to a General Partner Entity.
SECTION 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER
A. General. Except to the extent expressly permitted in Sections 11.3.B and
11.3.C or in connection with the exercise of a Unit Redemption Right pursuant
to Section 8.6, a Limited Partner may not transfer all or any portion of its
Partnership Interest, or any of such Limited Partner's rights as a Limited
Partner, without the prior written consent of the General Partner, which
consent may be withheld in the General Partner's sole and absolute discretion.
Any transfer otherwise permitted under Sections 11.3.B and 11.3.C shall be
subject to the conditions set forth in Section 11.3.D, 11.3.E and 11.3.F, and
all permitted transfers shall be subject to Section 11.5.
B. Incapacitated Limited Partners. If a Limited Partner is subject to
Incapacity, the executor, administrator, trustee, committee, guardian,
conservator or receiver of such Limited Partner's estate shall have all the
rights of a Limited Partner, but not more rights than those enjoyed by other
Limited Partners, for the purpose of settling or managing the estate and such
power as the Incapacitated Limited Partner possessed to transfer all or any
part of its interest in the Partnership. The Incapacity of a Limited Partner,
in and of itself, shall not dissolve or terminate the Partnership.
C. Permitted Transfers. A Limited Partner may transfer, with or without the
consent of the General Partner, all or a portion of its Partnership Interest
(i) in the case of a Limited Partner who is an individual, to a member of his
Immediate Family, any trust formed for the benefit of himself and/or members
of his Immediate Family, or any partnership, limited liability company, joint
venture, corporation or other business entity comprised only of himself and/or
members of his Immediate Family and entities the ownership interests in which
are owned by or for the benefit of himself and/or members of his Immediate
Family, (ii) in the case of a Limited Partner which is a trust, to the
beneficiaries of such trust, (iii) in the case of a Limited Partner which is a
partnership, limited liability company, joint venture, corporation or other
business entity to which Units were transferred pursuant to clause (i) above,
to its partners, owners or stockholders, as the case may be, who are members
of the Immediate Family of or are actually the Person(s) who transferred Units
to it pursuant to clause (i) above, (iv) in the case of a Limited Partner
which acquired Units as of the date hereof and which is a partnership, limited
liability company, joint venture, corporation or other business entity, to its
partners, owners, stockholders or Affiliates thereof, as the case may be, or
the Persons owning the beneficial interests in any of its partners, owners or
stockholders or Affiliates thereof (it being understood that this clause (iv)
will apply to all of each Person's Partnership Interests whether the Units
relating thereto were acquired on the date hereof or hereafter), (v) in the
case of a Limited Partner which is a partnership, limited liability company,
joint venture, corporation or other business entity other than any of the
foregoing described in clause (iii) or (iv), in accordance with the terms of
any agreement between such Limited Partner and the Partnership pursuant to
which such Partnership Interest was issued, (vi) pursuant to a gift or other
transfer without consideration, (vii) pursuant to applicable laws of descent
or distribution, (viii) to another Limited Partner and (ix) pursuant to a
grant of security interest or other encumbrance effectuated in a bona fide
transaction or as a result of the exercise of remedies related thereto,
subject to the provisions of Section 11.3.F hereof. A trust or other entity
will be considered formed "for the benefit" of a Partner's Immediate Family
even though some other Person has a remainder interest under or with respect
to such trust or other entity.
D. No Transfers Violating Securities Laws. The General Partner may prohibit
any transfer of Units by a Limited Partner unless it receives a written
opinion of legal counsel (which opinion and counsel shall be reasonably
satisfactory to the Partnership) to such Limited Partner to the effect that
such transfer would not require filing of a registration statement under the
Securities Act or would not otherwise violate any federal or state securities
laws or regulations applicable to the Partnership or the Unit or, at the
option of the Partnership, an opinion of legal counsel to the Partnership to
the same effect.
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E. No Transfers Affecting Tax Status of Partnership. No transfer of Units by
a Limited Partner (including a redemption or exchange pursuant to Section 8.6)
may be made to any Person if (i) in the opinion of legal counsel for the
Partnership, it would result in the Partnership being treated as an
association taxable as a corporation for federal income tax purposes (except
as a result of the redemption or exchange for Shares of all Units held by all
Limited Partners other than the General Partner or the General Partner Entity
or any Subsidiary of either the General Partner or the General Partner Entity
or pursuant to a transaction expressly permitted under Section 7.11.B or
Section 11.2), (ii) in the opinion of legal counsel for the Partnership, it
likely would cause the General Partner Entity to no longer qualify as a REIT
or would subject the General Partner Entity to any additional taxes under
Section 857 or Section 4981 of the Code or (iii) such transfer is effectuated
through an "established securities market" or a "secondary market (or the
substantial equivalent thereof)" within the meaning of Section 7704 of the
Code.
F. No Transfers to Holders of Nonrecourse Liabilities. No pledge or transfer
of any Units may be made to a lender to the Partnership or any Person who is
related (within the meaning of Section 1.752-4(b) of the Regulations) to any
lender to the Partnership whose loan constitutes a Nonrecourse Liability
without the consent of the General Partner, in its sole and absolute
discretion, if the deemed exercise by such lender or Person of all of its
rights under the pledge or Unit transfer agreement would result in such lender
or Person owning Units in violation of the Ownership Limitation set forth in
Section 12.2.A of this Agreement; provided that, as a condition to such
consent the lender will be required to enter into an arrangement with the
Partnership and the General Partner to exchange or redeem for the Redemption
Amount any Units in which a security interest is held simultaneously with the
time at which such lender would be deemed to be a partner in the Partnership
for purposes of allocating liabilities to such lender under Section 752 of the
Code.
SECTION 11.4 SUBSTITUTED LIMITED PARTNERS
A. Consent of General Partner. No Limited Partner shall have the right to
substitute a transferee as a Limited Partner in its place. The General Partner
shall, however, have the right to consent to the admission of a transferee of
the interest of a Limited Partner pursuant to this Section 11.4 as a
Substituted Limited Partner, which consent may be, given or withheld by the
General Partner in its sole and absolute discretion. The General Partner's
failure or refusal to permit a transferee of any such interests to become a
Substituted Limited Partner shall not give rise to any cause of action against
the Partnership or any Partner.
B. Rights of Substituted Limited Partner. A transferee who has been admitted
as a Substituted Limited Partner in accordance with this Article XI shall have
all the rights and powers and be subject to all the restrictions and
liabilities of a Limited Partner under this Agreement. The admission of any
transferee as a Substituted Limited Partner shall be conditioned upon the
transferee executing and delivering to the Partnership an acceptance of all
the terms and conditions of this Agreement (including, without limitation, the
provisions of Section 16.11) and such other documents or instruments as may be
required to effect the admission.
C. Amendment of Exhibit A. Upon the admission of a Substituted Limited
Partner, the General Partner shall amend Exhibit A to reflect the name,
address, Capital Account, number of Units and Percentage Interest of such
Substituted Limited Partner and to eliminate or adjust, if necessary, the
name, address, Capital Account and Percentage Interest and interest of the
predecessor of such Substituted Limited Partner.
SECTION 11.5 ASSIGNEES
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee
shall be considered an Assignee for purposes of this Agreement. An Assignee
shall be entitled to all the rights of an assignee of a limited partnership
interest under the Act, including the right to receive distributions from the
Partnership and the share of Net Income, Net Losses, gain, loss and Recapture
Income attributable to the Units assigned to such transferee, and shall have
the rights granted to the Limited Partners under Section 8.6, but shall not be
deemed to be a holder of Units for any other purpose under this Agreement, and
shall not be entitled to
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vote such Units in any matter presented to the Limited Partners for a vote
(such Units being deemed to have been voted on such matter in the same
proportion as all other Units held by Limited Partners are voted). If any such
transferee desires to make a further assignment of any such Units, such
transferee shall be subject to all the provisions of this Article XI to the
same extent and in the same manner as any Limited Partner desiring to make an
assignment of Units.
SECTION 11.6 GENERAL PROVISIONS
A. Withdrawal of Limited Partner. No Limited Partner may withdraw from the
Partnership other than as a result of a permitted transfer of all of such
Limited Partner's Units in accordance with this Article XI or pursuant to
redemption of all of its Units under Section 8.6.
B. Termination of Status as Limited Partner. Any Limited Partner who shall
transfer all of its Units in a transfer permitted pursuant to this Article XI
or pursuant to redemption of all of its Units under Section 8.6 shall cease to
be a Limited Partner.
C. Timing of Transfers. Transfers pursuant to this Article XI may only be
made upon three Business Days prior notice, unless the General Partner
otherwise agrees.
D. Allocations. If any Partnership Interest is transferred during any
quarterly segment of the Partnership's fiscal year in compliance with the
provisions of this Article XI or redeemed or transferred pursuant to Section
8.6, Net Income, Net Losses, each item thereof and all other items
attributable to such interest for such fiscal year shall be divided and
allocated between the transferor Partner and the transferee Partner by taking
into account their varying interests during the fiscal year in accordance with
Section 706(d) of the Code, using the interim closing of the books method
(unless the General Partner, in its sole and absolute discretion, elects to
adopt a daily, weekly or a monthly proration period, in which event Net
Income, Net Losses, each item thereof and all other items attributable to such
interest for such fiscal year shall be prorated based upon the applicable
method selected by the General Partner). Solely for purposes of making such
allocations, each of such items for the calendar month in which the transfer
or redemption occurs shall be allocated to the Person who is a Partner as of
midnight on the last day of said month. All distributions of Available Cash
attributable to any Unit with respect to which the Partnership Record Date is
before the date of such transfer, assignment or redemption shall be made to
the transferor Partner or the Redeeming Partner, as the case may be, and, in
the case of a transfer or assignment other than a redemption, all
distributions of Available Cash thereafter attributable to such Unit shall be
made to the transferee Partner.
E. Additional Restrictions. In addition to any other restrictions on
transfer herein contained, including without limitation the provisions of this
Article XI and Article VII, in no event may any transfer or assignment of a
Partnership Interest by any Partner (including pursuant to Section 8.6) be
made without the express consent of the General Partner, in its sole and
absolute discretion, (i) to any person or entity who lacks the legal right,
power or capacity to own a Partnership Interest; (ii) in violation of
applicable law; (iii) of any component portion of a Partnership Interest, such
as the Capital Account, or rights to distributions, separate and apart from
all other components of a Partnership Interest; (iv) if in the opinion of
legal counsel to the Partnership such transfer would cause a termination of
the Partnership for federal or state income tax purposes (except as a result
of the redemption or exchange for Shares of all Units held by all Limited
Partners other than the General Partner, the General Partner Entity, or any
Subsidiary of either, or pursuant to a transaction expressly permitted under
Section 7.11.B or Section 11.2); (v) if in the opinion of counsel to the
Partnership, such transfer would cause the Partnership to cease to be
classified as a partnership for federal income tax purposes (except as a
result of the redemption or exchange for Shares of all Units held by all
Limited Partners other than the General Partner, the General Partner Entity,
or any Subsidiary of either, or pursuant to a transaction expressly permitted
under Section 7.11.B or Section 11.2); (vi) if such transfer would cause the
Partnership Interests of "benefit plan investors" to become "significant," as
those terms are used in 29 C.F.R. (S) 2510.3-101(f), or any successor
regulation thereto, or would cause the Partnership to become, with respect to
any employee benefit plan subject to Title I of ERISA, a "party-in-interest"
(as defined in Section 3(14) of ERISA) or, with respect to any plan defined in
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Section 4975(e) of the Code, a "disqualified person" (as defined in Section
4975(e) of the Code); (vii) if such transfer would, in the opinion of counsel
to the Partnership, cause any portion of the assets of the Partnership to
constitute assets of any ERISA Plan Investor pursuant to 29 C.F.R. (S) 2510.3-
101, or any successor regulation thereto; (viii) if such transfer requires the
registration of such Partnership Interest pursuant to any applicable federal
or state securities laws; (ix) if such transfer is effectuated through an
"established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code or such
transfer causes the Partnership to become a "publicly traded partnership," as
such term is defined in Section 469(k)(2) or Section 7704(b) of the Code
(provided that, this clause (ix) shall not be the basis for limiting or
restricting in any manner the exercise of the Unit Redemption Right under
Section 8.6 unless, and only to the extent that, outside tax counsel provides
to the General Partner an opinion to the effect that, in the absence of such
limitation or restriction, there is a significant risk that the Partnership
will be treated as a "publicly traded partnership" and, by reason thereof,
taxable as a corporation); (x) if such transfer subjects the Partnership or
the activities of the Partnership to regulation under the Investment Company
Act of 1940, the Investment Advisors Act of 1940 or ERISA, each as amended;
(xi) if such transfer could reasonably be expected to cause the General
Partner Entity to fail to remain qualified as a REIT; or (xii) if in the
opinion of legal counsel for the transferring Partner (which opinion and
counsel shall be reasonably satisfactory to the Partnership) or legal counsel
for the Partnership, such transfer would cause the General Partner Entity to
fail to continue to qualify as a REIT or subject the General Partner Entity to
any additional taxes under Section 857 or Section 4981 of the Code.
F. Avoidance of "Publicly Traded Partnership" Status. The General Partner
shall monitor the transfers of interests in the Partnership to determine (i)
if such interests are being traded on an "established securities market" or a
"secondary market (or the substantial equivalent thereof)" within the meaning
of Section 7704 of the Code and (ii) whether additional transfers of interests
would result in the Partnership being unable to qualify for at least one of
the "safe harbors" set forth in Regulations Section 1.7704-1 (or such other
guidance subsequently published by the IRS setting forth safe harbors under
which interests will not be treated as "readily tradable on a secondary market
(or the substantial equivalent thereof)" within the meaning of Section 7704 of
the Code) (the "Safe Harbors"). The General Partner shall take all steps
reasonably necessary or appropriate to prevent any trading of interests or any
recognition by the Partnership of transfers made on such markets and, except
as otherwise provided herein, to insure that at least one of the Safe Harbors
is met; provided, however, that the foregoing shall not authorize the General
Partner to limit or restrict in any manner the right of any holder of a Unit
to exercise the Unit Redemption Right in accordance with the terms of Section
8.6 unless, and only to the extent that, outside tax counsel provides to the
General Partner an opinion to the effect that, in the absence of such
limitation or restriction, there is a significant risk that the Partnership
will be treated as a "publicly traded partnership" and, by reason thereof,
taxable as a corporation.
ARTICLE XII
Restriction on Ownership of Units
SECTION 12.1 DEFINITIONS
For the purpose of this Article XII, the following terms shall have the
following meanings:
"Charitable Beneficiary" means one or more beneficiaries of the
Charitable Trust as determined pursuant to Section 12.4.G, provided that
each such organization must be described in Sections 501(c)(3),
170(b)(1)(A) and 170(c)(2) of the Code and that no such organization
constitute ownership of Units (including Units owned by it by reason of its
being a Charitable Beneficiary) that exceed the Ownership Limitation.
"Charitable Trust" means any trust provided for in Section 12.2.B and
Section 12.4.F.
"Charitable Trustee" means the Person unaffiliated with the Partnership
and a Prohibited Owner that is appointed by the Partnership to serve as
trustee of the Charitable Trust.
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"Constructive Ownership" means ownership of Units by a Person, whether
the interest in Units is held directly or indirectly (including by a
nominee), and shall include interests that would be treated as owned
through the application of Section 318(a) of the Code, as modified by
Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have the correlative
meanings.
"Initial Date" means the date upon which the Certificate is filed for
record with the Secretary of State of the State of Delaware.
"Market Price" means, for any date, with respect to any class or series
of outstanding Shares, the Closing Price for such Shares on such date. The
"Closing Price" on any date shall mean the last sale price on such date for
such Shares, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, for such
Shares, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted
to trading on the New York Stock Exchange or, if such Shares are not listed
or admitted to trading on the New York Stock Exchange, as reported on the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which
such Shares are listed or admitted to trading or, if such Shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq
National Market or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such Shares are
not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in
such Shares selected by the General Partner or, in the event that no
trading price is available for such Shares, the fair market value of such
Shares, as determined in good faith by the General Partner.
"Ownership Limitation" has the meaning set forth in Section 12.2.A.
"Prohibited Owner" means, with respect to any purported Transfer, any
Person who, but for the provisions of Section 12.2.B, would Beneficially or
Constructively Own Units.
"Restriction Termination Date" means the first day after the Initial Date
on which the General Partner determines that it is no longer in the best
interests of the General Partner Entity to attempt to, or continue to,
qualify as a REIT or that compliance with the restrictions and limitations
on Beneficial Ownership, Constructive Ownership and Transfers of Units set
forth herein is no longer required in order for the General Partner Entity
to qualify as a REIT.
"Transfer" means any issuance, sale, transfer, gift, assignment, devise
or other disposition, as well as any other event that causes any Person to
acquire Constructive Ownership, or any agreement to take any such actions
or cause any such events, of Units or the right to vote or receive
distributions on Units, including (i) a change in the capital structure of
the Partnership, (ii) a change in the relationship between two or more
Persons which causes a change in ownership of Units by application of
Section 318 of the Code, as modified by Section 856(d)(5), (iii) the
granting or exercise of any option or warrant (or any disposition of any
option or warrant), pledge, security interest or similar right to acquire
Units, (iv) any disposition of any securities or rights convertible into or
exchangeable for Units or any interest in Units or any exercise of any such
conversion or exchange right and (v) Transfers of interests in other
entities that result in changes in Constructive Ownership of Units; in each
case, whether voluntary or involuntary, whether owned of record or
Constructively Owned and whether by operation of law or otherwise. The
terms "Transferring" and "Transferred" shall have the correlative meanings.
SECTION 12.2 OWNERSHIP LIMITATION ON UNITS
A. Basic Restriction. No Person (other than the General Partner and the
wholly owned subsidiaries (direct and indirect) of the General Partner) may
Constructively Own more than 4.9% by value of any class of Partnership
Interests (the "Ownership Limitation").
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B. Transfers in Trust. If any Transfer of Units occurs which, if effective,
would result in any Person (excluding the General Partner and the wholly owned
subsidiaries (direct and indirect) of the General Partner) Constructively
Owning Units in violation of the Ownership Limitation,
(1) then that number of Units the Constructive Ownership of which
otherwise would cause such Person to violate the Ownership Limitation
(rounded up to the next whole Unit) shall be automatically transferred to a
Charitable Trust for the benefit of a Charitable Beneficiary, as described
in Section 12.4, effective as of the close of business on the Business Day
prior to the date of such Transfer, and such Person shall acquire no rights
in such Units; or
(2) if the transfer to the Charitable Trust described in clause (1) of
this sentence would not be effective for any reason to prevent the
violation of the Ownership Limitation, then the Transfer of that number of
Units that otherwise would cause any Person to violate the Ownership
Limitation shall be void ab initio, and the intended transferee shall
acquire no rights in such Units.
C. Notice of Restricted Transfer. Any Person who acquires or attempts or
intends to acquire Constructive Ownership of Units that reasonably could be
expected to violate the Ownership Limitation, or any Person who would have
owned Units that resulted in a transfer to the Charitable Trust pursuant to
the provisions of Section 12.4.A, shall immediately give written notice to the
Partnership of such event, or in the case of such a proposed or attempted
transaction, give at least 15 days prior written notice, and shall provide to
the Partnership such other information as the Partnership may request in order
to determine the effect, if any, of such acquisition or ownership on the
General Partner Entity's status as a REIT.
D. Legend. Each certificate for Units shall bear substantially the following
legend:
The interests represented by this certificate are subject to restrictions
on Constructive Ownership and Transfer for the purpose of the General
Partner Entity's maintenance of its status as a Real Estate Investment
Trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). Subject to certain further restrictions and except as expressly
provided in the Partnership Agreement of the Partnership, no Person may
Constructively Own Units of the Partnership in excess of 4.9 percent (in
value) of the outstanding Units of the Partnership (the "Ownership
Limitation"). Any Person who Constructively Owns or attempts to
Constructively Own Units in excess or in violation of the Ownership
Limitation must immediately notify the Partnership. If the Ownership
Limitation is violated, the Units represented hereby will be automatically
transferred to a Charitable Trustee of a Charitable Trust for the benefit
of one or more Charitable Beneficiaries. In addition, upon the occurrence
of certain events, attempted Transfers in violation of the Ownership
Limitation described above may be void ab initio. A Person who attempts to
Constructively Own Units in violation of the Ownership Limitation described
above shall have no claim, cause of action, or any recourse whatsoever
against a transferor of such Units. All capitalized terms in this legend
have the meanings defined in the Partnership Agreement of the Partnership,
as the same may be amended from time to time, a copy of which, including
the restrictions on transfer and ownership, will be furnished to each
holder of Units of the Partnership on request and without charge.
Instead of the foregoing legend, the certificate may state that the
Partnership will furnish a full statement about certain restrictions on
transferability to a Partner on request and without charge.
E. Increase in Ownership Limitation. The General Partner may from time to
time increase the Ownership Limitation, as provided in this Section 12.2.E.
Prior to the modification of the Ownership Limitation pursuant to this Section
12.2.E, the General Partner may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure the General Partner Entity's status as a REIT if the
modification in the Ownership Limitation were to be made.
F. Ambiguity. In the case of an ambiguity in the application of any of the
provisions of this Section 12.2, Section 12.3 or Section 12.4 or any
definition contained in Section 12.1, the General Partner shall have the power
to determine the application of the provisions of this Section 12.2, Section
12.3 or Section 12.4 with respect to
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any situation based on the facts known to it. If Section 12.2, Section 12.3 or
Section 12.4 requires an action by the General Partner and this Agreement
fails to provide specific guidance with respect to such action, the General
Partner shall have the power to determine the action to be taken so long as
such action is not contrary to the provisions of Sections 12.1, 12.2, 12.3 and
12.4.
G. Remedies for Breach. If the General Partner shall at any time determine
in good faith that a Transfer or other event has taken place that results in a
violation of the Ownership Limitation or that a Person intends to acquire or
has attempted to acquire Constructive Ownership of any Units in violation of
the Ownership Limitation (whether or not such violation is intended), the
General Partner shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or other event, including, without
limitation, causing the Partnership to redeem Units, refusing to give effect
to such Transfer on the books of the Partnership or instituting proceedings to
enjoin such Transfer or other event; provided, however, that any Transfer or
attempted Transfer or other event in violation of the Ownership Limitation
shall automatically result in the transfer to the Charitable Trust described
above, and, where applicable, such Transfer (or other event) shall be void ab
initio as provided above irrespective of any action (or non-action) by the
General Partner.
H. Remedies Not Limited. Nothing contained in this Section 12.2 shall limit
the authority of the General Partner Entity to take such other action as it
deems necessary or advisable to protect the General Partner Entity and the
interests of its shareholders in preserving the General Partner Entity's
status as a REIT.
SECTION 12.3 EXCEPTIONS TO THE OWNERSHIP LIMITATION
A. Exception by Request. The General Partner, in its sole and absolute
discretion, may grant to any Person who makes a request therefor an exception
to the Ownership Limitation with respect to the ownership of any series or
class of Units, subject to the following conditions and limitations: (i) the
General Partner shall have determined that assuming such Person would
Beneficially Own or Constructively Own the maximum amount of Units permitted
as a result of the exception to be granted, the Partnership would not be
classified as an association taxable as a corporation pursuant to Section 7704
of the Code and would not otherwise cause the General Partners to fail to
qualify as a REIT; and (ii) such Person provides the General Partner such
representations and undertakings, if any, as the General Partner may, in its
sole and absolute discretion, determine to be necessary in order for it to
make the determination that the conditions set forth in clause (i) above of
this Section 12.3 have been and/or will continue to be satisfied (including,
without limitation, an agreement as to a reduced Ownership Limitation for such
Person with respect to the Constructive Ownership of one or more other classes
of Units not subject to the exception), and such Person agrees that any
violation of such representations and undertakings or any attempted violation
thereof will result in the application of Section 12.2.G with respect to Units
held in excess of the Ownership Limitation with respect to such Person
(determined without regard to the exception granted such Person under this
subparagraph (A)).
B. Opinion. Prior to granting any exception or exemption pursuant to
subparagraph (A), the General Partner may require a ruling from the IRS or an
opinion of counsel, in either case in form and substance satisfactory to the
General Partner, in its sole and absolute discretion, as it may deem necessary
or advisable in order to determine or ensure the General Partner Entity's
status as a REIT; provided, however, that the General Partner shall not be
obligated to require obtaining a favorable ruling or opinion in order to grant
an exception hereunder.
SECTION 12.4 TRANSFER OF UNITS IN TRUST
A. Ownership in Trust. Upon any purported Transfer that would result in a
transfer of Units to a Charitable Trust, such Units shall be deemed to have
been transferred to the Charitable Trustee as trustee of a Charitable Trust
for the exclusive benefit of one or more Charitable Beneficiaries. Such
transfer to the Charitable Trustee shall be deemed to be effective as of the
close of business on the Business Day prior to the purported Transfer or other
event that results in the transfer to the Charitable Trust pursuant to Section
12.2.B. The Charitable Trustee shall be appointed by the Partnership and shall
be a Person unaffiliated with the Partnership
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and any Prohibited Owner. Each Charitable Beneficiary shall be designated by
the Partnership as provided in subparagraph G.
B. Status of Units Held by the Charitable Trustee. Units held by the
Charitable Trustee shall be issued and outstanding Units of the Partnership.
The Prohibited Owner shall have no rights in the Units held by the Charitable
Trustee. The Prohibited Owner shall not benefit economically from ownership of
any Units held in trust by the Charitable Trustee, shall have no rights to
distributions with respect to such Units, shall not have Unit Redemption
Rights with respect to such Units and shall not possess any rights to vote or
other rights attributable to the Units held in the Charitable Trust. The
Prohibited Owner shall have no claim, cause of action, or any other recourse
whatsoever against the purported transferor of such Units.
C. Distribution and Voting Rights. The Charitable Trustee shall have all
voting rights and rights to distributions with respect to Units held in the
Charitable Trust, which rights shall be exercised for the exclusive benefit of
the Charitable Beneficiary. Any distribution paid prior to the discovery by
the Partnership that Units have been transferred to the Charitable Trustee by
the recipient thereof shall be paid with respect to such Units to the
Charitable Trustee upon demand and any distribution authorized but unpaid
shall be paid when due to the Charitable Trustee. Any distributions so paid
over to the Charitable Trustee shall be held in trust for the Charitable
Beneficiary. The Prohibited Owner shall have no voting rights with respect to
Units held in the Charitable Trust and, subject to Delaware law, effective as
of the date that Units have been transferred to the Charitable Trustee, the
Charitable Trustee shall have the authority (at the Charitable Trustee's sole
discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior
to the discovery by the Partnership that Units have been transferred to the
Charitable Trustee and (ii) to recast such vote in accordance with the desires
of the Charitable Trustee acting for the benefit of the Charitable
Beneficiary; provided, however, that if the Partnership has already taken
irreversible action, then the Charitable Trustee shall not have the power to
rescind and recast such vote. Notwithstanding the provisions of Section 11.3
and this Section 12.4, until the Partnership has received notification that
Units have been transferred into a Charitable Trust, the Partnership shall be
entitled to rely on its Unit transfer and other Partnership records for
purposes of preparing lists of Partners entitled to vote at meetings,
determining the validity and authority of proxies or consents and otherwise
conducting votes of Partners.
D. Rights Upon Liquidation. Upon any voluntary or involuntary liquidation,
dissolution or winding up of or any distribution of the assets of the
Partnership, the Charitable Trustee shall be entitled to receive, ratably with
each other holder of Units of the class or series of Units that is held in the
Charitable Trust, that portion of the assets of the Partnership available for
distribution to the holders of such class or series (and, within such class,
pro rata in proportion to the respective Percentage Interests in such class of
such holders). The Charitable Trustee shall distribute any such assets
received in respect of the Units held in the Charitable Trust in any
liquidation, dissolution or winding up of, or distribution of the assets of
the Partnership, in accordance with Section 12.4.E.
E. Redemption of Units Held by Charitable Trustee. Within 20 days of
receiving notice from the Partnership that Units have been transferred to the
Charitable Trust, the Partnership shall redeem the Units held in the
Charitable Trust in accordance with Section 8.6.B. Upon such redemption, the
interest of the Charitable Beneficiary in the Units redeemed shall terminate
and the Charitable Trustee shall distribute the net proceeds of the redemption
to the Prohibited Owner and to the Charitable Beneficiary as provided in this
Section 12.4.E. The Prohibited Owner shall receive the lesser of (1) the price
paid by the Prohibited Owner for the Units or, if the Prohibited Owner did not
give value for the Units in connection with the event causing the Units to be
held in the Charitable Trust (e.g., in the case of a gift, devise or other
such transaction), the fair market value (based on the Market Price of the
Shares of the General Partner) of the Units on the day of the event causing
the Units to be held in the Charitable Trust and (2) the price per Unit
received by the Charitable Trustee from the redemption or other disposition of
the Units held in the Charitable Trust. Any net proceeds in excess of the
amount payable to the Prohibited Owner shall be immediately paid to the
Charitable Beneficiary. If, prior to the discovery by the Partnership that
Units have been transferred to the Charitable Trustee, such Units are redeemed
by a Prohibited Owner, then (i) such Units shall be deemed to have been
redeemed on behalf of the Charitable Trust and (ii) to
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the extent that the Prohibited Owner received an amount for such Units that
exceeds the amount that such Prohibited Owner was entitled to receive pursuant
to this Section 12.4.E, such excess shall be paid by the Prohibited Owner to
the Charitable Trustee upon demand.
F. Designation of Charitable Beneficiaries. By written notice to the
Charitable Trustee, the Partnership shall designate one or more nonprofit
organizations to be the Charitable Beneficiary of the interest in the
Charitable Trust such that (i) Units held in the Charitable Trust would not
violate the Ownership Limitation and (ii) each such organization must be
described in Sections 501(c)(3), 170(b)(1)(A) or 170(c)(2) of the Code and
that no such organization constitutes Ownership of Units (including Units
owned by it by reason of its being a Charitable Beneficiary) that exceeds the
Ownership Limitation.
SECTION 12.5 ENFORCEMENT
The Partnership is authorized specifically to seek equitable relief,
including injunctive relief, to enforce the provisions of this Article XII.
SECTION 12.6 NON-WAIVER
No delay or failure on the part of the Partnership in exercising any right
hereunder shall operate as a waiver of any right of the Partnership, as the
case may be, except to the extent specifically waived in writing.
ARTICLE XIII
Admission of Partners
SECTION 13.1 ADMISSION OF A SUCCESSOR GENERAL PARTNER
A successor to all of the General Partner's General Partnership Interest
pursuant to Section 11.2 who is proposed to be admitted as a successor General
Partner shall be admitted to the Partnership as the General Partner, effective
upon such transfer. Any such transferee shall carry on the business of the
Partnership without dissolution. In each case, the admission shall be subject
to such successor General Partner executing and delivering to the Partnership
a written acceptance of all of the terms and conditions of this Agreement and
such other documents or instruments as may be required to effect the
admission.
SECTION 13.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS
A. General. No Person shall be admitted as an Additional Limited Partner
without the consent of the General Partner, which consent shall be given or
withheld in the General Partner's sole and absolute discretion. A Person who
makes a Capital Contribution to the Partnership in accordance with this
Agreement, including without limitation, under Section 4.2.B, or who exercises
an option to receive Units shall be admitted to the Partnership as an
Additional Limited Partner only with the consent of the General Partner and
only upon furnishing to the General Partner (i) evidence of acceptance in form
satisfactory to the General Partner of all of the terms and conditions of this
Agreement, including, without limitation, the power of attorney granted in
Section 16.11 and (ii) such other documents or instruments as may be required
in the discretion of the General Partner to effect such Person's admission as
an Additional Limited Partner. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded on the books and records of the Partnership, following the
consent of the General Partner to such admission.
B. Allocations to Additional Limited Partners. If any Additional Limited
Partner is admitted to the Partnership on any day other than the first day of
a Partnership Year, then Net Income, Net Losses, each item thereof and all
other items allocable among Partners and Assignees for such Partnership Year
shall be allocated among such Additional Limited Partner and all other
Partners and Assignees by taking into account their varying interests during
the Partnership Year in accordance with Section 706(d) of the Code, using the
interim closing of
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the books method (unless the General Partner, in its sole and absolute
discretion, elects to adopt a daily, weekly or monthly proration method, in
which event Net Income, Net Losses, and each item thereof would be prorated
based upon the applicable period selected by the General Partner). Solely for
purposes of making such allocations, each of such items for the calendar month
in which an admission of any Additional Limited Partner occurs shall be
allocated among all the Partners and Assignees including such Additional
Limited Partner. All distributions of Available Cash with respect to which the
Partnership Record Date is before the date of such admission shall be made
solely to Partners and Assignees other than the Additional Limited Partner,
and all distributions of Available Cash thereafter shall be made to all the
Partners and Assignees including such Additional Limited Partner.
SECTION 13.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
For the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Act to amend the
records of the Partnership and, if necessary, to prepare as soon as practical
an amendment of this Agreement (including an amendment of Exhibit A) and, if
required by law, shall prepare and file an amendment to the Certificate and
may for this purpose exercise the power of attorney granted pursuant to
Section 16.11.
ARTICLE XIV
Dissolution and Liquidation
SECTION 14.1 DISSOLUTION
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the withdrawal of the General Partner, any successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
its affairs shall be wound up, upon the first to occur of any of the following
("Liquidating Events"):
(i) the expiration of its term as provided in Section 2.4 hereof;
(ii) an event of withdrawal of the General Partner, as defined in the Act
(other than an event of bankruptcy), unless, within ninety (90) days after
the withdrawal a "majority in interest" (as defined below) of the remaining
Partners Consent in writing to continue the business of the Partnership and
to the appointment, effective as of the date of withdrawal, of a substitute
General Partner;
(iii) through December 31, 2058, an election to dissolve the Partnership
made by the General Partner with the consent of Limited Partners who hold
ninety percent (90%) of the outstanding Units held by Limited Partners
(including Units held by the General Partner);
(iv) an election to dissolve the Partnership made by the General Partner,
in its sole and absolute discretion after December 31, 2058;
(v) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Act;
(vi) the sale of all or substantially all of the assets and properties of
the Partnership for cash or for marketable securities; or
(vii) a final and non-appealable judgment is entered by a court of
competent jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a
court with appropriate jurisdiction against the General Partner, in each
case under any federal or state bankruptcy or insolvency laws as now or
hereafter in effect, unless prior to or at the time of the entry of such
order or judgment a "majority in interest" (as defined below) of the
remaining Partners Consent in writing to continue the business of the
Partnership and to the appointment, effective as of a date prior to the
date of such order or judgment, of a substitute General Partner.
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As used herein, a "majority in interest" shall refer to Partners (excluding
the General Partner) who hold more than fifty percent (50%) of the outstanding
Percentage Interests not held by the General Partner.
SECTION 14.2 WINDING UP
A. General. Upon the occurrence of a Liquidating Event, the Partnership
shall continue solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets and satisfying the claims of its creditors and
Partners. No Partner shall take any action that is inconsistent with, or not
necessary to or appropriate for, the winding up of the Partnership's business
and affairs. The General Partner (or, if there is no remaining General
Partner, any Person elected by a majority in interest of the Limited Partners
(the "Liquidator")) shall be responsible for overseeing the winding up and
dissolution of the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value thereof,
and the proceeds therefrom (which may, to the extent determined by the General
Partners, include equity or other securities of the General Partners or any
other entity) shall be applied and distributed in the following order:
(1) First, to the payment and discharge of all of the Partnership's debts
and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's
debts and liabilities to the General Partners;
(3) Third, to the payment and discharge of all of the Partnership's debts
and liabilities to the Limited Partners;
(4) Fourth, to the holder of Partnership Interests that are entitled to
any preference in distribution upon liquidation in accordance with the
rights of any such class or series of Partnership Interests (and, within
each such class or series, to each holder thereof pro rata in proportion to
its respective Percentage Interest in such class); and
(5) The balance, if any, to the Partners in accordance with their Capital
Accounts, after giving effect to all contributions, distributions, and
allocations for all periods.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article XIV.
B. Deferred Liquidation. Notwithstanding the provisions of Section 14.2.A
which require liquidation of the assets of the Partnership, but subject to the
order of priorities set forth therein, if prior to or upon dissolution of the
Partnership the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to
satisfy liabilities of the Partnership (including to those Partners as
creditors) or distribute to the Partners, in lieu of cash, as tenants in
common and in accordance with the provisions of Section 14.2.A, undivided
interests in such Partnership assets as the Liquidator deems not suitable for
liquidation. Any such distributions in kind shall be made only if, in the good
faith judgment of the Liquidator, such distributions in kind are in the best
interest of the Partners, and shall be subject to such conditions relating to
the disposition and management of such properties as the Liquidator deems
reasonable and equitable and to any agreements governing the operation of such
properties at such time. The Liquidator shall determine the fair market value
of any property distributed in kind using such reasonable method of valuation
as it may adopt.
SECTION 14.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS
Subject to Section 14.4, if the Partnership is "liquidated" within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be
made under this Article XIV to the General Partner and Limited Partners who
have positive Capital Accounts in compliance with Regulations Section 1.704-
1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in its Capital Account
(after giving effect to all contributions, distributions and
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allocations for all taxable years, including the year during which such
liquidation occurs), such Partner shall have no obligation to make any
contribution to the capital of the Partnership with respect to such deficit,
and such deficit shall not be considered a debt owed to the Partnership or to
any other Person for any purpose whatsoever. In the discretion of the General
Partner, a pro rata portion of the distributions that would otherwise be made
to the General Partner and Limited Partners pursuant to this Article XIV may
be: (A) distributed to a trust established for the benefit of the General
Partner and Limited Partners for the purposes of liquidating Partnership
assets, collecting amounts owed to the Partnership and paying any contingent
or unforeseen liabilities or obligations of the Partnership or of the General
Partner arising out of or in connection with the Partnership (in which case,
the assets of any such trust shall be distributed to the General Partner and
Limited Partners from time to time, in the reasonable discretion of the
General Partner, in the same proportions as the amount distributed to such
trust by the Partnership would otherwise have been distributed to the General
Partner and Limited Partners pursuant to this Agreement); or (B) withheld to
provide a reasonable reserve for Partnership liabilities (contingent or
otherwise) and to reflect the unrealized portion of any installment
obligations owed to the Partnership, provided that such withheld amounts shall
be distributed to the General Partner and Limited Partners as soon as
practicable.
SECTION 14.4 RIGHTS OF LIMITED PARTNERS
Except as otherwise provided in this Agreement, each Limited Partner shall
look solely to the assets of the Partnership for the return of its Capital
Contributions and shall have no right or power to demand or receive property
other than cash from the Partnership. Except as otherwise expressly provided
in this Agreement, no Limited Partner shall have priority over any other
Limited Partner as to the return of its Capital Contributions, distributions
or allocations.
SECTION 14.5 NOTICE OF DISSOLUTION
If a Liquidating Event occurs or an event occurs that would, but for
provisions of an election or objection by one or more Partners pursuant to
Section 14.1, result in a dissolution of the Partnership, the General Partner
shall, within thirty (30) days thereafter, provide written notice thereof to
each of the Partners and to all other parties with whom the Partnership
regularly conducts business (as determined in the discretion of the General
Partner).
SECTION 14.6 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP
Upon the completion of the liquidation of Partnership cash and property as
provided in Section 14.2, the Partnership shall be terminated and the
Certificate and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be
canceled and such other actions as may be necessary to terminate the
Partnership shall be taken.
SECTION 14.7 REASONABLE TIME FOR WINDING UP
A reasonable time shall be allowed for the orderly winding up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 14.2, to minimize any losses otherwise attendant upon such
winding up, and the provisions of this Agreement shall remain in effect among
the Partners during the period of liquidation.
SECTION 14.8 WAIVER OF PARTITION
Each Partner hereby waives any right to partition of the Partnership's
property.
SECTION 14.9 LIABILITY OF LIQUIDATOR
The Liquidator shall be indemnified and held harmless by the Partnership in
the same manner and to the same degree as an Indemnitee may be indemnified
pursuant to Section 7.7.
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ARTICLE XV
Amendment of Partnership Agreement; Meetings
SECTION 15.1 AMENDMENTS
A. General. Amendments to this Agreement may be proposed by a General
Partner or by any Limited Partners holding twenty-five percent (25%) or more
of the Partnership Interests. Following such proposal (except an amendment
governed by Section 15.1.B), the General Partner shall submit any proposed
amendment to the Limited Partners. The General Partner shall seek the written
vote of the Partners on the proposed amendment or shall call a meeting to vote
thereon and to transact any other business that it may deem appropriate. For
purposes of obtaining a written vote, the General Partner may require a
response within a reasonable specified time, but not less than fifteen (15)
days, and failure to respond in such time period shall constitute a vote in
the same proportion as the votes of the Partners who responded in a timely
manner. Except as provided in Section 15.1.B, 15.1.C or 15.1.D, a proposed
amendment shall be adopted and be effective as an amendment hereto if it is
approved by the General Partner and it receives the Consent of Limited
Partners holding Percentage Interests that are more than fifty percent (50%)
of the aggregate Percentage Interest of all Limited Partners holding Limited
Partnership Interests then entitled to vote thereon (including for such
purpose any such Limited Partnership Interests held by the General Partner).
B. Amendments Not Requiring Limited Partner Approval. Notwithstanding
Section 15.1.A but subject to Section 15.1.C, the General Partner shall have
the power, without the consent of the Limited Partners, to amend this
Agreement as may be required to facilitate or implement any of the following
purposes:
(1) to add to the obligations of the General Partner or surrender any
right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination or withdrawal of
Partners in accordance with this Agreement (which may be effected through
the replacement of Exhibit A with an amended Exhibit A);
(3) to set forth the designations, rights, powers, duties and preferences
of the holders of any additional Partnership Interests issued pursuant to
Article IV;
(4) to reflect a change that does not adversely affect the Limited
Partners in any material respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not inconsistent with law or
with other provisions of this Agreement, or make other changes with respect
to matters arising under this Agreement that will not be inconsistent with
law or with the provisions of this Agreement; and
(5) to satisfy any requirements, conditions, or guidelines contained in
any order, directive, opinion, ruling or regulation of a federal, state or
local agency or contained in federal, state or local law.
The General Partner shall notify the Limited Partners in writing when any
action under this Section 15.1.B is taken in the next regular communication to
the Limited Partners or within 90 days of the date thereof, whichever is
earlier.
C. Amendments Requiring Limited Partner Approval (Excluding General
Partners). Notwithstanding Section 15.1.A, without the Consent of the Outside
Limited Partners, the General Partner shall not amend Section 4.2.A, Section
5.1.E, Section 7.1.A (second sentence only), Section 7.4, Section 7.5, Section
7.6, Section 7.8, Section 7.10 (second sentence only), Section 7.11.B, Section
7.11.C, Section 8.5, Section 9.3, Section 11.2, Section 14.1 (other than
Section 14.1(iii) which can be amended only with a Consent of ninety percent
(90%) of the Units (including Units held by the General Partner)), Section
14.5, this Section 15.1.C or Section 15.2.
D. Other Amendments Requiring Certain Limited Partner
Approval. Notwithstanding anything in this Section 15.1 to the contrary, this
Agreement shall not be amended with respect to any Partner adversely affected
without the Consent of such Partner adversely affected if such amendment would
(i) convert a Limited Partner's interest in the Partnership into a general
partner's interest, (ii) modify the limited liability of a Limited Partner or
require the Limited Partner to make additional Capital Contributions or
provide additional funding to the Partnership, (iii) amend Section 4.1 (last
two sentences only), (iv) amend Section 7.11.A, (v) amend Article V, Article
VI, clauses (1)-(5) of Section 14.2.A or Section 14.3 (except as permitted
pursuant to Sections 4.2, 5.4, 6.2 and 15.1(B)(3)), (vi) amend Section 8.3,
(vii) amend Section 8.6 or any defined terms set forth in Article I
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that relate to the Unit Redemption Right (except as permitted in Section
8.6.E), (viii) amend Section 10.5, Section 11.2.B, Section 11.3.A, Section
11.3.B, Section 11.3.C., Section 11.4.B or Section 11.5 (second sentence
only), (ix) amend Section 16.1, (x) amend Article XII (other than as
reasonably necessary to maintain the General Partner Entity's qualification as
a REIT) or (xi) amend this Section 15.1.D. This Section 15.1.D does not
require unanimous consent of all Partners adversely affected unless the
amendment is to be effective against all Partners adversely affected.
E. Amendment and Restatement of Exhibit A Not An Amendment. Notwithstanding
anything in this Article XV or elsewhere in this Agreement to the contrary,
any amendment and restatement of Exhibit A hereto by the General Partner to
reflect events or changes otherwise authorized or permitted by this Agreement,
whether pursuant to Section 7.1.A(21) hereof or otherwise, shall not be deemed
an amendment of this Agreement and may be done at any time and from time to
time, as necessary by the General Partner without the Consent of the Limited
Partners.
SECTION 15.2 MEETINGS OF THE PARTNERS
A. General. Meetings of the Partners may be called by the General Partner
and shall be called upon the receipt by the General Partner of a written
request by Limited Partners holding twenty-five percent (25%) or more of the
Partnership Interests. The call shall state the nature of the business to be
transacted. Notice of any such meeting shall be given to all Partners not less
than seven (7) days nor more than thirty (30) days prior to the date of such
meeting. Partners may vote in person or by proxy at such meeting. Whenever the
vote or Consent of Partners is permitted or required under this Agreement,
such vote or Consent may be given at a meeting of Partners or may be given in
accordance with the procedure prescribed in Section 15.1.A. Except as
otherwise expressly provided in this Agreement, the consent of Partners
holding Percentage Interests that are more than fifty percent (50%) of the
aggregate Percentage Interest represented by the Partnership Interests then
entitled to vote (including any such Partnership Interests held by the General
Partner) shall control.
B. Actions Without a Meeting. Except as otherwise expressly provided by this
Agreement, any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action so taken is signed by Partners holding Percentage Interests that are
more than fifty percent (50%) (or such other percentage as is expressly
required by this Agreement) of the aggregate Percentage Interest represented
by the Partnership Interests then entitled to vote thereon (including any such
Partnership Interests held by the General Partner). Such consent may be in one
instrument or in several instruments, and shall have the same force and effect
as a vote of Partners holding Percentage Interests that are more than fifty
percent (50%) (or such other percentage as is expressly required by this
Agreement) of the aggregate Percentage Interest represented by the Partnership
Interests then entitled to vote thereon (including any such Partnership
Interests held by the General Partner). Such consent shall be filed with the
General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the date on which written consents from Partners holding the
required Percentage Interests have been filed with the General Partner.
C. Proxy. Each Limited Partner may authorize any Person or Persons to act
for him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Limited Partner
or its attorney-in-fact. No proxy shall be valid after the expiration of
eleven (11) months from the date thereof unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the Limited Partner
executing it, such revocation to be effective upon the Partnership's receipt
of written notice thereof.
D. Conduct of Meeting. Each meeting of Partners shall be conducted by the
General Partner or such other Person as the General Partner may appoint
pursuant to such rules for the conduct of the meeting as the General Partner
or such other Person deem appropriate.
ARTICLE XVI
General Provisions
SECTION 16.1 ADDRESSES AND NOTICE
Any notice, demand, request or report required or permitted to be given or
made to a Partner or Assignee under this Agreement shall be in writing and
shall be deemed given or made when delivered in person or when
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sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address set forth in Exhibit A
or such other address as the Partners shall notify the General Partner in
writing.
SECTION 16.2 TITLES AND CAPTIONS
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no
way define, limit, extend or describe the scope or intent of any provisions
hereof. Except as specifically provided otherwise, references to "Articles"
"Sections" and "Exhibits" are to Articles, Sections and Exhibits of this
Agreement.
SECTION 16.3 PRONOUNS AND PLURALS
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural and vice
versa.
SECTION 16.4 FURTHER ACTION
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
SECTION 16.5 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
SECTION 16.6 CREDITORS
Other than as expressly set forth herein with regard to any Indemnitee, none
of the provisions of this Agreement shall be for the benefit of, or shall be
enforceable by, any creditor of the Partnership.
SECTION 16.7 WAIVER
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
SECTION 16.8 COUNTERPARTS
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all the parties hereto, notwithstanding
that all such parties are not signatories to the original or the same
counterpart. Each party shall become bound by this Agreement immediately upon
affixing its signature hereto.
SECTION 16.9 APPLICABLE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
SECTION 16.10 INVALIDITY OF PROVISIONS
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
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SECTION 16.11 POWER OF ATTORNEY
A. General. Each Limited Partner and each Assignee who accepts Units (or any
rights, benefits or privileges associated therewith) is deemed to irrevocably
constitute and appoint the General Partner, any Liquidator and authorized
officers and attorneys-in-fact of each, and each of those acting singly, in
each case with full power of substitution, as its true and lawful agent and
attorney-in-fact, with full power and authority in its name, place and stead
to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the General
Partner or any Liquidator deems appropriate or necessary to form, qualify
or continue the existence or qualification of the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware and in all other jurisdictions in which
the Partnership may conduct business or own property, (b) all instruments
that the General Partner or any Liquidator deem appropriate or necessary to
reflect any amendment, change, modification or restatement of this
Agreement in accordance with its terms, (c) all conveyances and other
instruments or documents that the General Partner or any Liquidator deems
appropriate or necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement, including, without
limitation, a certificate of cancellation, (d) all instruments relating to
the admission, withdrawal, removal or substitution of any Partner pursuant
to, or other events described in, Article XI, XII or XIII hereof or the
Capital Contribution of any Partner and (e) all certificates, documents and
other instruments relating to the determination of the rights, preferences
and privileges of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner or
any Liquidator, to make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action which is made or given by the
Partners hereunder or is consistent with the terms of this Agreement or
appropriate or necessary, in the sole discretion of the General Partner or
any Liquidator, to effectuate the terms or intent of this Agreement.
Nothing contained in this Section 16.11 shall be construed as authorizing
the General Partner or any Liquidator to amend this Agreement except in
accordance with Article XV hereof or as may be otherwise expressly provided
for in this Agreement.
B. Irrevocable Nature. The foregoing power of attorney is hereby declared to
be irrevocable and a power coupled with an interest, in recognition of the
fact that each of the Partners will be relying upon the power of the General
Partner or any Liquidator to act as contemplated by this Agreement in any
filing or other action by it on behalf of the Partnership, and it shall
survive and not be affected by the subsequent Incapacity of any Limited
Partner or Assignee and the transfer of all or any portion of such Limited
Partner's or Assignee's Units and shall extend to such Limited Partner's or
Assignee's heirs, successors, assigns and personal representatives. Each such
Limited Partner or Assignee hereby agrees to be bound by any representation
made by the General Partner or any Liquidator, acting in good faith pursuant
to such power of attorney; and each such Limited Partner or Assignee hereby
waives any and all defenses which may be available to contest, negate or
disaffirm the action of the General Partner or any Liquidator, taken in good
faith under such power of attorney. Each Limited Partner or Assignee shall
execute and deliver to the General Partner or the Liquidator, within fifteen
(15) days after receipt of the General Partner's or Liquidator's request
therefor, such further designation, powers of attorney and other instruments
as the General Partner or the Liquidator, as the case may be, deems necessary
to effectuate this Agreement and the purposes of the Partnership.
SECTION 16.12 ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement among the
Partners with respect to the subject matter hereof and supersedes any prior
written oral understandings or agreements among them with respect thereto.
A-55
<PAGE>
SECTION 16.13 NO RIGHTS AS SHAREHOLDERS
Nothing contained in this Agreement shall be construed as conferring upon
the holders of the Units any rights whatsoever as partners or shareholders of
the General Partner Entity, including, without limitation, any right to
receive dividends or other distributions made to shareholders of the General
Partner Entity or to vote or to consent or receive notice as shareholders in
respect to any meeting of shareholders for the election of trustees of the
General Partner Entity or any other matter.
SECTION 16.14 LIMITATION TO PRESERVE REIT STATUS
To the extent that any amount paid or credited to the General Partner or any
of its officers, directors, trustees, employees or agents pursuant to Section
7.4 or Section 7.7 would constitute gross income to the General Partner for
purposes of Section 856(c)(2) or 856(c)(3) of the Code (a "General Partner
Payment") then, notwithstanding any other provision of this Agreement, the
amount of such General Partner Payment for any fiscal year shall not exceed
the lesser of:
(i) an amount equal to the excess, if any, of (a) 4.20% of the General
Partner's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
through (H) of Section 856(c)(2) of the Code over (b) the amount of gross
income (within the meaning of Section 856(c)(2) of the Code) derived by the
General Partner from sources other than those described in subsections (A)
through (H) of Section 856(c)(2) of the Code (but not including the amount
of any General Partner Payments); or
(ii) an amount equal to the excess, if any of (a) 25% of the General
Partner's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
through (I) of Section 856(c)(3) of the Code over (b) the amount of gross
income (within the meaning of Section 856(c)(3) of the Code) derived by the
General Partner from sources other than those described in subsections (A)
through (I) of Section 856(c)(3) of the Code (but not including the amount
of any General Partner Payments);
provided, however, that General Partner Payments in excess of the amounts set
forth in subparagraphs (i) and (ii) above may be made if the General Partner,
as a condition precedent, obtains an opinion of tax counsel that the receipt
of such excess amounts would not adversely affect the General Partner's
ability to qualify as a REIT. To the extent General Partner Payments may not
be made in a year due to the foregoing limitations, such General Partner
Payments shall carry over and be treated as arising in the following year,
provided, however, that such amounts shall not carry over for more than five
years, and if not paid within such five year period, shall expire; provided
further, that (i) as General Partner Payments are made, such payments shall be
applied first to carry over amounts outstanding, if any, and (ii) with respect
to carry over amounts for more than one Partnership Year, such payments shall
be applied to the earliest Partnership Year first.
A-56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
HOST MARRIOTT TRUST
By:
---------------------------------
Name:
Title:
LIMITED PARTNERS:
By:
---------------------------------
as Attorney-in-Fact for the
Limited Partners
A-57
<PAGE>
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
CLASS A CLASS B AGREED INITIAL PERCENTAGE
NAME AND ADDRESS OF PARTNER PARTNERSHIP UNITS PARTNERSHIP UNITS CAPITAL ACCOUNT INTEREST
- --------------------------- ----------------- ----------------- --------------- ----------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
LIMITED PARTNERS:
TOTAL 100.00%
=== === === ======
</TABLE>
A-58
<PAGE>
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. CAPITAL ACCOUNTS OF THE PARTNERS
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section l.704-l(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership
income and gain (including income and gain exempt from tax) computed in
accordance with Section 1.B hereof and allocated to such Partner pursuant to
Section 6.1 of the Agreement and Exhibit C thereof, and decreased by (x) the
amount of cash or Agreed Value of all actual and deemed distributions of cash
or property made to such Partner pursuant to this Agreement and (y) all items
of Partnership deduction and loss computed in accordance with Section 1.B
hereof and allocated to such Partner pursuant to Section 6.1 of the Agreement
and Exhibit C thereof.
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a) (1) of the Code shall be included in taxable income or loss),
with the following adjustments:
(1) Except as otherwise provided in Regulations Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership, provided that the amounts of
any adjustments to the adjusted bases of the assets of the Partnership made
pursuant to Section 734 of the Code as a result of the distribution of
property by the Partnership to a Partner (to the extent that such
adjustments have not previously been reflected in the Partners' Capital
Accounts) shall be reflected in the Capital Accounts of the Partners in the
manner and subject to the limitations prescribed in Regulations Section
l.704-1(b)(2)(iv) (m)(4).
(2) The computation of all items of income, gain, and deduction shall be
made without regard to the fact that items described in Sections
705(a)(l)(B) or 705(a)(2)(B) of the Code are not includable in gross income
or are neither currently deductible nor capitalized for federal income tax
purposes.
(3) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(4) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year.
(5) In the event the Carrying Value of any Partnership Asset is adjusted
pursuant to Section 1.D hereof, the amount of any such adjustment shall be
taken into account as gain or loss from the disposition of such asset.
(6) Any items specially allocated under Section 2 of Exhibit C hereof
shall not be taken into account.
C. Generally, a transferee (including any Assignee) of a Unit shall succeed
to a pro rata portion of the Capital Account of the transferor; provided,
however, that, if the transfer causes a termination of the Partnership under
Section 708(b)(l)(B) of the Code, the Partnership's properties shall be
deemed, solely for federal income tax purposes, to have been distributed in
liquidation of the Partnership to the holders of the Partnership units
(including the transferee) and recontributed by such Persons in reconstitution
of the Partnership. In such event, the Carrying Values of the Partnership
properties shall be adjusted immediately prior to such deemed distribution
pursuant to Section 1.D(2) hereof. The Capital Accounts of such reconstituted
Partnership shall be maintained in accordance with the principles of this
Exhibit B.
A-59
<PAGE>
D. (1) Consistent with the provisions of Regulations Section 1.704-
1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Values of all
Partnership assets shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership property,
as of the times of the adjustments provided in Section 1.D(2) hereof, as if
such Unrealized Gain or Unrealized Loss had been recognized on an actual sale
of each such property and allocated pursuant to Section 6.1 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a)
immediately prior to the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than a de
minimis Capital Contribution; (b) immediately prior to the distribution by the
Partnership to a Partner of more than a de minimis amount of property as
consideration for an interest in the Partnership; and (c) immediately prior to
the liquidation of the Partnership within the meaning of Regulations Section
1.704-l(b)(2)(ii)(g), provided however that adjustments pursuant to clauses
(a) and (b) above shall be made only if the General Partner determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership.
(3) In accordance with Regulations Section 1.704-l(b)(2)(iv)(e), the
Carrying Value of Partnership assets distributed in kind shall be adjusted
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as of the time any such asset is
distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of this
Exhibit B, the aggregate cash amount and fair market value of all Partnership
assets (including cash or cash equivalents) shall be determined by the General
Partner using such reasonable method of valuation as it may adopt, or in the
case of a liquidating distribution pursuant to Article XIV of the Agreement,
shall be determined and allocated by the Liquidator using such reasonable
methods of valuation as it may adopt. The General Partner, or the Liquidator,
as the case may be, shall allocate such aggregate fair market value among the
assets of the Partnership in such manner as it determines in its sole and
absolute discretion to arrive at a fair market value for individual
properties.
E. The provisions of the Agreement (including this Exhibit B and the other
Exhibits to the Agreement) relating to the maintenance of Capital Accounts are
intended to comply with Regulations Section 1.704-1(b), and shall be
interpreted and applied in a manner consistent with such Regulations. In the
event the General Partner shall determine that it is prudent to modify the
manner in which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating to liabilities
which are secured by contributed or distributed property or which are assumed
by the Partnership, the General Partner, or the Limited Partners) are computed
in order to comply with such Regulations, the General Partner may make such
modification without regard to Article XV of the Agreement, provided that it
is not likely to have a material effect on the amounts distributable to any
Person pursuant to Article XIV of the Agreement upon the dissolution of the
Partnership. The General Partner also shall (i) make any adjustments that are
necessary or appropriate to maintain equality between the Capital Accounts of
the Partners and the amount of Partnership capital reflected on the
Partnership's balance sheet, as computed for book purposes, in accordance with
Regulations Section l.704-l(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section l.704-1(b).
2. NO INTEREST
No interest shall be paid by the Partnership on Capital Contributions or on
balances in Partners' Capital Accounts.
3. NO WITHDRAWAL
No Partner shall be entitled to withdraw any part of its Capital
Contribution or Capital Account or to receive any distribution from the
Partnership, except as provided in Articles IV, V, VII, XIII and XIV of the
Agreement.
A-60
<PAGE>
EXHIBIT C
Special Allocation Rules
1. SPECIAL ALLOCATION RULES.
Notwithstanding any other provision of the Agreement or this Exhibit C, the
following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of
the Agreement or any other provisions of this Exhibit C, if there is a net
decrease in Partnership Minimum Gain during any Partnership Year, each Partner
shall be specially allocated items of Partnership income and gain for such
year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain, as determined
under Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(f)(6). This
Section 1.A is intended to comply with the minimum gain chargeback
requirements in Regulations Section 1.704-2(f) and for purposes of this
Section 1.A only, each Partner's Adjusted Capital Account Deficit shall be
determined prior to any other allocations pursuant to Section 6.1 of this
Agreement with respect to such Partnership Year and without regard to any
decrease in Partner Minimum Gain during such Partnership Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of
Section 6.1 of this Agreement or any other provisions of this Exhibit C
(except Section 1.A hereof), if there is a net decrease in Partner Minimum
Gain attributable to a Partner Nonrecourse Debt during any Partnership Year,
each Partner who has a share of the Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i) (5), shall be specially allocated items of Partnership income and
gain for such year (and, if necessary, subsequent years) in an amount equal to
such Partner's share of the net decrease in Partner Minimum Gain attributable
to such Partner Nonrecourse Debt, determined in accordance with Regulations
Section 1.704-2(i) (5). Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be allocated to each
General Partner and Limited Partner pursuant thereto. The items to be so
allocated shall be determined in accordance with Regulations Section 1.704-
2(i) (4). This Section 1.B is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and shall be
interpreted consistently therewith. Solely for purposes of this Section 1.B,
each Partner's Adjusted Capital Account Deficit shall be determined prior to
any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit
with respect to such Partnership Year, other than allocations pursuant to
Section 1.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly receives
any adjustments, allocations or distributions described in Regulations
Sections 1.704-l(b)(2)(ii)(d)(4), l.704-1(b)(2)(ii)(d)(5), or 1.704-
l(b)(2)(ii)(d)(6), and after giving effect to the allocations required under
Sections 1.A and 1.B hereof with respect to such Partnership Year, such
Partner has an Adjusted Capital Account Deficit, items of Partnership income
and gain (consisting of a pro rata portion of each item of Partnership income,
including gross income and gain for the Partnership Year) shall be
specifically allocated to such Partner in an amount and manner sufficient to
eliminate, to the extent required by the Regulations, its Adjusted Capital
Account Deficit created by such adjustments, allocations or distributions as
quickly as possible. This Section 1.C is intended to constitute a "qualified
income offset" under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
D. Gross Income Allocation. In the event that any Partner has an Adjusted
Capital Account Deficit at the end of any Partnership Year (after taking into
account allocations to be made under the preceding paragraphs hereof with
respect to such Partnership Year), each such Partner shall be specially
allocated items of Partnership income and gain (consisting of a pro rata
portion of each item of Partnership income, including gross income and gain
for the Partnership Year) in an amount and manner sufficient to eliminate, to
the extent required by the Regulations, its Adjusted Capital Account Deficit.
A-61
<PAGE>
E. Nonrecourse Deductions. Except as may otherwise be expressly provided by
the General Partner pursuant to Section 4.2 with respect to other classes of
Units, Nonrecourse Deductions for any Partnership Year shall be allocated only
to the Partners holding Class A Units and Class B Units in accordance with
their respective Percentage Interests. If the General Partner determines in
its good faith discretion that the Partnership's Nonrecourse Deductions must
be allocated in a different ratio to satisfy the safe harbor requirements of
the Regulations promulgated under Section 704(b) of the Code, the General
Partner is authorized, upon notice to the Limited Partners, to revise the
prescribed ratio for such Partnership Year to the numerically closest ratio
which would satisfy such requirements.
F. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for
any Partnership Year shall be specially allocated to the Partner who bears the
economic risk of loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Regulations Sections 1.704-2(b)(4) and 1.704-2(i).
G. Code Section 754 Adjustments. To the extent an adjustment to the adjusted
tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the
Code is required, pursuant to Regulations Section 1.704-l(b)(2)(iv)(m), to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in which
their Capital Accounts are required to be adjusted pursuant to such Section of
the Regulations.
2. ALLOCATIONS FOR TAX PURPOSES
A. Except as otherwise provided in this Section 2, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as its correlative item of "book"
income, gain, loss or deduction is allocated pursuant to Section 6.1 of the
Agreement and Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss, and
deduction shall be allocated for federal income tax purposes among the
Partners as follows:
(1) (a) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners consistent with the
principles of Section 704(c) of the Code to take into account the variation
between the 704(c) Value of such property and its adjusted basis at the
time of contribution (taking into account Section 2.C of this Exhibit C);
and
(b) any item of Residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the same
manner as its correlative item of "book" gain or loss is allocated
pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit
C.
(2) (a) In the case of an Adjusted Property, such items shall
(i) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into
account the Unrealized Gain or Unrealized Loss attributable to such
property and the allocations thereof pursuant to Exhibit B;
(ii) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a manner
consistent with Section 2.B(1) of this Exhibit C; and
(b) any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the same
manner its correlative item of "book" gain or loss is allocated
pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit
C.
(3) all other items of income, gain, loss and deduction shall be
allocated among the Partners the same manner as their correlative item of
"book" gain or loss is allocated pursuant to Section 6.1 of the Agreement
and Section 1 of this Exhibit C.
A-62
<PAGE>
C. To the extent Regulations promulgated pursuant to Section 704(c) of the
Code permit a partnership to utilize alternative methods to eliminate the
disparities between the Carrying Value of property and its adjusted basis, the
General Partner shall, subject to the following, have the authority to elect
the method to be used by the Partnership and such election shall be binding on
all Partners. Subject to the exceptions described in the next three sentences,
with respect to the Contributed Property transferred to the Partnership as of
the date hereof, the Partnership shall elect to use the "traditional method"
set forth in Regulations Section 1.704-3(b), but may make a curative
allocation pursuant to Regulations Section 1.704-3(c) to a Partner of taxable
gain recognized by the Partnership on the sale or other taxable disposition of
part or all of the Contributed Property to reduce or eliminate disparities
between the book and tax items of the noncontributing Partners attributable to
the application of the "ceiling rule" under the "traditional method." With
respect to the Contributed Property transferred to the Partnership as of the
date hereof by various affiliates of The Blackstone Group and a series of
funds controlled by Blackstone Real Estate Partners, the Partnership shall
elect to use the "traditional method" set forth in Regulations Section 1.704-
3(b). With respect to the Contributed Property transferred to the Partnership
by The Ritz-Carlton Hotels as of the date hereof, the Partnership shall use
the method specified pursuant to the agreement governing the contribution of
the Contributed Property. With respect to the Contributed Property transferred
to the Partnership by Capitol Center Associates Limited Partnership as of the
date hereof, the Partnership shall use the "remedial method" set forth in
Regulations Section 1.704-3(d).
A-63
<PAGE>
EXHIBIT D
Notice of Redemption
The undersigned hereby irrevocably (i) redeems Units in Host Marriott,
L.P. in accordance with the terms of the First Amended and Restated Agreement
of Limited Partnership of Host Marriott, L.P., as amended, and the Unit
Redemption Right referred to therein, (ii) surrenders such Units and all
right, title and interest therein and (iii) directs that the Cash Amount or
Shares Amount (as determined by the General Partner) deliverable upon exercise
of the Unit Redemption Right be delivered to the address specified below, and
if Shares are to be delivered, such Shares be registered or placed in the
name(s) and at the address(es) specified below. The undersigned hereby
represents, warrants and certifies that the undersigned (a) has marketable and
unencumbered title to such Units, free and clear of the rights of or interests
of any other person or entity, (b) has the full right, power and authority to
redeem and surrender such Units as provided herein and (c) has obtained the
consent or approval of all persons or entities, if any, having the right to
consult or approve such redemption and surrender.
Dated: Name of Limited Partner:
----------- ------------
-------------------------------------
(Signature of Limited Partner)
-------------------------------------
(Street Address)
-------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
-------------------------------------
If Shares are to be issued, issue to:
Name:
Please insert social security or identifying number:
A-64
<PAGE>
EXHIBIT E
VALUE OF CONTRIBUTED PROPERTY
<TABLE>
<CAPTION>
CONTRIBUTED PROPERTY 704(C) VALUE AGREED VALUE
- -------------------- ------------ ------------
<S> <C> <C>
$ $
---- ----
Subtotal............................................ $ $
---- ----
$ $
---- ----
Subtotal............................................ $ $
---- ----
$ $
---- ----
Subtotal............................................ $ $
---- ----
$ $
---- ----
Subtotal............................................ $ $
---- ----
$ $
---- ----
Subtotal............................................ $ $
---- ----
$ $
---- ----
Subtotal............................................ $ $
---- ----
TOTAL CONTRIBUTED PROPERTY............................ $ $
==== ====
</TABLE>
A-65
<PAGE>
APPENDIX B
B-1
<PAGE>
APPENDIX C
FORM OF TAX OPINION OF
HOGAN & HARTSON L.L.P.
WITH RESPECT TO MERGERS
, 1998
Host Marriott Trust
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as tax counsel to Host Marriott Trust, a Maryland real estate
investment trust ("Host REIT"), Host Marriott Corporation, a Delaware
corporation ("Host"), and Host Marriott, L.P., a Delaware limited partnership
(the "Operating Partnership"), in connection with the following series of
related transactions (which collectively are referred to as the "REIT
Conversion"), each of which is described more fully in the Prospectus/Consent
Solicitation Statement which is part of the Registration Statement filed with
the Securities and Exchange Commission by the Operating Partnership on Form S-
4 (File No. 333-55807) and which includes the Supplement for each Partnership
(as defined in (i) below) attached thereto (the "Consent Solicitation"):
(i) the contribution of the following assets by Host and its subsidiaries
to the Operating Partnership, in exchange for a number of units of limited
partnership interest ("OP Units") and units of general partnership interest
of the Operating Partnership equal to the number of shares of Host common
stock outstanding at the time of the REIT Conversion, preferred partnership
interests in the Operating Partnership corresponding to any shares of Host
preferred stock outstanding at the time of the REIT Conversion, and the
assumption of certain liabilities of Host and its subsidiaries: (a) its
wholly owned full-service hotel assets; (b) its interests in Atlanta
Marriott Marquis II Limited Partnership, a Delaware limited partnership
("Atlanta Marquis"); Desert Springs Marriott Limited Partnership, a
Delaware limited partnership ("Desert Springs"); Hanover Marriott Limited
Partnership, a Delaware limited partnership ("Hanover"); Marriott
Diversified American Hotels, L.P., a Delaware limited partnership ("MDAH");
Marriott Hotel Properties Limited Partnership, a Delaware limited
partnership ("MHP"); Marriott Hotel Properties II Limited Partnership, a
Delaware limited partnership ("MHP2"); Mutual Benefit Chicago Marriott
Suite Hotel Partners, L.P., a Rhode Island limited partnership ("Chicago
Suites"); and Potomac Hotel Limited Partnership, a Delaware limited
partnership ("PHLP") (collectively, the "Partnerships"); (c) its interests
in partnerships (other than the Partnerships) or limited liability
companies that own one or more full-service hotels and are not wholly owned
by Host or one of its subsidiaries (the "Private Partnerships" and together
with the Partnerships, the "Hotel Partnerships"); and (d) certain other
businesses and assets (excluding that portion of its shares of common stock
of HMC Senior Communities, Inc., a Delaware corporation ("SLC"), and a
certain amount of cash and possibly other consideration, which Host will
distribute to its shareholders, as described in (vii) below);
(ii) the refinancing and amendment of the debt securities and certain
credit facilities of Host;
(iii) the proposed mergers of subsidiaries of the Operating Partnership
(the "Merger Partnerships") into the Partnerships, in which the
Partnerships will be the surviving entities (the "Mergers");
(iv) the acquisition (whether by merger or otherwise) by the Operating
Partnership of certain Private Partnerships or interests therein;
(v) the acquisition by the Operating Partnership of ownership of, or
controlling interests in, twelve upscale and luxury full-service hotel
properties (the "Blackstone Hotels") and certain other related assets
(including a mortgage loan secured by an additional hotel) from The
Blackstone Group and a series of funds controlled by Blackstone Real Estate
Partners (collectively, the "Blackstone Entities") in exchange for the
assumption or repayment of debt, OP Units and shares of common stock of
SLC, and cash (the "Blackstone Acquisition");
C-1
<PAGE>
(vi) the creation and capitalization of the one or more taxable
corporations in which the Operating Partnership will own 95% of the
economic interest but no voting stock and which will hold various assets
contributed by Host and its subsidiaries to the Operating Partnership (the
"Non-Controlled Subsidiaries") with all of the voting stock, representing
5% of the economic interest, to be owned by the Host Marriott Incentive
Compensation Statutory Trust, the beneficiaries of which will be certain
employees of Host REIT and a designated public charity (the "Incentive
Compensation Trust");
(vii) the merger of Host into Host REIT, and the subsequent distribution
by Host of SLC common stock and cash and possibly other consideration to
Host's shareholders;
(viii) the leasing of the hotels in which the Operating Partnership has a
direct or indirect interest (the "Hotels") to subsidiaries of SLC; and
(ix) the related transactions described in the Consent Solicitation and
the other steps necessary or desirable to complete the REIT Conversion.
In connection with the REIT Conversion, we have been asked to provide you
with the opinions on certain federal income tax matters set forth in this
letter. Capitalized terms used in this letter and not otherwise defined herein
have the meaning set forth in the Consent Solicitation.
BASES FOR OPINIONS
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, applicable legislative history, and the administrative rulings and
practices of the Internal Revenue Service (the "IRS"), including its practices
and policies in issuing private letter rulings, which are not binding on the
IRS except with respect to a taxpayer that receives such a ruling, all as of
the date hereof. These provisions and interpretations are subject to change,
which may or may not be retroactive in effect, that might result in material
modifications of our opinions. Our opinion does not foreclose the possibility
of a contrary determination by the IRS or a court of competent jurisdiction,
or of a contrary position taken by the IRS or the Treasury Department in
regulations or rulings issued in the future. In this regard, an opinion of
counsel with respect to an issue merely represents counsel's best judgment
with respect to the probable outcome on the merits with respect to such issue,
is not binding on the IRS or the courts, and is not a guarantee that the IRS
will not assert a contrary position with respect to such issue or that a court
will not sustain such a position asserted by the IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the
following: (1) the Consent Solicitation; (2) the First Amended and Restated
Agreement of Limited Partnership of the Operating Partnership, dated as of
, 1998; (3) the Declaration of Trust of Host REIT, dated as of , 1998;
(4) the Articles of Incorporation of SLC, dated as of and the Bylaws of
SLC, dated as of ; (5) the partnership agreements (or form thereof), each
as amended to the date hereof and as proposed to be amended in connection with
the REIT Conversion, of each Partnership, each Merger Partnership and each
Private Partnership that will remain in existence after the REIT Conversion;
(6) the form of agreement of merger relating to the Mergers (including various
exhibits thereto) by and among the Operating Partnership, a Partnership, and
its corresponding Merger Partnership, as amended to the date hereof; (7) each
contribution agreement relating to the acquisition by the Operating
Partnership of the non-Host interests in the Private Partnerships; (8) the
separate contribution agreements (or form thereof) relating to the Blackstone
Acquisition and the acquisition by the Operating Partnership of Host's assets,
respectively; (9) the form of lease pursuant to which the Operating
Partnership, its subsidiaries and its controlled partnerships will lease
virtually all of the Hotels to the Lessees (the "Leases"); (10) the form of
sale agreements pursuant to which the Operating Partnership and certain of its
subsidiaries and controlled partnerships, and Atlanta Marquis, Hanover, MHP
and PHLP will separately sell a portion of the personal property associated
with the hotels owned by such entities to a Non-Controlled Subsidiary; (11)
the organizational documents (or form thereof) relating to the formation and
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capitalization of each Non-Controlled Subsidiary; (12) the form of operating
agreement of the Lessees, each as amended through the date hereof; (13) the
organizational documents (or form thereof) relating to the formation and
capitalization of the Incentive Compensation Trust; and (14) any other
necessary documents. In particular, in rendering the opinions set forth in
this letter, we have relied on certain written representations of Host REIT,
Host, the Operating Partnership, and the General Partners contained in a
letter to us dated on this date, regarding certain aspects of the REIT
Conversion (the "Representation Letter").
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Consent Solicitation and the Representation Letter.
In particular, but without limiting the foregoing, we did not prepare the
information in (i) the chart setting forth the estimated Book-Tax Difference
per Partnership Unit with respect to the Hotels owned by each of the
Partnerships, which appears in the Consent Solicitation under the heading
"Federal Income Tax Consequences--Tax Treatment of Limited Partners Who Hold
OP Units Following the Mergers--Sale of Individual Hotels" (or the
corresponding information included in the Supplements for the individual
Partnerships); (ii) the chart setting forth the estimated "capital accounts"
for the Limited Partners in each of the Partnerships (per Partnership Unit) as
of the time of the Mergers, which appears in the Consent Solicitation under
the heading "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Refinancing of the
Indebtedness Secured by Individual Hotels;" (iii) Appendix E to the Consent
Solicitation; or (iv) the numerical information appearing in the Supplements
for the individual Partnerships under the caption "Federal Income Tax
Consequences--Tax Treatment of [Partnership] Limited Partners Who Exercise
Their Right to Make the Note Election," and we did not review or otherwise
pass upon the underlying data used in preparing this information.
We consequently have relied upon representations in the Representation
Letter that the information presented in such documents or otherwise furnished
to us is accurate and complete in all material respects. We are not aware,
however, of any material facts or circumstances contrary to, or inconsistent
with, the representations we have relied upon as described herein, or other
assumptions set forth herein.
In this regard, we have assumed the following: (i) that all of the
representations and statements set forth in the documents that we reviewed
(including the Representation Letter) are true and correct, and that all of
the obligations imposed by any such documents on the parties thereto have been
and will continue to be performed or satisfied in accordance with their terms;
(ii) the genuineness of all signatures, the proper execution of all documents,
the authenticity of all documents submitted to us as originals, the conformity
to originals of documents submitted to us as copies, and the authenticity of
the originals from which any copies were made; (iii) that each of the
Operating Partnership, the Hotel Partnerships, the Merger Partnerships and the
other direct or indirect subsidiaries of the Operating Partnership have been
and will continue to be operated in the manner described in the relevant
partnership agreement, limited liability company operating agreement, articles
of incorporation, or other organizational documents and in the Consent
Solicitation; and (iv) that each of the Operating Partnership, the Hotel
Partnerships, the Merger Partnerships and the other direct or indirect
subsidiaries of the Operating Partnership is duly organized and validly
existing under the laws of the state in which it was created. Any variation or
difference in the facts from those set forth in the documents that we have
reviewed and upon which we have relied (including in particular, the Consent
Solicitation and the Representation Letter) may affect the conclusions stated
herein.
OPINIONS
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, we are of the opinion that:
1. The proposed method of operation of the Operating Partnership is such
that it and each of the Partnerships will be treated as a partnership for
federal income tax purposes and will not be subject to tax as a corporation
or an association taxable as a corporation.
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2. Except for any gain attributable to the sale of personal property to a
Non-Controlled Subsidiary in connection with the REIT Conversion, the
Mergers will not result in the recognition of taxable gain or loss at the
time of the Mergers to a Limited Partner (i) who does not exercise his Unit
Redemption Right on a date sooner than the date two years after the date of
the consummation of the Mergers; (ii) who does not receive a cash
distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of the prepayment of certain
indebtedness) in connection with the Mergers in excess of such Limited
Partner's adjusted basis in his Partnership Interest at the time of the
Mergers; (iii) who does not receive a Note upon the exercise of his right
to make the Note Election; (iv) who is not required to recognize gain by
reason of the exercise by another Limited Partner in the same Partnership
of his right to make the Note Election; and (v) whose "at risk" amount does
not fall below zero as a result of the Mergers.
3. The Unit Redemption Right will not be considered "other consideration"
such that its receipt in the Mergers would result in a Limited Partner
being treated under the "disguised sale" rules (as set forth in Section 707
of the Code and the Treasury Regulations thereunder) as having sold all or
a portion of his Partnership Interest to the Operating Partnership in the
Mergers.
4. A Limited Partner's exercise of his Unit Redemption Right more than
two years after the date of consummation of the Mergers will not cause the
Mergers to constitute a taxable transaction for the Limited Partner (or for
the other Limited Partners in the same Partnership).
5. It is more likely than not that a Limited Partner's exercise of his
Unit Redemption Right more than one year after the date of consummation of
the Mergers but less than two years after such date will not cause the
Mergers to constitute a taxable transaction for the Limited Partner (or for
the other Limited Partners in the same Partnership).
6. Although the matter is not free from doubt, a Limited Partner who does
not exercise his right to make the Note Election should not be required to
recognize gain by reason of the exercise of such right by another Limited
Partner in the same Partnership. In any event, such Limited Partner would
not recognize gain in excess of the amount of such Limited Partner's
allocable share of such gain (determined pursuant to his Partnership's
partnership agreement).
7. A Limited Partner's relief from Partnership liabilities allocable to
such Limited Partner in connection with the Mergers and the REIT Conversion
and/or any subsequent repayment of certain indebtedness encumbering the
Hotels will not cause such Limited Partner to recognize taxable gain at the
time of the Mergers unless (and only to the extent that) the amount thereof
exceeds such Limited Partner's adjusted basis in his Partnership Interest
at the time of the Mergers.
8. The discussion in each of the Consent Solicitation and the Supplements
under the heading "Federal Income Tax Consequences," to the extent such
discussion contains descriptions of applicable federal income tax law, is
correct in all material respects.
In connection with our opinion regarding the tax status of the Operating
Partnership, we note that if a partnership is a "publicly traded partnership"
within the meaning of Section 7704 of the Code and the Treasury Regulations
thereunder, it may not be treated as a partnership for federal income tax
purposes. Based upon, subject to, and limited by the assumptions and
qualifications set forth herein, we are of the opinion that, as of the
Effective Date, the Operating Partnership will not be a "publicly traded
partnership." There is a significant risk, however, that after the Unit
Redemption Right becomes exercisable, the Operating Partnership will be a
"publicly traded partnership." Nevertheless, a partnership that is a "publicly
traded partnership" will be treated as a partnership for federal income tax
purposes if at least ninety percent (90%) of its income consists of
"qualifying income," as defined in Section 7704(d) of the Code. In this
regard, we expect to provide Host REIT and the Operating Partnership with an
opinion letter on the Effective Date, which will be based, in part, on our
opinion that even if the Operating Partnership were a "publicly traded
partnership" within the meaning of Section 7704 of the Code and the Treasury
Regulations thereunder, it should qualify as a partnership for federal income
tax purposes because it will have sufficient "qualifying income," as defined
in Section 7704(d) of the Code. That opinion, however, will be based upon and
limited by a number of representations as to key factual matters by Host REIT
and the Operating Partnership.
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We note that in connection with the REIT Conversion, Atlanta Marquis,
Hanover, MHP and PHLP will be required to sell a portion of the personal
property associated with the Hotels owned by such Partnerships to a Non-
Controlled Subsidiary. This opinion letter does not address the tax
consequences to such Partnerships or the Limited Partners of such Partnerships
of these transactions.
In addition, a Limited Partner may exercise his right to make the Note
Election and receive a Note in exchange for OP Units received in connection
with the Mergers. This opinion letter does not address the tax consequences to
the Limited Partners who make this election. Furthermore, as discussed in the
Consent Solicitation under the heading "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Effect of Subsequent Events," a variety of future
events and transactions could cause some or all of the Limited Partners
holding OP Units to recognize part or all of the taxable gain that otherwise
has been deferred through the Mergers. This opinion letter does not address
the tax consequences to the Limited Partners of such future events and
transactions, and the Limited Partners will have limited control, if any
control, over whether these events and transactions occur.
* * * * *
For a discussion relating the law to the facts, and the legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussions of federal income tax issues in the Consent Solicitation and
each of the Supplements under the heading "Federal Income Tax Consequences."
We assume no obligation to advise you of any changes in our opinion
subsequent to the deliveries of this opinion letter.
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or
foreign tax consequences that may result from the REIT Conversion or any other
transaction undertaken in connection therewith. Without limitation to the
foregoing, this opinion letter expressly does not, and should not be construed
to, address the tax consequences of the REIT Conversion for the General
Partners, Host, Host REIT, or the owners of interests in any of these
entities.
This opinion letter has been prepared solely for your use in connection with
the Consent Solicitation and the REIT Conversion and should not be quoted in
whole or in part or otherwise be referred to, nor filed with or furnished to
any governmental agency or other person or entity, without the prior written
consent of this firm. We do, however, consent to the references to this
opinion letter and to Hogan & Hartson L.L.P. under the captions, "Legal
Matters" and "Federal Income Tax Consequences," in the Consent Solicitation
(and under the caption, "Federal Income Tax Consequences," in each of the
Supplements) and to the inclusion of this opinion letter as an exhibit to the
Consent Solicitation. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933.
Very truly yours,
Hogan & Hartson L.L.P.
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APPENDIX D
FORM OF TAX OPINION OF
HOGAN & HARTSON L.L.P.
WITH RESPECT TO QUALIFICATION
OF HOST REIT AS A REIT
, 1998
Host Marriott Trust
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, MD 20817
Ladies and Gentlemen:
We have acted as tax counsel to Host Marriott Trust, a Maryland real estate
investment trust ("Host REIT"), Host Marriott Corporation, a Delaware
corporation ("Host"), and Host Marriott, L.P., a Delaware limited partnership
(the "Operating Partnership"), in connection with the following series of
related transactions (which collectively are referred to as the "REIT
Conversion"), each of which is described more fully in the Prospectus/Consent
Solicitation Statement which is part of the Registration Statement filed with
the Securities and Exchange Commission by the Operating Partnership on Form S-
4 (File No. 333-55807) and which includes the Supplement for each Partnership
(as defined in (i) below) attached thereto (the "Consent Solicitation"):
(i) the contribution of the following assets by Host and its subsidiaries
to the Operating Partnership, in exchange for a number of units of limited
partnership interest ("OP Units") and units of general partnership interest
of the Operating Partnership equal to the number of shares of Host common
stock outstanding at the time of the REIT Conversion, preferred partnership
interests in the Operating Partnership corresponding to any shares of Host
preferred stock outstanding at the time of the REIT Conversion, and the
assumption of certain liabilities of Host and its subsidiaries: (a) its
wholly owned full-service hotel assets; (b) its interests in Atlanta
Marriott Marquis II Limited Partnership, a Delaware limited partnership
("Atlanta Marquis"); Desert Springs Marriott Limited Partnership, a
Delaware limited partnership ("Desert Springs"); Hanover Marriott Limited
Partnership, a Delaware limited partnership ("Hanover"); Marriott
Diversified American Hotels, L.P., a Delaware limited partnership ("MDAH");
Marriott Hotel Properties Limited Partnership, a Delaware limited
partnership ("MHP"); Marriott Hotel Properties II Limited Partnership, a
Delaware limited partnership ("MHP2"); Mutual Benefit Chicago Marriott
Suite Hotel Partners, L.P., a Rhode Island limited partnership ("Chicago
Suites"); and Potomac Hotel Limited Partnership, a Delaware limited
partnership ("PHLP") (collectively, the "Partnerships"); (c) its interests
in partnerships (other than the Partnerships) or limited liability
companies that own one or more full-service hotels and are not wholly owned
by Host or one of its subsidiaries (the "Private Partnerships" and together
with the Partnerships, the "Hotel Partnerships"); and (d) certain other
businesses and assets (excluding that portion of its shares of common stock
of HMC Senior Communities, Inc., a Delaware corporation ("SLC") and a
certain amount of cash and possibly other consideration which Host will
distribute to its shareholders, as described in (vii) below);
(ii) the refinancing and amendment of the debt securities and certain
credit facilities of Host;
(iii) the proposed mergers of subsidiaries of the Operating Partnership
(the "Merger Partnerships") into the Partnerships, in which the
Partnerships will be the surviving entities (the "Mergers");
(iv) the acquisition (whether by merger or otherwise) by the Operating
Partnership of certain Private Partnerships or interests therein;
(v) the acquisition by the Operating Partnership of ownership of, or
controlling interests in, twelve upscale and luxury full-service hotel
properties (the "Blackstone Hotels") and certain other related assets
(including a mortgage loan secured by an additional hotel) from The
Blackstone Group and a series of funds controlled by Blackstone Real Estate
Partners (collectively, the "Blackstone Entities") in exchange for the
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assumption or repayment of debt, OP Units and shares of common stock of
SLC, and cash (the "Blackstone Acquisition");
(vi) the creation and capitalization of the one or more taxable
corporations in which the Operating Partnership will own 95% of the
economic interest but no voting stock and which will hold various assets
contributed by Host and its subsidiaries to the Operating Partnership (the
"Non-Controlled Subsidiaries") with all of the voting stock, representing
5% of the economic interest, to be owned by the Host Marriott Incentive
Compensation Statutory Trust, the beneficiaries of which will be certain
employees of Host REIT and a designated public charity (the "Incentive
Compensation Trust");
(vii) the merger of Host into Host REIT, and the subsequent distribution
by Host of SLC common stock and cash and possibly other consideration to
Host's shareholders;
(viii) the leasing of the hotels in which the Operating Partnership has a
direct or indirect interest (the "Hotels") to subsidiaries of SLC; and
(ix) the related transactions described in the Consent Solicitation and
the other steps necessary or desirable to complete the REIT Conversion.
In connection with the REIT Conversion, we have been asked to provide you
with the opinions on certain federal income tax matters set forth in this
letter. Capitalized terms used in this letter and not otherwise defined herein
have the meaning set forth in the Consent Solicitation.
BASES FOR OPINIONS
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, applicable legislative history, and the administrative rulings and
practices of the Internal Revenue Service (the "IRS"), including its practices
and policies in issuing private letter rulings, which are not binding on the
IRS except with respect to a taxpayer that receives such a ruling, all as of
the date hereof. These provisions and interpretations are subject to change,
which may or may not be retroactive in effect, that might result in material
modifications of our opinions. Our opinion does not foreclose the possibility
of a contrary determination by the IRS or a court of competent jurisdiction,
or of a contrary position taken by the IRS or the Treasury Department in
regulations or rulings issued in the future. In this regard, an opinion of
counsel with respect to an issue merely represents counsel's best judgment
with respect to the probable outcome on the merits with respect to such issue,
is not binding on the IRS or the courts, and is not a guarantee that the IRS
will not assert a contrary position with respect to such issue or that a court
will not sustain such a position asserted by the IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, agreements, certificates and other documents as we have
considered necessary or appropriate as a basis for such opinions, including
the following: (1) the Consent Solicitation; (2) the First Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, dated
as of , 1998; (3) the Declaration of Trust of Host REIT, dated as of ,
1998; (4) the Articles of Incorporation of SLC, dated as of and the Bylaws
of SLC, dated as of ; (5) the partnership agreements (or form thereof),
each as amended to the date hereof and as proposed to be amended in connection
with the REIT Conversion, of each Partnership, each Merger Partnership and
each Private Partnership that will remain in existence after the REIT
Conversion; (6) the form of agreement of merger relating to the Mergers
(including various exhibits thereto) by and among the Operating Partnership, a
Partnership, and its corresponding Merger Partnership, as amended to the date
hereof; (7) each contribution agreement relating to the acquisition by the
Operating Partnership of the non-Host interests in the Private Partnerships;
(8) the separate contribution agreements (or form thereof) relating to the
Blackstone Acquisition and the acquisition by the Operating Partnership of
Host's assets, respectively; (9) the form of lease pursuant to which the
Operating Partnership, its subsidiaries and its controlled partnerships will
lease virtually all of the Hotels to the Lessees (the "Leases"); (10) the form
of sale agreements pursuant to which the Operating Partnership and certain of
its subsidiaries and controlled partnerships, and Atlanta Marquis, Hanover,
MHP and
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PHLP will separately sell a portion of the personal property associated with
the hotels owned by such entities to a Non-Controlled Subsidiary; (11) the
organizational documents (or form thereof) relating to the formation and
capitalization of each Non-Controlled Subsidiary; (12) the form of operating
agreement of the Lessees, each as amended through the date hereof; (13) the
organizational documents (or form thereof) relating to the formation and
capitalization of the Incentive Compensation Trust; and (14) any other
necessary documents. The opinions set forth in this letter also are premised
on certain written representations of Host REIT, Host and the Operating
Partnership contained in a letter to us dated as of this date, regarding the
organization, ownership and operations (including the income, assets,
businesses, liabilities, properties and accumulated undistributed earnings and
profits) of Host REIT, the Operating Partnership, the Hotel Partnerships, the
Subsidiary Partnerships, the Non-Controlled Subsidiaries, the Incentive
Compensation Trust, and SLC and the Lessees following the REIT Conversion (the
"Representation Letter").
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Consent Solicitation and the Representation Letter.
We consequently have relied upon representations in the Representation Letter
that the information presented in such documents or otherwise furnished to us
is accurate and complete in all material respects. We are not aware, however,
of any material facts or circumstances contrary to, or inconsistent with, the
representations we have relied upon as described herein, or other assumptions
set forth herein.
In this regard, we have assumed the following: (i) that all of the
representations and statements set forth in the documents that we reviewed
(including the Representation Letter) are true and correct, and that all of
the obligations imposed by any such documents on the parties thereto have been
and will continue to be performed or satisfied in accordance with their terms;
(ii) the genuineness of all signatures, the proper execution of all documents,
the authenticity of all documents submitted to us as originals, the conformity
to originals of documents submitted to us as copies, and the authenticity of
the originals from which any copies were made; (iii) that each of Host REIT,
the Operating Partnership, the Hotel Partnerships, SLC, the Non-Controlled
Subsidiaries, the Incentive Compensation Trust, the Lessees, and the
Subsidiary Partnerships have been and will continue to be operated in the
manner described in the relevant declaration of trust, partnership agreement,
limited liability company operating agreement, articles of incorporation, or
other organizational documents and in the Consent Solicitation; (iv) that each
of Host REIT, the Operating Partnership, the Hotel Partnerships, SLC, the Non-
Controlled Subsidiaries, the Incentive Compensation Trust, the Lessees, and
the Subsidiary Partnerships is duly incorporated or organized and validly
existing under the laws of the state in which it was created; (v) as
represented by Host REIT and the Operating Partnership, that each of the
Leases will be enforced in accordance with its terms, and that each of the
lessors and the Lessees will act at all times in accordance with the terms
thereof; (vi) as represented by Host REIT and the Operating Partnership, that
there are no agreements or understandings between Host REIT or the Operating
Partnership, on the one hand, and the Incentive Compensation Trust, which owns
100% of the voting stock of each Non-Controlled Subsidiary, or any of the Non-
Controlled Subsidiaries themselves, on the other hand, that are inconsistent
with the Incentive Compensation Trust being considered to be both the record
and beneficial owner of more than 90% of the outstanding voting stock of each
of the Non-Controlled Subsidiaries; and (vii) as represented by Host REIT and
the Operating Partnership, no member of the Marriott family, or any entity in
which any member of the Marriott family owns an interest, nor any other
shareholder of Host REIT will own (determined by taking into account the
attribution rules under Section 318(a) of the Code, as modified by Section
856(d)(5) of the Code) at the time of the REIT Conversion more than 9.8% by
value of Host REIT, and Host REIT will take all available measures (including
without limitation enforcing the provisions of the Declaration of Trust of
Host REIT) to ensure that there is not ownership in excess of such limit in
the future. Any variation or difference in the facts from those set forth in
the documents that we have reviewed and upon which we have relied (including,
in particular, the Consent Solicitation and the Representation Letter) may
affect the conclusions stated herein.
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OPINIONS
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein (including those set forth below), we are of the opinion
that:
1. Host REIT, beginning with its first taxable year commencing after
consummation of the REIT Conversion, will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Code.
2. The Leases will be respected as leases for federal income tax
purposes.
* * * * *
Host REIT's ability to qualify as a REIT will depend in particular upon
whether each of the Leases is respected as a lease for federal income tax
purposes. If any one of such Leases is not respected as a lease for federal
income tax purposes, the Company likely will fail to qualify as a REIT. The
determination of whether a lease is a lease for federal income tax purposes is
highly dependent on specific facts and circumstances. In delivering the
opinion set forth above that each of the Leases will be respected as a lease
for federal income tax purposes, and the opinion set forth above that Host
REIT's proposed method of operation (as described in the Representation
Letter) should enable Host REIT to meet the requirements for qualification and
taxation as a REIT for its first taxable year commencing following
consummation of the REIT Conversion and subsequent taxable years, we expressly
rely upon, among other things, Host REIT's representations as to various
factual matters with respect to the Leases, including representations as to
the commercial reasonableness of the economic and other terms of the Leases,
the intent and economic expectations of the parties to the Leases, and the
allocation of various economic risks between the parties to the Leases, taking
into account all surrounding facts and circumstances.
Host REIT's ability to qualify as a REIT also will depend upon Host REIT not
having at the close of its first taxable year for which its REIT election is
effective any "earnings and profits" accumulated in any prior taxable year of
Host REIT, Host, or any of its predecessors or subsidiaries (which would be
based on the consolidated earnings and profits of Host (including each of its
predecessors) accumulated from 1929, the first year that the predecessor of
Host was a C corporation, through and including Host's 1998 taxable year). The
calculation of "earnings and profits" depends upon a number of factual and
legal interpretations related to the activities and operations of Host and its
corporate affiliates during its entire corporate existence and is subject to
review and challenge by the IRS. Host and Host REIT have represented to us for
purposes of our opinion that Host REIT will not have at the close of its first
taxable year for which its REIT election is effective any "earnings and
profits" accumulated in any prior taxable year of Host REIT, Host, or any of
its predecessors or subsidiaries. There can be no assurance, however, that the
IRS will not examine the tax returns of Host and its affiliates for all years
prior to and including the REIT Conversion and propose adjustments to increase
their taxable income, which could result in Host REIT being considered to have
undistributed "earnings and profits" at the close of its first taxable year
for which its REIT election is effective, in which event Host REIT would not
qualify as a REIT for such year. We express no opinion as to Host's current
and accumulated "earnings and profits" or whether Host REIT will be considered
to have undistributed "earnings and profits" at the close of its first taxable
year for which its REIT election is effective.
Host REIT's qualification and taxation as a REIT depend upon Host REIT's
ability to meet on an ongoing basis (through actual annual operating results,
distribution levels, diversity of share ownership and otherwise) the various
qualification tests imposed under the Code and described in the Consent
Solicitation. We have relied upon representations of Host REIT and the
Operating Partnership with respect to these matters (including those set forth
in the Representation Letter and in the Consent Solicitation) and will not
review Host REIT's compliance with these requirements on a continuing basis.
Accordingly, no assurance can be given that the actual results of Host REIT's
operations, the sources of its income, the nature of its assets, the level of
its distributions
D-4
<PAGE>
to shareholders and the diversity of its share ownership for any given taxable
year will satisfy the requirements under the Code for qualification and
taxation as a REIT.
For a discussion relating the law to the facts, and the legal analysis
underlying the opinions set forth in this letter, we incorporate by reference
the discussions of federal income tax issues in the section of the Consent
Solicitation under the heading "Federal Income Tax Consequences--Federal
Income Taxation of Host REIT Following the Mergers."
We assume no obligation to advise you of any changes in our opinion
subsequent to the delivery of this opinion letter.
This opinion letter addresses only the specific federal income tax matters
set forth above and does not address any other federal, state, local or
foreign tax consequences that may result from the REIT Conversion or any other
transaction undertaken in connection therewith. This opinion letter has been
prepared solely for your use in connection with the Consent Solicitation and
the REIT Conversion and should not be quoted in whole or in part or otherwise
be referred to, or filed with or furnished to any governmental agency or other
person or entity, without the prior written consent of this firm. We do,
however, consent to the references to this opinion letter and to Hogan &
Hartson L.L.P. under the captions, "Legal Matters" and "Federal Income Tax
Consequences," in the Consent Solicitation (and under the caption, "Federal
Income Tax Consequences," in the Supplements) and to the inclusion of the form
of this opinion letter as an exhibit to the Consent Solicitation. In giving
this consent, we do not thereby admit that we are an "expert" within the
meaning of the Securities Act of 1933.
Very truly yours,
Hogan & Hartson L.L.P.
D-5
<PAGE>
APPENDIX E
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
ORIGINAL LIMITED ORIGINAL LIMITED ALLOCATION ALLOCATION
PARTNER'S AD- PARTNER'S AD- OF PARTNERSHIP OF PARTNERSHIP
JUSTED BASIS AS OF JUSTED BASIS AS OF LIABILITIES AS OF LIABILITIES AS OF
PARTNERSHIP DECEMBER 31, 1997(1) DECEMBER 31, 1998(2) DECEMBER 31, 1997 DECEMBER 31, 1998
----------- -------------------- -------------------- ----------------- -----------------
(PER PARTNERSHIP UNIT)
<S> <C> <C> <C> <C>
Atlanta Marquis......... $ 69,241 $ 7,073 $221,162 $163,994
Chicago Suites.......... $ 53,541 $ 53,016 $ 37,567 $ 35,538
Desert Springs
PIF(3)................. $ 96,713 $104,207 $115,024 $123,279
Installment(4)......... $ 96,914 $104,408 $115,024 $123,279
Hanover
PIF(3)................. $191,006 $209,560 $135,329 $150,038
Installment(4)......... $203,406 $221,960 $135,329 $150,038
MDAH
PIF--COD(5)............ $209,866 $189,604 $171,164 $155,313
Installment--COD(6).... $209,107 $188,655 $171,164 $155,313
PIF--COD Deferred(7)... $200,281 $184,452 $171,164 $155,313
Installment--COD
Deferred(8)........... $199,522 $183,503 $171,164 $155,313
MHP..................... $112,346 $132,477 $192,626 $216,322
MHP2
PIF(3)................. $309,743 $304,892 $262,726 $257,539
Installment(4)......... $310,653 $305,802 $262,726 $257,539
PHLP.................... $ 20,823 $ 19,751 $ 77,625 $ 71,458
</TABLE>
- --------
(1) Amounts are for a Limited Partner who acquired a single Partnership
Interest in the original offering of such interests and who has held such
interest at all times since. The amount does not include syndication costs
allocated to a Limited Partner. Syndication costs were $11,898 per
Partnership Unit for Atlanta Marquis, $4,517 per Partnership Unit for
Chicago Suites, $10,015 per Partnership Unit for Desert Springs, $13,358
per Partnership Unit for Hanover, $11,559 per Partnership Unit for MDAH,
$10,700 per Partnership Unit for MHP, and $11,310 per Partnership Unit for
MHP2.
(2) Computed without regard to the Merger and reflects a reduction in basis
for projected distributions of cash including any amounts to be
distributed from third and fourth quarter 1998 operations, which will be
distributed in 1999.
(3) For a Limited Partner who paid in full ("PIF") for his Partnership Unit at
the time of purchase.
(4) For a Limited Partner who purchased his Partnership Unit for an
installment note.
(5) For a Limited Partner who paid in full for his Partnership Unit at the
time of purchase and did not elect to reduce his tax basis in such
Partnership Unit to defer the recognition of "cancellation of debt income"
("COD") in 1993.
(6) For a Limited Partner who purchased his Partnership Unit for an
installment note and did not elect to reduce his tax basis in 1993.
(7) For a Limited Partner who paid in full for his Partnership Unit at the
time of purchase and did elect to reduce his tax basis in 1993.
(8) For a Limited Partner who purchased his Partnership Unit for an
installment note and did elect to reduce his tax basis in 1993.
E-1
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Declaration of Trust of Host REIT 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 Host REIT and at the request of Host REIT, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise from and against
any claim or liability to which such person may become subject or which such
person may incur by reason of his or her status as a present or former Trustee
or officer of Host REIT. The Bylaws of Host REIT 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 Host REIT and at the request of Host REIT, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity, against any claim or liability to which he may become
subject by reason of such status. The Declaration of Trust and Bylaws also
permit Host REIT to indemnify and advance expenses to any person who served as
a predecessor of Host REIT in any of the capacities described above and to any
employee or agent of Host REIT or a predecessor of Host REIT. The Bylaws
require Host REIT to indemnify a trustee or officer who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is
made a party by reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for trustees and officers of
Maryland corporations. Host REIT will indemnify its present and former
trustees and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the trustee or officer was material to the matter giving rise
to the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the trustee or officer actually received
an improper personal benefit in money, property or services or (c) in the case
of any criminal proceeding, the trustee or officer had reasonable cause to
believe that the act or omission was unlawful. However, under Maryland law,
Host REIT may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. The Bylaws of Host REIT require it, as a condition
to advancing expenses, to obtain (a) a written affirmation by the trustee or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by Host REIT as authorized by the Bylaws and (b)
a written statement by or on his behalf to repay the amount paid or reimbursed
by Host REIT if it shall ultimately be determined that the standard of conduct
was not met.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Financial Statement Sched-
ules.................................................................... S-1
Schedule III--Real Estate and Accumulated Depreciation................... S-2
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
2.1** --Form of Agreement and Plan of Merger between the Partnerships and
the Merger Partnerships
3.1 --Form of Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P.
3.2 --Amended and Restated Agreement of Limited Partnership dated
December 31, 1997 of Atlanta Marriott Marquis II Limited
Partnership (incorporated by reference to Exhibit 2.a. of Atlanta
Marquis Limited Partnership's Form 10-K for the year ended December
31, 1997)
3.3 --Amended and Restated Agreement of Limited Partnership dated June
12, 1989, of Mutual Benefit Chicago Marriott Suite Hotel Partners,
L.P. (incorporated by reference to Exhibit 3.1 of Mutual Benefit
Chicago Marriott Suite Hotel Partners, L.P.'s Form 10 filed June
12, 1998)
3.4 --Second Amended and Restated Agreement of Limited Partnership dated
September 26, 1997 of Desert Springs Marriott Limited Partnership
(incorporated by reference to Exhibit 3.2 of Desert Springs Limited
Partnership's Form 10-Q for the quarter ended September 30, 1997)
3.5 --Second Amended and Restated Agreement of Limited Partnership dated
April 3, 1997 of Hanover Marriott Limited Partnership (incorporated
by reference to Exhibit 3(a) of Hanover Marriott Limited
Partnership's Form 10 filed June 12, 1998)
3.6 --Amended and Restated Agreement of Limited Partnership dated
February 7, 1990 of Marriott Diversified American Hotels, L.P.
(incorporated by reference to Exhibit 3(a) of Marriott Diversified
American Hotels, L.P.'s Form 10 filed June 12, 1998)
3.7 --Amended and Restated Agreement of Limited Partnership dated
November 27, 1985 of Marriott Hotel Properties Limited Partnership
(incorporated by reference to Exhibit 3.1 of Marriott Hotel
Properties Limited Partnership's Form 10 dated September 29, 1986)
3.8 --Amended and Restated Agreement of Limited Partnership dated June
14, 1996 of Marriott Hotel Properties II Limited Partnership
(incorporated by reference to Exhibit 3.1 of Marriott Hotel
Properties II Limited Partnership's Form 10-K for the year ended
December 31, 1996)
3.9 --Amended and Restated Agreement of Limited Partnership dated July
16, 1982 of Potomac Hotel Limited Partnership (incorporated by
reference to Exhibit 3 of Potomac Hotel Limited Partnership's Form
10-K for the year ended December 31, 1994)
3.10 --Certificate of Incorporation dated April 15, 1998 of HMC Real
Estate Corporation, the general partner of Host Marriott, L.P.
3.11 --Bylaws dated April 15, 1998 of HMC Real Estate Corporation, the
general partner of Host Marriott, L.P.
4.1** --Form of Indenture between Host Marriott, L.P. and [Indenture
Trustee]
4.2** --Form of Note
5.1** --Opinion of Hogan & Hartson L.L.P. regarding legality of the
securities being registered
8.1** --Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
10.1** --Form of Management Agreement
10.2** --Form of Lease
12.1 --Computation of Ratios of Earnings to Fixed Charges
21.1** --List of Subsidiaries of Host Marriott, L.P.
23.1** --Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.2 --Consent of Arthur Andersen LLP
23.3 --Consent of American Appraisal Associates, Inc.
25.1** --Statement of Eligibility and Qualification of [Trustee] [bound
separately]
99.1 --Appraisal of Houston Marriott Medical Center Hotel by American
Appraisal Associates, Inc. dated March 1, 1998
99.2 --Appraisal of Seattle Marriott Hotel, Sea-Tac by American Appraisal
Associates, Inc. dated March 1, 1998
99.3 --Appraisal of Marriott's Desert Springs Resort & Spa by American
Appraisal Associates, Inc. dated March 1, 1998
99.4 --Appraisal of Raleigh Marriott Crabtree Valley by American Appraisal
Associates, Inc. dated March 1, 1998
99.5 --Appraisal of Atlanta Marriott Marquis by American Appraisal
Associates, Inc. dated March 1, 1998
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
99.6 --Appraisal of Greensboro-High Point Marriott by American Appraisal
Associates, Inc. dated March 1, 1998
99.7 --Appraisal of San Ramon Marriott at Bishop Ranch by American
Appraisal Associates, Inc. dated March 1, 1998
99.8 --Appraisal of Marriott Rivercenter by American Appraisal Associates,
Inc. dated March 1, 1998
99.9 --Appraisal of New Orleans Marriott Hotel by American Appraisal
Associates, Inc. dated March 1, 1998
99.10 --Appraisal of Santa Clara Marriott by American Appraisal Associates,
Inc. dated March 1, 1998
99.11 --Appraisal of Fairview Park Marriott by American Appraisal
Associates, Inc. dated March 1, 1998
99.12 --Appraisal of Detroit Marriott Livonia Hotel by American Appraisal
Associates, Inc. dated March 1, 1998
99.13 --Appraisal of Biscayne Bay Marriott Hotel & Marina by American
Appraisal Associates, Inc. dated March 1, 1998
99.14 --Appraisal of Marriott's Mountain Shadow Resort & Golf Club by
American Appraisal Associates, Inc. dated March 1, 1998
99.15 --Appraisal of Southfield Marriott Hotel by American Appraisal
Associates, Inc. dated March 1, 1998
99.16 --Appraisal of Marriott At Research Triangle Park by American
Appraisal Associates, Inc. dated March 1, 1998
99.17 --Appraisal of Tampa Marriott Westshore by American Appraisal
Associates, Inc. dated March 1, 1998
99.18 --Appraisal of Albuquerque Marriott by American Appraisal Associates,
Inc. dated March 1, 1998
99.19 --Appraisal of Fullerton Marriott Hotel by American Appraisal
Associates, Inc. dated March 1, 1998
99.20 --Appraisal of Dayton Marriott by American Appraisal Associates, Inc.
dated March 1, 1998
99.21 --Appraisal of Marriott's Harbor Beach Resort by American Appraisal
Associates, Inc. dated March 1, 1998
99.22 --Appraisal of Marriott's Orlando World Center by American Appraisal
Associates, Inc. dated March 1, 1998
99.23 --Appraisal of Chicago Marriott Suites O'Hare by American Appraisal
Associates, Inc. dated March 1, 1998
99.24 --Appraisal of Hanover Marriott Hotel by American Appraisal
Associates, Inc. dated March 1, 1998
99.25** --Fairness Opinion dated , 1998 of American Appraisal Associates,
Inc.
</TABLE>
- --------
** To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to trustees, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
II-3
<PAGE>
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a trustee, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Trust
Indenture Act.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF
MARYLAND, ON AUGUST 7, 1998.
Host Marriott, L.P.
By: HMC Real Estate Corporation,
---------------------------------
AS GENERAL PARTNER OF HOST
MARRIOTT, L.P.
By: /s/ Robert E. Parsons, Jr.
---------------------------------
NAME: ROBERT E. PARSONS, JR.
TITLE: PRESIDENT AND DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert E. Parsons, Jr. President and August 7, 1998
- ------------------------------------- Director (Chief
ROBERT E. PARSONS, JR. Executive Officer
and Chief Financial
Officer)
/s/ Donald D. Olinger Vice President August 7, 1998
- ------------------------------------- (Chief Accounting
DONALD D. OLINGER Officer)
/s/ Christopher G. Townsend Vice President and August 7, 1998
- ------------------------------------- Director
CHRISTOPHER G. TOWNSEND
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Host Marriott Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Host Marriott Hotels and HMC Senior Communities,
Inc. included in this registration statement and have issued our reports
thereon dated May 22, 1998 and May 1, 1998, respectively. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The schedules included on pages S-2 through S-5 are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Washington, D.C.
May 22, 1998
S-1
<PAGE>
SCHEDULE III
PAGE 1 OF 4
HOST MARRIOTT HOTELS
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS JANUARY 2, 1998
----------------- SUBSEQUENT ------------------------ DATE OF
BUILDINGS & COSTS BUILDINGS & ACCUMULATED COMPLETION OF DATE DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIFE
----------- ---- ---- ------------ ----------- ---- ------------ ------ ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service
hotels:
New York
Marriott
Marquis Hotel,
New York, NY... $ 282 $-- $ 520 $ 36 $-- $ 556 $ 556 $(127) 1986 N/A 40
San Francisco
Moscone Center,
San Francisco,
CA............. -- -- 278 8 -- 286 286 (42) 1989 N/A 40
Other full-
service
properties,
each less than
5% of total.... 1,502 394 3,030 446 404 3,466 3,870 (312) various various 40
------ ---- ------ ---- ---- ------ ------ -----
Total
full-service... 1,784 394 3,828 490 404 4,308 4,712 (481)
Other properties,
each less than
5% of total..... -- 14 14 3 14 17 31 (17) various N/A various
------ ---- ------ ---- ---- ------ ------ -----
Total........... $1,784 $408 $3,842 $493 $418 $4,325 $4,743 $(498)
====== ==== ====== ==== ==== ====== ====== =====
</TABLE>
S-2
<PAGE>
SCHEDULE III
PAGE 2 OF 4
HOST MARRIOTT HOTELS
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
Notes:
(A) The change in total cost of properties for the fiscal years ended
January 2, 1998, January 3, 1997 and December 29, 1995 is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994......................................... $2,787
Additions:
Acquisitions..................................................... 356
Capital expenditures............................................. 25
Transfers from construction in progress.......................... 185
Deductions:
Dispositions and other........................................... (367)
------
Balance at December 29, 1995......................................... 2,986
Additions:
Acquisitions..................................................... 1,087
Capital expenditures............................................. 77
Transfers from construction-in-progress.......................... 28
Deductions:
Dispositions and other........................................... (322)
------
Balance at January 3, 1997........................................... 3,856
Additions:
Acquisitions..................................................... 920
Capital expenditures............................................. 112
Deductions:
Dispositions and other........................................... (145)
------
Balance at January 2, 1998........................................... $4,743
======
</TABLE>
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended January 2, 1998, January 3, 1997 and
December 29, 1995 is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994........................................... $333
Depreciation and amortization........................................ 65
Dispositions and other............................................... (24)
----
Balance at December 29, 1995........................................... 374
Depreciation and amortization........................................ 96
Dispositions and other............................................... (59)
----
Balance at January 3, 1997............................................. 411
Depreciation and amortization........................................ 118
Dispositions and other............................................... (31)
----
Balance at January 2, 1998............................................. $498
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $3,998 million at January 2, 1998.
(D) The total cost of properties excludes construction-in-progress
properties.
S-3
<PAGE>
SCHEDULE III
PAGE 3 OF 4
HMC SENIOR LIVING COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS JANUARY 2, 1998
--------------------- ------------------------------
BUILDINGS SUBSEQUENT BUILDINGS
AND COSTS AND ACCUMULATED DATE DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE
- ----------- -------- -------- ------------ ----------- -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Park Lane
Dallas, TX...... $ 24,961 $ 5,472 $ 29,404 $ 32 $ 5,472 $ 29,436 $ 34,908 $ (372) 1997 40
Memorial Woods
Houston, TX..... 24,319 7,417 29,775 9,340 7,417 39,115 46,532 (374) 1997 40
Knightsbridge
Columbus, OH.... 22,322 -- 30,229 7,991 -- 38,220 38,220 (495) 1997 40
Remington Club I
San Diego, CA... -- 4,225 31,193 47 4,225 31,240 35,465 (394) 1997 40
Remington Club II
San Diego, CA... 26,403 4,089 30,611 45 4,089 30,656 34,745 (304) 1997 40
Forwood Manor
Wilimington,
DE.............. -- 4,710 23,598 18 4,710 23,616 28,326 (300) 1997 40
Other senior
living properties
each less than 5%
total............ 251,929 74,842 224,469 103,262 76,801 325,773 402,573 (6,457)
-------- -------- -------- -------- -------- -------- -------- -------
Total............ $349,934 $100,755 $399,279 $120,735 $102,714 $518,056 $620,769 $(8,696)
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
S-4
<PAGE>
SCHEDULE III
PAGE 4 OF 4
HMC SENIOR LIVING COMMUNITIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
Notes:
(A) The change in total cost of properties for the year ended January 2,
1998 is as follows:
<TABLE>
<S> <C>
Balance as of June 21 1997....................................... $500,034
Additions:
Capital expenditures......................................... 30,783
Contributions from Host Marriott............................. 89,952(1)
--------
Balance as of January 2, 1998.................................... $620,769
========
</TABLE>
(B) The change in accumulated depreciation and amortization for the year
ended January 2, 1998 is as follows:
<TABLE>
<S> <C>
Balance as of June 21, 1997........................................ $ --
Depreciation and amortization.................................... (8,696)
-------
Balance as of January 2, 1998...................................... $(8,696)
=======
</TABLE>
(C) The total cost of properties excludes construction-in-progress
properties.
- --------
(1)During the period from June 21, 1997 through January 2, 1998, Host Marriott
Corporation contributed buildings and improvements of $89,952 to HMC Senior
Living Communities, Inc.
S-5
<PAGE>
EXHIBIT 3.10
CERTIFICATE OF INCORPORATION
OF
HMC REAL ESTATE CORPORATION
The Undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the "corporation")
is: HMC REAL ESTATE CORPORATION
SECOND: The address, including street, number, city and county, of the
registered office of the corporation in the State of Delaware is 1013 Centre
Road, City of Wilmington, County of New Castle; and the name of the registered
agent of the corporation in the State of Delaware at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the corporation, which shall be in addition to the authority of the
corporation to conduct any lawful business, to promote any lawful purpose, and
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware, is as follows:
General Partner of Host Marriott, L.P.
To carry on and conduct a general food and beverage business; to operate in
connection therewith facilities for the manufacture, productions, processing,
storage, distribution, and sale of foods and beverages and any other related
items; to sell at wholesale and retail; to operate such facilities on its own
account, under management contracts with others, or under franchise, or in any
other legitimate capacity; to engage in the business of providing and promoting
entertainments, amusements, and other means of recreation.
To carry on and conduct a general hotel business; to operate in connection
therewith hotels, motels, inn, taverns, and other places of lodging of every
kind and description; and to provide and operate facilities necessary or
desirable in connection therewith; and to operate such facilities on its own
account, under management contracts with others, or under franchises, or in any
other legitimate capacity.
To acquire, by purchase, exchange, lease, franchise, license, or any other
lawful manner, and to build, own, operate, manage, sell, lease, mortgage, or
otherwise dispose of, the facilities and properties which are, or may be,
required in the conduct of such general food and beverage business and hotel
business and all other businesses related thereto, also to purchase, acquire,
own, hold, use, lease (either as lessor or lessee), rent, sublet, grant, sell,
exchange, subdivide, mortgage, encumber, deed in trust, manage, improve,
develop, maintain, construct, operate and generally deal in, any and all real
estate, improved and unimproved, stores, office buildings, apartment houses,
shopping centers, commercial buildings, restaurants, hotels, garages,
warehouses, manufacturing plants, and other buildings of any kind or
description, and any and all other property of every kind or description, real,
personal, and mixed, and any interest or right therein, wheresoever situated.
<PAGE>
To manufacture, purchase, or acquire in any lawful manner, and to hold,
own, mortgage, pledge, sell, lease, rent, transfer, or in any manner dispose of,
and to deal and trade in, goods, wares, merchandise, including equipment,
furniture and fixtures, and property of any and every class and description.
To acquire the good will, business, rights and property, franchises, and
assets of every kind, with or without undertaking the whole or any part of the
liabilities, of any person, firm, association, or corporation; and to acquire
any property or business as a going concern or otherwise by (i) purchase of the
assets thereof wholly or in part, (ii) by acquisition of the shares or any part
thereof, or (iii) in any other manner; and to pay for the same in cash, the
stock of this corporation, bonds, or otherwise; to hold, maintain and operate,
or in any manner dispose of the whole or any part of the good will, business,
rights, and property so acquired; and to conduct in any lawful manner the whole
or any part of any business so acquired, and to exercise all the powers
necessary or convenient in and about the conduct and management of such
business.
To apply for, purchase, or in any manner to acquire, and to hold, own, use
and operate, and to sell, assign, transfer, or in any manner dispose of, and to
grant licenses, franchises, or other rights in respect of, and in any manner
deal with, any and all rights, trade and service marks, systems, inventions,
improvements, and processes used in connection with or secured under letters
patent or copyrights of the United States or other countries, or otherwise, and
to work, operate, or develop the same, and to carry on any business,
manufacturing or otherwise, which may directly or indirectly effectuate these
objects or any of them.
To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge, or
otherwise dispose of the shares of the capital stock of, or any bonds,
securities, or evidences of indebtedness created by any other corporation or
corporations of this State or any other state, country, nation, or government
and while owner of said stock, to exercise all the rights, powers, and
privileges of ownership, including the right to vote thereon, to the same extent
as natural persons might or could do, and to promote or to aid in any manner,
financially or otherwise, any corporation of which any shares of stock, bonds,
notes, debentures, or other securities or evidences of indebtedness are held
directly or indirectly by this corporation, and for this purpose to guarantee
the contracts, dividends, shares, bonds, notes, debentures, and other
obligations of such other corporations.
To issue bonds, debentures, or obligations from time to time for any of the
objects or purposes of the corporation and to secure the same by mortgage,
pledge, deed of trust, or otherwise, including, but without limitation, bonds,
debentures, and other obligations convertible into other securities of the
corporation.
To act as a general partner, limited partner, or joint venturer of a
partnership or joint venture that proposes to conduct a business that the
corporation would engage in singly.
To conduct business in any of the States, territories, colonies, or
dependencies of the United States, in the District of Columbia, and in any and
all foreign countries, to have one or more offices therein, and therein to hold,
purchase, mortgage, and convey real and personal property, without limit as to
the amount.
To do any or all of the things herein set forth to the same extent as a
natural person might or could do and in any part of the world, as principals,
agents, contractors, trustees, or otherwise, and either alone or in company with
others.
To purchase, hold, and reissue any of the shares of its capital stock.
To exercise all powers enumerated in the General Corporation Law of
Delaware; and, in addition, to exercise all powers granted by any other law or
by this certificate of incorporation,
<PAGE>
together with any powers incidental thereto, so far as such powers are necessary
or convenient to the conduct, promotion or attainment of the business or
purposes set forth herein.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue in One Hundred (100), all of which are without par
value. All such shares are of one class and are shares of Common Stock.
No holder of any of the shares of the stock of the corporation, whether now
or hereafter authorized and issued, shall be entitled as of right to purchase or
subscribe for (1) any unissued stock of any class, or (2) any additional shares
of any class to be issued by reason of any increase of the authorized capital
stock of the corporation of any class, or (3) bonds, certificates of
indebtedness, debentures or other securities convertible into stock of the
corporation, or carrying any right to purchase stock of any class, but any such
unissued stock or such additional authorized issue of any stock or of other
securities convertible into stock, or carrying any right to purchase stock, may
be issued and disposed of pursuant to resolution of the Board of Directors to
such persons, firms, corporations or associations and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of its discretion.
FIFTH: The name and mailing address of the incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
---- ---------------
<S> <C>
Abby Ancarrow 1013 Centre Road
Wilmington, DE 19805
</TABLE>
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receives appointed for this corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
corporation under the provisions of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors of class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation, as consequence of such compromise or
arrangement, the said compromise or arrangement and said reorganization shall,
if sanctioned by the court to which the said application has been made, be
binding on all the creditors of class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
TENTH: No director of the corporation shall be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
ELEVENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by
<PAGE>
said laws, and all rights at any time conferred upon the stockholders of the
corporation by this certificate of incorporation are granted subject to the
provisions of this Article ELEVENTH.
Signed on April 15, 1998
___________________________________
Abby Ancarrow
Incorporator
<PAGE>
Exhibit 3.11
BYLAWS
OF
HMC Real Estate Corporation
(a Delaware corporation)
--------------------
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the
corporation shall be signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice-President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions-imposed by the
General Corporation Law, the Board of Directors of the corporation may provide
by resolution or resolutions that some or all of any or all classes or series of
the
<PAGE>
stock of the corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any uncertificated shares, the
corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty nor less than ten days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next
<PAGE>
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting. In order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. If no record date has been
fixed by the Board of Directors, the record date for determining the
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by the
General Corporation Law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by the General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action. In order that
the corporation may determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon
<PAGE>
whom the certificate of incorporation confers such rights where there are two or
more classes or series of shares of stock or upon which or upon whom the General
Corporation Law confers such rights notwithstanding that the certificate of
incorporation may provide for more than one class or series of shares of stock,
one or more of which are limited or denied such rights thereunder; provided,
however, that no such right shall vest in the event of an increase or a decrease
in the authorized number of shares of stock of any class or series which is
otherwise denied voting rights under the provisions of the certificate of
incorporation, except as any provision of law may otherwise require.
7. STOCKHOLDER MEETINGS.
- TIME. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the organization of
the corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A
special meeting shall be held on the date and at the time fixed by the
directors.
- PLACE. Annual meetings and special meetings shall be held at such place,
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
- CALL. Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the meeting.
- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the corporation may be examined. The notice of an annual
meeting shall state that the meeting is called for the election of directors and
for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the purpose or
purposes for which the meeting is called. The notice of any meeting shall also
include, or be accompanied by, any additional statements, information, or
documents prescribed by the General Corporation Law. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than ten days nor more than
sixty days before the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, and directed to each stockholder at his
record address or at such other address which he may have furnished by request
in writing to the Secretary of the corporation. Notice by mail shall be deemed
to be given
<PAGE>
when deposited, with postage thereon prepaid, in the United States Mail. If a
meeting is adjourned to another time, not more than thirty days hence, and/or to
another place, and if an announcement of the adjourned time and/or place is made
at the meeting, it shall not be necessary to give notice of the adjourned
meeting unless the directors, after adjournment, fix a new record date for the
adjourned meeting. Notice need not be given to any stockholder who submits a
written waiver of notice signed by him before or after the time stated therein.
Attendance of a stockholder at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice.
- STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
- CONDUCT OF MEETING. Meetings of the stockholders shall be presided over
by one of the following officers in the order of seniority and if present and
acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice-President, or, if none of the foregoing is in office
and present and acting, by a chairman to be chosen by the stockholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
- PROXY REPRESENTATION. Every stockholder may authorize another person or
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy
<PAGE>
shall be voted or acted upon after three years from its date unless such proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and, if, and only as long as, it is coupled with
an interest sufficient in law to support an irrevocable power. A proxy may be
made irrevocable regardless of whether the interest with which it is coupled is
an interest in the stock itself or an interest in the corporation generally.
- INSPECTORS. The directors, in advance of any meeting, may, but need not,
appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by him
or them and execute a certificate of any fact found by him or them.
- QUORUM. The holders of a majority of the outstanding shares of stock
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
- VOTING. Each share of stock shall entitle the holders thereof to one
vote. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Any other action shall be authorized by a majority
of the votes cast except where the General Corporation Law prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provisions of the certificate of
incorporation and these Bylaws. In the election of directors, and for any other
action, voting need not be by ballot.
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special
<PAGE>
meeting of stockholders, may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Action taken pursuant to this paragraph shall be
subject to the provisions of Section 228 of the General Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors of the
corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of three (3) persons. Thereafter the
number of directors constituting the whole board shall be at least one. Subject
to the foregoing limitation and except for the first Board of Directors, such
number may be fixed from time to time by action of the stockholders or of the
directors, or, if the number is not fixed, the number shall be three (3). The
number of directors may be increased or decreased by action of the stockholders
or of the directors.
3. ELECTION AND TERM. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected incorporator or incorporators and shall hold office until the first
annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may
resign at any time upon written notice to the corporation. Thereafter,
directors who are elected at an annual meeting of stockholders, and directors
who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal. Except as the General Corporation Law may otherwise
require, in the interim between annual meetings of stockholders or of special
meetings of stockholders called for the election of directors and/or for the
removal of one or more directors and for the filling of any vacancy in that
connection, newly created directorships and any vacancies in the Board of
Directors,
<PAGE>
including unfilled vacancies resulting from the removal of directors for cause
or without cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum, or by the sole remaining
director.
4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board shall fix, except
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the State
of Delaware as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the
direction of Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, of the President, or of a majority of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
regular meetings for which the time and place have been fixed. Written, oral, or
any other mode of notice of the time and place shall be given for special
meetings in sufficient time for the convenient assembly of the directors
thereat. Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the directors need be specified in any
notice or written waiver of notice.
- QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A
majority of the directors present, whether or not a quorum is present, may
adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
<PAGE>
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the
General Corporation Law, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require
7. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President, a Secretary,
a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of
<PAGE>
Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive
Vice-President, one or more other Vice-Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers with such
titles as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board
of Directors choosing him, no officer other than the Chairman or Vice-Chairman
of the Board, if any, need be a director. Any number of offices may be held by
the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform such
duties in the management and operation of the corporation as shall be prescribed
in the resolutions of the Board of Directors designating and choosing such
officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to him. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
ARTICLE IV
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors shall
prescribe.
ARTICLE V
FISCAL YEAR
The fiscal year of the corporation shall end on the Friday closest to
December 3lst.
<PAGE>
ARTICLE VI
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer or employee of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
<PAGE>
(c) To the extent that a director, officer or employee of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this Article 6, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith. For purposes of determining the
reasonableness of any such expenses, a certification to such effect by any
member of the Bar of the State of Delaware, which member of the Bar may have
acted as counsel to any such director, officer or employee, shall be binding
upon the Corporation unless the Corporation establishes that the certification
was made in bad faith.
(d) Any indemnification under subsections (a) and (b) of this Article 6
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because any such
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of this Article 6. Such determination shall be made (1) by the Board of
Directors, by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer, director
or employee of the Corporation in defending any civil, criminal, administrative
or investigative action, suit or proceeding, shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director, officer, employee or agent
to repay such amount if it shall ultimately be determined that any such person
is not entitled to be indemnified by the Corporation as authorized by this
Article 6.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this Article 6 shall not be deemed
exclusive of any other rights to which any person seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) The Corporation may but shall not be required to purchase and maintain
insurance on behalf of any person who is or was a director, officer or employee
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any capacity, or arising out of such
person's status
<PAGE>
as such, whether or not the Corporation would have the power to indemnify such
person against such liability under this Article 6.
(h) For purposes of this Article 6, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees, 80 that any
person who is or was a director, officer or employee of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this Article 6 with respect to the resulting or surviving corporation as such
person would have had with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this Article 6, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer or employee of the Corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article 6.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article 6 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) This Article 6 shall be interpreted and construed to accord, as a
matter of right, to any person who is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, the full measure of indemnification and
advancement of expenses permitted by Section 145 of the Business Corporation Law
of the State of Delaware.
(l) Any person seeking indemnification or advancement of expenses by virtue
of such person being or having been a director, officer or employee of the
Corporation may seek to enforce the provisions of this Article 6 by an action in
law or equity in any court of the United States or any state or political
subdivision
<PAGE>
thereof having jurisdiction of the parties. Without limitation of the foregoing,
it is specifically recognized that remedies available at law may not be adequate
if the effect thereof is to impose delay on the immediate realization by any
such person of the rights conferred by this Article 6. Any costs incurred by any
person in enforcing the provisions of this Article 6 shall be an indemnifiable
expense in the same manner and to the same extent as other indemnifiable
expenses under this Article 6.
(m) No amendment, modification or repeal of this Article 6 shall have the
effect of or be construed to limit or adversely affect any claim to
indemnification or advancement of expenses made by any person who is or was a
director, officer or employee of this Corporation with respect to any state of
facts which existed prior to the date of such amendment, modification or repeal.
Accordingly, any amendment, modification or repeal of this Article 6 shall be
deemed to have prospective application only and shall not be applied
retroactively.
ARTICLE VII
CONTROL OVER BYLAWS
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or repeal
these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors
or by the stockholders.
I HEREBY CERTIFY that the foregoing is a full, true, and correct copy of
the Bylaws of HMC Real Estate Corporation, a Delaware corporation, as in effect
on the date hereof.
WITNESS my hand and the seal of the corporation.
Dated: April 15, 1998
(SEAL)
Asst. Secretary of
HMC Real Estate Corporation
<PAGE>
EXHIBIT 12.1
HOST MARRIOTT HOTELS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
FIRST
TWO QUARTERS FISCAL YEAR
------------- ----------------------
1998 1997 1997 1996 1995 1994
------ ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Income from operations before income tax-
es...................................... $ 157 $ 56 $ 83 $ (8) $(75) $(16)
Add (deduct):
Fixed charges............................ 186 157 363 283 206 184
Capitalized interest................... -- -- (1) (3) (5) (10)
Amortization of capitalized interest... 1 -- 5 7 6 8
Net gains (losses) related to certain
50% or less owned affiliate........... 1 1 (1) 1 2 5
Minority interest...................... 30 24 32 6 2 1
------ ------ ---- ---- ---- ----
Adjusted earnings........................ $ 375 $ 238 $481 $286 $136 $172
====== ====== ==== ==== ==== ====
Fixed charges:
Interest on indebtedness and amortiza-
tion of deferred financing costs ..... $151 $122 $287 $237 $178 $165
Preferred stock dividends.............. 17 17 37 3 -- --
Portion of rents representative of the
interest factor....................... 18 18 39 33 17 11
Debt service guarantee interest expense
of unconsolidated affiliates.......... -- -- -- 10 11 8
------ ------ ---- ---- ---- ----
Total fixed charges.................. $ 186 $ 157 $363 $283 $206 $184
====== ====== ==== ==== ==== ====
Ratio of earnings to fixed charges....... 2.02 1.52 1.33 1.01 -- --
====== ====== ==== ==== ==== ====
Deficiency of earnings to fixed charges.. -- -- -- -- $(70) $(12)
====== ====== ==== ==== ==== ====
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
Arthur Andersen LLP
Washington, D.C.
August 7, 1998
1
<PAGE>
EXHIBIT 23.3
CONSENT OF APPRAISER
We hereby consent to the references made to us, our appraisals and/or
fairness opinion by Host Marriott, L.P. in the Prospectus/Consent Solicitation
Statement constituting a part of this Registration Statement on Form S-4. In
addition we consent to the filing of our appraisal reports and fairness
opinion referred to therein as exhibits to the Registration Statement. In
giving such consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
American Appraisal Associates, Inc.
/s/ Ronald M. Georgen
By __________________________________
Ronald M. Georgen
President
Milwaukee, Wisconsin
August 7 , 1998
<PAGE>
Exhibit 99.1
MARKET VALUE
Houston Marriott Medical
Center Hotel
6580 Fannin Street
Houston, Texas
Potomac Hotel Limited Partnership
March 1, 1998
<PAGE>
American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Houston Marriott Medical Center Hotel
located at 6580 Fannin Street, Houston, Texas, and submit our findings in this
report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addresses hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
<PAGE>
American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
<PAGE>
American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
The Houston Marriott Medical Center Hotel, located at 6580 Fannin Street,
Houston, Texas, comprises a leased land parcel; land improvements consisting
mainly of site utilities, paving,
<PAGE>
American Appraisal Associates Page 4
lighting, and landscaping; a single-structure, 26-story hotel facility of steel
frame and concrete panel wall construction, in addition to fixed building
services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; elevators; escalators; and fire
protection. The facility functions very well in its capacity. Functional areas
include 386 hotel rooms; restaurants; bar; retail shop; meeting rooms; fitness
area; business center; indoor pool; facilities support; hotel laundry; and
office area. Also included are personal property necessary for continued
operation of the hotel and intangible assets. Intangible assets associated with
the operating facility include the time-economic benefit of a going concern.
Opened in 1984, the property is in good condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
<PAGE>
American Appraisal Associates Page 5
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment
<PAGE>
American Appraisal Associates Page 6
can be utilized in the direct capitalization technique within the income
capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
<PAGE>
American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
<PAGE>
American Appraisal Associates Page 8
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed judgment
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from
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American Appraisal Associates Page 9
the estimate provided here. Specifically, we applied only the following
procedures. We requested and were provided historical, and budgeted 1998 income
and expense data associated with the hotel, in addition to general market
intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
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In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Houston Marriott Medical
Center Hotel, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of TWENTY-SIX MILLION THREE HUNDRED
THOUSAND DOLLARS ($26,300,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
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American Appraisal Associates Page 11
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Raymond M. Gee, MAI
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Mark Martin, MAI
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.2
MARKET VALUE
Seattle Marriott Hotel, Sea-Tac
3201 South 176th Street
Seattle, Washington
Potomac Hotel Limited Partnership
March 1, 1998
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May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Seattle Marriott Hotel, Sea-Tac
located at 3201 South 176th Street, Seattle, Washington, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34,
Subpart C - Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
The Seattle Marriott Hotel, Sea-Tac, located at 3201 South 176th Street,
Seattle, Washington, comprises an owned land parcel; land improvements
consisting of landscaping, paving, site lighting, and site utilities; a
single-structure, nine-story, full-service hotel facility of steel frame
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American Appraisal Associates Page 4
and concrete panel wall construction, in addition to fixed building services
including plumbing; sewerage; heating, ventilating, and air conditioning;
electric power and lighting; elevators; and fire protection. The facility
functions adequately in its capacity. Functional areas include 459 hotel rooms;
restaurant; bar; meeting rooms; fitness area; indoor pool and hot tubs;
facilities support; hotel laundry; and office area. Also included are personal
property necessary for continued operation of the hotel and intangible assets.
Intangible assets associated with the operating facility include the time-
economic benefit of a going concern. Opened in 1980, the property is in good
condition overall. At the date of this valuation, the property was managed by an
affiliate of Marriott International, Inc. The subject property is located in an
airport neighborhood. Ownership of the subject property has not transferred
within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
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American Appraisal Associates Page 5
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment
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American Appraisal Associates Page 6
can be utilized in the direct capitalization technique within the income
capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
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American Appraisal Associates Page 8
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from
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American Appraisal Associates Page 9
the estimate provided here. Specifically, we applied only the following
procedures. We requested and were provided historical, and budgeted 1998 income
and expense data associated with the hotel, in addition to general market
intelligence, such as the STAR report, for the subject's market. Also requested
and provided, if applicable, were lease, contractual, and management agreement
information associated with the hotel. The historical income and expense data
were restated to provide a format expediting ratio and other trend analysis. The
hotel was inspected if so noted on the certificate of appraiser provided as
Exhibit B of this report. These data were analyzed. A survey was then conducted
with the manager of the hotel. The survey addressed such issues as the ownership
interest; the physical and functional attributes of the tangible property;
locational attributes; property tax issues; market conditions including business
mix, demand generators, future trends and predictability of the business, and
anticipated additions and deletions of hotels to the subject's competitive
market; the property's direct competitors, their estimated average daily rates,
occupancies, rank in comparison to the subject property, and trends in that
rank; most probable buyers; marketing periods; income and expenses including
their quantity, quality, and durability; and risk factors considering location,
hotel market volatility, competition, guest mix, reputation, product/amenities,
level of operations, workforce, and management issues. Considering the above-
referenced data, a projection of net operating income prior to incentive
management fees was made. The resulting gross margin was checked against our
database of similar hotel's gross margins for reasonableness. The impact of
incentive management fees on the subject hotel was then estimated and deducted
to arrive at the estimated net operating income of the property. The
capitalization rate to be applied to the latest 12 months net operating income
associated with the subject property, in addition to the capitalization rates
and, if appropriate, the discount rates to be applied to the projected net
operating income associated with the property, was then estimated. The rates
were based upon the review of current published surveys reflecting the opinions
of such investors or participants as Real Estate Investment Trusts (REIT's),
pension funds, hotel acquisition/management companies, insurance companies,
lenders, brokers, and consultants in combination with the capitalization rates
reflected in transactions, adjusted for the interest analyzed, locational
influences, reserve policies, functional attributes of the property, property
tax issues, local market volatility and competition, guest mix, renovation
influences, workforce and management issues, other income characteristics and
the like. The value of the hotel, based on the application of the income
capitalization approach with an appropriate adjustment for owner-funded capital
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
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American Appraisal Associates Page 10
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going-forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected
owner-funded capital expenditure estimates developed by an engineer retained by
Host Marriott Corporation. We did not consider the costs that might be incurred
in selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Seattle Marriott Hotel,
Sea-Tac, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of SIXTY-THREE MILLION SIX HUNDRED THOUSAND DOLLARS
($63,600,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
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American Appraisal Associates Page 11
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
-----------------------------
Eric Risberg
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
------------------------------
Mark Martin, MAI
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American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.3
MARKET VALUE
Marriott's Desert Springs
Resort & Spa
74855 Country Club Drive
Palm Desert, California
Desert Springs Marriott
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject resort hotel exhibited to us as the
Marriott's Desert Springs Resort & Spa
located at 74855 Country Club Drive, Palm Desert, California, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Desert
Springs Marriott Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34,
Subpart C - Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the resort hotel. The value
conclusion does not include existing long-term debt, working capital, or any
other assets or liabilities (such as deferred incentive management fees) which
may exist and are not specifically delineated herein, as these items will be
addressed elsewhere with regard to the fairness opinions. We have, however,
considered all management fees encumbering the property on a going- forward
basis. The value conclusion assumes all furniture, fixtures and equipment (F.F.
& E.) reserves for replacements are adequate and furthermore does not consider
any deferred maintenance (such as environmental concerns). The value conclusion
does consider projected capital expenditures commonly referred to as owner-
funded items, based in part on projected owner-funded capital expenditure
estimates developed by an engineer retained by Host Marriott Corporation. We
did not consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the fee simple estate subject to the lease
associated with the Valley Golf Course. Fee Simple Estate is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
Marriott's Desert Springs Resort & Spa, located at 74855 Country Club Drive,
Palm Desert, California, comprises 148.30 acres of owned land and 152.97 acres
of leased land; land improvements consisting mainly of landscaping, site
utilities, asphalt and concrete paving, concrete sidewalks, site lighting, one
owned and one leased 18-hole golf course, one 18-hole putting course, five
swimming pools, 20 tennis courts, an extensive number of man-made lakes; a
multi-structure, multi-story resort hotel facility of steel and concrete frame
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; and fire protection. The facility functions very well in its capacity.
Functional areas include 884 hotel rooms; five restaurants; three lounges;
numerous retail shops; meeting rooms; a full-service spa; a parking structure;
facilities support; and office area. Also included are personal property
necessary for continued operation of the resort hotel and intangible assets.
Intangible assets associated with the operating facility include the
time-economic benefit of a going concern. Opened in February 1987, the property
is in very good condition overall. At the date of this valuation, the property
was managed by an affiliate of Marriott International, Inc. The subject property
is located in a well appointed mixed-use resort, commercial, and residential
neighborhood. Ownership of the subject property has not transferred within the
past three years.
As previously indicated, the subject property leases the Valley Golf Course.
The lease, which commenced on April 24, 1987, has an initial term of 24 years, 8
months, and 7 days, expiring on December 31, 2011. This initial lease has five
10-year automatic renewal options unless terminated 23 months prior to
expiration. Therefore, if the lease were continually renewed under the terms of
the renewal options, the lease would terminate on December 31, 2061.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
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American Appraisal Associates Page 5
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject resort hotel with other resort hotels that have
recently sold
Nature of the business and history of the property
Economic condition and outlook for the resort hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is
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American Appraisal Associates Page 6
dependent on the degree of comparability of each sale with the property valued;
the dates of sale in relation to the date of valuation, taking into account
market changes in the interim; and consideration of any unusual conditions
affecting price or terms of sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
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American Appraisal Associates Page 7
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These factors
include a review of the subject's operating plan and projections, an analysis of
the resort hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the resort hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other resort hotels to the reported net operating
incomes or pro forma net operating incomes at the time of sale. Net operating
income is earnings before interest, taxes, depreciation, and amortization. Most
weight is given to the direct capitalization technique when a property has
reached a mature level of operations and this mature level of operations is
anticipated to continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
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American Appraisal Associates Page 8
Prices paid for operating resort hotels normally include all tangible and
intangible assets associated with the facility. The income capitalization
approach and the sales comparison approach to value do not segregate the
tangible assets from the inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it.
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American Appraisal Associates Page 9
It is also used to allocate an enterprise value to the various components of the
enterprise such as land, land improvements, buildings, equipment, furniture, and
other tangible assets.
The subject resort hotel is a viable, existing, ongoing enterprise with
established market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject resort
hotel, the cost approach to value would not be relied on by a buyer or a seller
in estimating the value of the subject facility. Therefore, the cost approach
to value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed judgment
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the resort hotel, in
addition to general market intelligence, such as the STAR report, for the
subject's market. Also requested and provided, if applicable, were lease,
contractual, and management agreement information associated with the resort
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The resort hotel was inspected if so
noted on the certificate of appraiser provided as Exhibit B of this report.
These data were analyzed. A survey was then conducted with the controller of the
resort hotel. The survey addressed such issues as the ownership interest; the
physical and functional attributes of the tangible property; locational
attributes; property tax issues; market conditions including business mix,
demand generators, future trends and predictability of the business, and
anticipated additions and deletions of hotels to the subject's competitive
market; the property's direct competitors, their estimated average daily rates,
occupancies, rank in comparison to the subject property, and trends in that
rank; most probable buyers; marketing periods; income and expenses including
their quantity, quality, and durability; and risk factors considering location,
hotel market volatility, competition, guest mix, reputation, product/amenities,
level of operations, workforce, and management issues. Considering the above-
referenced data, a projection of net operating income prior to incentive
management fees was made. The resulting gross margin was
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American Appraisal Associates Page 10
checked against our database of similar resort hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject resort
hotel was then estimated and deducted to arrive at the estimated net operating
income of the property. The capitalization rate to be applied to the latest 12
months net operating income associated with the subject property, in addition to
the capitalization rates and, if appropriate, the discount rates to be applied
to the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the resort hotel, based
on the application of the income capitalization approach with an appropriate
adjustment for owner-funded capital expenditures, was then estimated, and its
conclusion was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
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American Appraisal Associates Page 11
Conclusion
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Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Desert Springs Marriott
Resort & Spa, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of TWO HUNDRED TWENTY-THREE MILLION EIGHT
HUNDRED THOUSAND DOLLARS ($223,800,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Apprasial Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The American Society of Appraisers has a mandatory recertification program for
all of its senior members. I am in compliance with the requirements of that
program.
---------------------------------
Michael D. Larson
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
----------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.4
MARKET VALUE
Raleigh Marriott Crabtree Valley
4500 Marriott Drive
Raleigh, North Carolina
Potomac Hotel Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
July 8, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Raleigh Marriott Crabtree Valley
located at 4500 Marriott Drive, Raleigh, North Carolina, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does consider
projected capital expenditures commonly referred to as owner-funded items, based
in part on projected owner-funded capital expenditure estimates developed by an
engineer retained by Host Marriott Corporation. We did not consider the costs
that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers. The
depth of discussion contained in this report is specific solely to your needs as
the client and for the intended use stated above. American Appraisal Associates,
Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Raleigh Marriott Crabtree Valley, located at 4500 Marriott Drive, Raleigh,
North Carolina, comprises an owned land parcel; land improvements consisting
mainly of site utilities, paving, lighting, an indoor/outdoor pool, and
landscaping; a single-structure, six-story hotel facility of steel framing and
stucco exterior wall finish construction, in addition to fixed building services
including plumbing; sewerage; heating, ventilating, and air conditioning;
electric power and lighting; elevators; and fire protection. The facility
functions very well in its capacity. Functional areas include 375 hotel rooms;
restaurant; bar; retail (gift) shop/business center; meeting rooms; fitness
area; facilities support; and office area. Also included are personal property
necessary for continued operation of the hotel and intangible assets. Intangible
assets associated with the operating facility include the time-economic benefit
of a going concern. Opened in 1982, the property is reportedly in good condition
overall. At the date of this valuation, the property was managed by an affiliate
of Marriott International, Inc. The subject property is located in a suburban
neighborhood. Ownership of the subject property has not transferred within the
past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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American Appraisal Associates Page 8
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Raleigh Marriott Crabtree
Valley, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of TWENTY-EIGHT MILLION DOLLARS ($28,000,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the property
together with a detailed analysis of the requirements of the ADA could reveal
that the property is not in compliance with one or more of the requirements of
the act. If so, this fact could have a negative effect on the value of the
property. Since we have no direct evidence relating to this issue, we did not
consider the possible noncompliance with the requirements of ADA (other than
those reported by the engineer) in estimating the value of the property.
Scott Kellenberger made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Scott Kellenberger made a personal inspection of the property that is the
subject of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
---------------------------------
Philip R. Cook
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
Scott Kellenberger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
-----------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.5
MARKET VALUE
Atlanta Marriott Marquis
265 Peachtree Center Avenue
Atlanta, Georgia
Atlanta Marriott Marquis II
Limited Partnership
March 1, 1998
<PAGE>
Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Atlanta Marriott Marquis
located at 265 Peachtree Center Avenue, Atlanta, Georgia, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Atlanta
Marriott Marquis II Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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The Atlanta Marriott Marquis, located at 265 Peachtree Center Avenue, Atlanta,
Georgia, comprises an owned land parcel; land improvements consisting mainly of
paving, outdoor lighting, indoor/outdoor pool, landscaping, and site utilities;
a single-structure, 51-story convention hotel facility of precast concrete panel
or poured-in-place concrete walls and concrete frame construction, in addition
to fixed building services including plumbing; sewerage; heating, ventilating,
and air conditioning; electric power and lighting; elevators; escalators; and
fire protection. The facility functions adequately in its capacity. Functional
areas include 1,671 hotel rooms; restaurants; bar; retail shop; meeting rooms;
fitness area; under-facility parking; facilities support; and office area. Also
included are personal property necessary for continued operation of the hotel
and intangible assets. Intangible assets associated with the operating facility
include the time-economic benefit of a going concern. Opened on July 1, 1985,
the property is in good condition overall. At the date of this valuation, the
property was managed by an affiliate of Marriott International, Inc. The subject
property is located in a downtown neighborhood. The partnership owning the hotel
was restructured in January 1998. As a part of the restructuring, the formerly
leased land was contributed to the partnership. Ownership of the subject
property in its entirety has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
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Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a
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American Appraisal Associates Page 6
good indication of the range of value, as the data represent typical actions and
reactions of buyers and sellers in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
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projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Atlanta Marriott Marquis,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of TWO HUNDRED FIFTY-FIVE MILLION DOLLARS ($255,000,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice.
Alice MacQueen made an inspection of the property that is the subject of
this report; I have not made a personal inspection of the property.
Anyone providing significant professional assistance is identified on this
signature page.
---------------------------------
Denise Schilling
Significant Professional Assistance By:
Les Kiehnau
Jim Budyak
Mark Winger
Alice MacQueen
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
------------------------------------
Ken P. Wilson, MAI
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American Appraisal Associates
GENERAL SERVICE CONDITIONS
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American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.6
MARKET VALUE
Greensboro - High Point Marriott
1 Marriott Drive
Greensboro, North Carolina
Potomac Hotel Limited Partnership
March 1, 1998
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July 8, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Greensboro - High Point Marriott
located at 1 Marriott Drive, Greensboro, North Carolina, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Greensboro - High Point Marriott, located at 1 Marriott Drive, Greensboro,
North Carolina, comprises a leased land parcel; land improvements consisting
mainly of site utilities, paving, lighting, an indoor/outdoor pool, a man-made
lake, a cobblestone bridge, sidewalks and landscaping; a single-structure, six-
story hotel facility of steel frame and stucco type wall finish construction, in
addition to fixed building services including plumbing; sewerage; heating,
ventilating, and air conditioning; electric power and lighting; elevators; and
fire protection. The facility functions very well in its capacity. Functional
areas include 299 hotel rooms; restaurant; bar; retail (gift) shop; meeting
rooms; fitness area; business center; facilities support; and office area. Also
included are personal property necessary for continued operation of the hotel
and intangible assets. Intangible assets associated with the operating facility
include the time-economic benefit of a going concern. Opened in 1983, the
property is reportedly in good condition overall. At the date of this valuation,
the property was managed by an affiliate of Marriott International, Inc. The
subject property is located in an airport neighborhood. Ownership of the subject
property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to provide
a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
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American Appraisal Associates Page 7
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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American Appraisal Associates Page 8
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going-forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Greensboro - High Point
Marriott, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of TWENTY-SEVEN MILLION EIGHT HUNDRED THOUSAND DOLLARS
($27,800,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
Scott Kellenberger made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Scott Kellenberger made a personal inspection of the property that is the
subject of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
--------------------------------
Philip R. Cook
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
Scott Kellenberger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.7
MARKET VALUE
San Ramon Marriott at
Bishop Ranch
2600 Bishop Drive
San Ramon, California
Marriott Hotel Properties II
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
San Ramon Marriott at Bishop Ranch
located at 2600 Bishop Drive, San Ramon, California, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties II Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
The San Ramon Marriott at Bishop Ranch, located at 2600 Bishop Drive, San Ramon,
California, comprises a leased land parcel; land improvements consisting of
landscaping, paving,
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American Appraisal Associates Page 4
site lighting, outdoor pool and spa, and site utilities; a single-structure,
seven-story, full-service hotel facility of reinforced concrete or fireproofed
steel frame and pre-fabricated glass fiber reinforced exposed aggregate concrete
panel wall construction, in addition to fixed building services including
plumbing; sewerage; heating, ventilating, and air conditioning; electric power
and lighting; elevators; and fire protection. The facility functions very well
in its capacity. Functional areas include 368 hotel rooms; restaurant; bar;
meeting rooms; fitness area; business center; facilities support; and office
area. Also included are personal property necessary for continued operation of
the hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in May
1989, the property is in excellent condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property in its entirety has not transferred within the past three
years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These factors
include a review of the subject's operating plan and projections, an analysis of
the hotel industry's historical performance and forecast investment reports, and
other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured
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American Appraisal Associates Page 8
equipment, contractors' overhead and profit, and fees, but without provision for
overtime, bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed judgment
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American Appraisal Associates Page 9
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject
hotel was then estimated and deducted to arrive at the estimated net operating
income of the property. The capitalization rate to be applied to the latest 12
months net operating income associated with the subject property, in addition to
the capitalization rates and, if appropriate, the discount rates to be applied
to the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the San Ramon Marriott at
Bishop Ranch, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of THIRTY-FIVE MILLION THREE HUNDRED
THOUSAND DOLLARS ($35,300,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
--------------------------------
Eric Risberg
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.8
MARKET VALUE
Marriott Rivercenter
101 Bowie Street
San Antonio, Texas
Marriott Hotel Properties II
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Marriott Rivercenter
located at 101 Bowie Street, San Antonio, Texas, and submit our findings in this
report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties II Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
<PAGE>
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
The Marriott Rivercenter, located at 101 Bowie Street, San Antonio, Texas,
comprises a leased land parcel; land improvements consisting mainly of paving,
outside lighting, landscaping,
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American Appraisal Associates Page 4
indoor/outdoor pool, and site utilities; a single-structure, 38-story convention
hotel facility of prefabricated glass-fiber reinforced concrete panel walls and
reinforced concrete and steel frame construction, in addition to fixed building
services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; elevators; escalators; and fire
protection. The facility functions very well in its capacity. Functional areas
include 999 hotel rooms; restaurant; bar; retail shop; meeting rooms; fitness
area; subterranean parking; facilities support; hotel laundry; and office area.
Also included are personal property necessary for continued operation of the
hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in October
1988, the property is in excellent condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a downtown neighborhood. Ownership of
the subject property has not transferred in its entirety within the past three
years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured
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American Appraisal Associates Page 8
equipment, contractors' overhead and profit, and fees, but without provision for
overtime, bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment
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American Appraisal Associates Page 9
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject
hotel was then estimated and deducted to arrive at the estimated net operating
income of the property. The capitalization rate to be applied to the latest 12
months net operating income associated with the subject property, in addition to
the capitalization rates and, if appropriate, the discount rates to be applied
to the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Marriott Rivercenter,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of ONE HUNDRED EIGHTY MILLION SIX HUNDRED THOUSAND DOLLARS
($180,600,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Mark Martin, MAI
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Ken P. Wilson, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.9
MARKET VALUE
New Orleans Marriott Hotel
555 Canal Street
New Orleans, Louisiana
Marriott Hotel Properties II
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
New Orleans Marriott Hotel
located at 555 Canal Street, New Orleans, Louisiana, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties II Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
The New Orleans Marriott Hotel, located at 555 Canal Street, New Orleans,
Louisiana, comprises an owned land parcel; land improvements consisting mainly
of paving, outside lighting, landscaping, outdoor pool, and site utilities; a
four-structure, 41-story convention hotel
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American Appraisal Associates Page 4
facility of concrete panel walls and reinforced concrete and steel frame
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; escalators; and fire protection. The facility functions
adequately in its capacity. Functional areas include 1,290 hotel rooms;
restaurants; bars; retail shops; meeting rooms; fitness area; parking structure;
hotel laundry; facilities support; and office area. Also included are personal
property necessary for continued operation of the hotel and intangible assets.
Intangible assets associated with the operating facility include the time-
economic benefit of a going concern. Opened in 1972, the property is reportedly
in good condition overall. At the date of this valuation, the property was
managed by an affiliate of Marriott International, Inc. The subject property is
located in a downtown neighborhood. Ownership of the subject property in its
entirety has not transferred within the past three years. There is reportedly
some asbestos within the construction of the hotel. We have not considered the
impact of the asbestos on the hotel's value.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured
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American Appraisal Associates Page 8
equipment, contractors' overhead and profit, and fees, but without provision for
overtime, bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment
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American Appraisal Associates Page 9
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject
hotel was then estimated and deducted to arrive at the estimated net operating
income of the property. The capitalization rate to be applied to the latest 12
months net operating income associated with the subject property, in addition to
the capitalization rates and, if appropriate, the discount rates to be applied
to the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the New Orleans Marriott
Hotel, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of ONE HUNDRED EIGHTY-FOUR MILLION THREE HUNDRED
THOUSAND DOLLARS ($184,300,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have not made a recent physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report within the past two years.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The American Society of Appraisers has a mandatory recertification program for
all of its senior members. I am in compliance with the requirements of that
program.
--------------------------------
Paul B. Marshalka
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.10
MARKET VALUE
Santa Clara Marriott
2700 Mission College Boulevard
Santa Clara, California
Marriott Hotel Properties II
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Santa Clara Marriott
located at 2700 Mission College Boulevard, Santa Clara, California, and submit
our findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties II Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Santa Clara Marriott, located at 2700 Mission College Boulevard, Santa
Clara, California, comprises a leased land parcel; land improvements consisting
mainly of paving, outside lighting, landscaping, indoor/outdoor pool, tennis
courts, and site utilities; a single-structure, 13-story hotel facility of
concrete panel walls and steel frame construction, in addition to fixed building
services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; elevators; and fire protection. The
facility functions adequately in its capacity. Functional areas include 754
hotel rooms; restaurants; bar; retail shop; meeting rooms; fitness area; parking
structure; facilities support; and office area. Also included are personal
property necessary for continued operation of the hotel and intangible assets.
Intangible assets associated with the operating facility include the time-
economic benefit of a going concern. Opened in June 1976, the property is in
good condition overall. At the date of this valuation, the property was managed
by an affiliate of Marriott International, Inc. The subject property is located
in a suburban neighborhood. Ownership of the subject property in its entirety
has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity
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American Appraisal Associates Page 8
and utility of the existing property at current market prices for materials,
labor and manufactured equipment, contractors' overhead and profit, and fees,
but without provision for overtime, bonuses for labor, and premiums for
materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP
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American Appraisal Associates Page 9
Standards Rule 1-4. The results of our investigation should be treated as an
informed judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical, and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These data
were analyzed. A survey was then conducted with the manager of the hotel. The
survey addressed such issues as the ownership interest; the physical and
functional attributes of the tangible property; locational attributes; property
tax issues; market conditions including business mix, demand generators, future
trends and predictability of the business, and anticipated additions and
deletions of hotels to the subject's competitive market; the property's direct
competitors, their estimated average daily rates, occupancies, rank in
comparison to the subject property, and trends in that rank; most probable
buyers; marketing periods; income and expenses including their quantity,
quality, and durability; and risk factors considering location, hotel market
volatility, competition, guest mix, reputation, product/amenities, level of
operations, workforce, and management issues. Considering the above-referenced
data, a projection of net operating income prior to incentive management fees
was made. The resulting gross margin was checked against our database of similar
hotel's gross margins for reasonableness. The impact of incentive management
fees on the subject hotel was then estimated and deducted to arrive at the
estimated net operating income of the property. The capitalization rate to be
applied to the latest 12 months net operating income associated with the subject
property, in addition to the capitalization rates and, if appropriate, the
discount rates to be applied to the projected net operating income associated
with the property, was then estimated. The rates were based upon the review of
current published surveys reflecting the opinions of such investors or
participants as Real Estate Investment Trusts (REIT's), pension funds, hotel
acquisition/management companies, insurance companies, lenders, brokers, and
consultants in combination with the capitalization rates reflected in
transactions, adjusted for the interest analyzed, locational influences, reserve
policies, functional attributes of the property, property tax issues, local
market volatility and competition, guest mix, renovation influences, workforce
and management issues, other income characteristics and the like. The value of
the hotel, based on the application of the income capitalization approach with
an appropriate adjustment for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Santa Clara Marriott,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of ONE HUNDRED TWENTY-SIX MILLION TWO HUNDRED THOUSAND DOLLARS
($126,200,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
________________________________
Eric Risberg
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Mark Martin, MAI
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American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.11
MARKET VALUE
Fairview Park Marriott
3111 Fairview Park Drive
Falls Church, Virginia
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Fairview Park Marriott
located at 3111 Fairview Park Drive, Falls Church, Virginia, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the fee simple estate subject to the ground
lease associated with the parking garage.
Fee Simple Estate is defined as an absolute ownership, unencumbered by any other
interest or estate, subject to the limitations imposed by the governmental
powers of taxation, eminent domain, police power, and escheat.
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American Appraisal Associates Page 4
Property Valued
- ---------------
The Fairview Park Marriott, located at 3111 Fairview Park Drive, Falls Church,
Virginia, comprises an owned "hotel site" containing 5.15294 acres and a leased
"parking garage site" of about 1.33755 acres, for a combined land area of about
6.49049 acres; land improvements consisting mainly of site utilities, paving,
lighting, an indoor/outdoor pool, and landscaping; a single-structure, 16-level
hotel facility of steel frame and colored precast concrete construction, in
addition to fixed building services including plumbing; sewerage; heating,
ventilating, and air conditioning; electric power and lighting; camera
surveillance system; and fire protection. The facility functions very well in
its capacity. Functional areas include 395 hotel rooms; restaurant; bar;
lounge; retail (gift) shop; meeting and banquet rooms; fitness area; business
center; parking structure; hotel laundry; facilities support; and office area.
Also included are leasehold improvements which primarily comprise a parking
structure; personal property necessary for continued operation of the hotel and
intangible assets. Intangible assets associated with the operating facility
include the time-economic benefit of a going concern. Opened in 1989, the
property is reportedly in excellent condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in an office park within a suburban
neighborhood. Ownership of the subject property has not transferred within the
past three years.
Based upon discussions and information as provided by Fairview Park Marriott
Hotel and Host Marriott personnel, it is our understanding that the leasehold
estate as held by Marriott Diversified American Hotels, Limited Partnership
(MDAH) in the parking garage ground lease of 1.3375-acres was originally
acquired in February of 1990 from Essex House Condominium Corporation (EHCC) via
a deed of conveyance. Reportedly, Park West/Fairview Associates, a Delaware
joint venture partnership (as lessor), is leasing the hotel parking garage site
to MDAH (as lessee) for a total consideration of $1.00 per year until the year
2085. Given the nominal consideration under the existing ground lease for a
remaining lease term of about 87 years, for purposes of this limited valuation
the leasehold estate in the subject ground lease is effectively fee simple.
The Fairview Park Hotel parking garage is adjacent to and connected with a
parking garage and office facility reportedly owned by Park West/Fairview
Associates. Both parking garage structures are utilized for the provision of
parking for the Fairview Park Hotel and the adjacent
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American Appraisal Associates Page 5
office building. We also understand that there are various covenant, easement,
and joint operating agreements associated with the two parking ramp operations.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
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In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative
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American Appraisal Associates Page 7
investment opportunities. When properly applied, the income capitalization
approach is generally considered to provide the most reliable value indication
for income-producing properties. The income streams generated by the subject are
the result of the assemblage of land, buildings, labor, equipment, and marketing
operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond
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American Appraisal Associates Page 8
the foreseeable future, an estimate of the stabilized annual future cash flow
attributable to the operation is capitalized and discounted to its present
value. The summation of the discounted annual cash flows and the stabilized
annual cash flow after capitalization and discounting gives an indication of the
current market value of the enterprise. The discounted cash flow analysis is a
useful gauge of value when volatility is reasonably predictable with regard to
the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
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External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical, and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These
data were analyzed. A survey was then conducted with the manager of the hotel.
The survey addressed such issues as the ownership interest; the physical and
functional attributes of
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American Appraisal Associates Page 10
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may
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American Appraisal Associates Page 11
exist and are not specifically delineated herein, as these items will be
addressed elsewhere with regard to the fairness opinions. We have, however,
considered all management fees encumbering the property on a going- forward
basis. The value conclusion assumes all furniture, fixtures and equipment (F.F.
& E.) reserves for replacements are adequate and furthermore does not consider
any deferred maintenance (such as environmental concerns). The value conclusion
does consider projected capital expenditures commonly referred to as owner-
funded items, based in part on projected owner-funded capital expenditure
estimates developed by an engineer retained by Host Marriott Corporation. We
did not consider the costs that might be incurred in selling the property, as
this is also addressed elsewhere with regard to the fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate subject to the ground lease
associated with the parking structure in the Fairview Park Marriott, assuming it
to be offered for sale in the open market, is reasonably represented by the
amount of FIFTY-EIGHT MILLION NINE HUNDRED THOUSAND DOLLARS ($58,900,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
<PAGE>
American Appraisal Associates Page 12
Mark Martin, MAI
036131
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have not made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
________________________________
Philip R. Cook
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
MARKET VALUE
Fairview Park Marriott
3111 Fairview Park Drive
Falls Church, Virginia
Marriott Diversified
American Hotels, L.P.
March 1, 1998
<PAGE>
Exhibit 99.12
MARKET VALUE
Detroit Marriott Livonia Hotel
17100 Laurel Park Drive North
Livonia, Michigan
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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American Appraisal Associates Page 1
July 8, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Detroit Marriott Livonia Hotel
located at 1700 Laurel Park Drive North, Livonia, Michigan, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Southfield Marriott Hotel, located at 17100 Laurel Park Drive North,
Livonia, Michigan, comprises an owned land parcel; land improvements consisting
mainly of landscaping, site utilities, paving, concrete sidewalks and lighting;
a one-structure, six-story hotel facility of reinforced concrete and steel frame
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; and fire protection. The facility functions very well in its capacity.
Functional areas include 224 hotel rooms; restaurant; bar; retail shop; meeting
rooms; fitness area; facilities support; and office area. Also included are
personal property necessary for continued operation of the hotel and intangible
assets. Intangible assets associated with the operating facility include the
time-economic benefit of a going concern. Opened in September 1989, the property
is reportedly in very good condition overall. At the date of this valuation, the
property was managed by an affiliate of Marriott International, Inc. The subject
property is located in a suburban neighborhood. Ownership of the subject
property has not transferred within the past three years.
Based upon discussions with, and information provided by, informed
representatives of the Detroit Marriott Livonia Hotel, the subject property is
encumbered by a Reciprocal Easement Agreement ("easement"). This easement was
entered into on January 15, 1987; prior to construction of the subject hotel
improvements. The subject hotel is located immediately adjacent to the Laurel
Park Shopping Mall. The aforementioned easement provides for the construction
of certain improvements to connect the subject hotel to the adjacent mall. In
addition, the hotel is granted exclusive use of 100 parking spaces in the 1,038-
space parking structure located on the mall property and adjacent to the
subject. For the exclusive use of these parking spaces, the hotel pays a pro
rata share of the operating and maintenance costs associated with the parking
structure. For purposes of our analysis, we have considered the impact of this
easement on the subject property.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
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American Appraisal Associates Page 5
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
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American Appraisal Associates Page 6
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted
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American Appraisal Associates Page 7
cash flow analysis, the present value of the anticipated stream of cash flows
generated by the property over a specified projection period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
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American Appraisal Associates Page 8
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it.
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American Appraisal Associates Page 9
It is also used to allocate an enterprise value to the various components of the
enterprise such as land, land improvements, buildings, equipment, furniture, and
other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed judgment
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was
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American Appraisal Associates Page 10
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
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American Appraisal Associates Page 11
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 31,
1998, the Market Value of the fee simple estate in the Detroit Marriott Livonia
Hotel, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of NINETEEN MILLION SIX HUNDRED THOUSAND DOLLARS
($19,600,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the property
together with a detailed analysis of the requirements of the ADA could reveal
that the property is not in compliance with one or more of the requirements of
the act. If so, this fact could have a negative effect on the value of the
property. Since we have no direct evidence relating to this issue, we did not
consider the possible noncompliance with the requirements of ADA (other than
those reported by the engineer) in estimating the value of the property.
Scott Kellenberger made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Scott Kellenberger made a personal inspection of the property that is the
subject of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The American Society of Appraisers has a mandatory recertification program for
all of its senior members. I am in compliance with the requirements of that
program.
----------------------------------
Michael D. Larson
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
Scott Kellenberger
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
-------------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.13
MARKET VALUE
Biscayne Bay Marriott Hotel & Marina
1633 North Bayshore Drive
Miami, Florida
Potomac Hotel Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Biscayne Bay Marriott Hotel & Marina
located at 1633 North Bayshore Drive, Miami, Florida, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and
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American Appraisal Associates Page 2
knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date
and the passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
The Biscayne Bay Marriott Hotel & Marina, located at 1633 North Bayshore Drive,
Miami, Florida, comprises a leased land parcel; land improvements consisting
mainly of paving, landscaping, outdoor pool, and site utilities; a single-
structure, 30-story, and basement hotel facility of load bearing stucco-covered
concrete block construction, in addition to fixed building services including
plumbing;
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American Appraisal Associates Page 4
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; escalators; and fire protection. The facility functions
very well in its capacity. Functional areas include 601 hotel rooms;
restaurant; bars; retail shops; meeting rooms; fitness area; parking deck;
facilities support; hotel laundry; and office area. Also included are personal
property necessary for continued operation of the hotel and intangible assets.
Intangible assets associated with the operating facility include the time-
economic benefit of a going concern. Opened in December 1983, the property is
in fair condition overall. At the date of this valuation, the property was
managed by an affiliate of Marriott International, Inc. The subject property is
located in a downtown neighborhood. Ownership of the subject property has not
transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
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American Appraisal Associates Page 5
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment
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American Appraisal Associates Page 6
capital through the income capitalization approach is an important means of
developing a value indication. This estimate is developed by discounting or
capitalizing the projected net income at a rate commensurate with investment
risks inherent to the ownership of the property. Such a conversion of income
considers competitive returns offered by alternative investment opportunities.
When properly applied, the income capitalization approach is generally
considered to provide the most reliable value indication for income-producing
properties. The income streams generated by the subject are the result of the
assemblage of land, buildings, labor, equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
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American Appraisal Associates Page 7
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in
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American Appraisal Associates Page 8
excess capital costs in existing facilities, lack of full use of space, and
inability to expand or update the property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical, and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These
data were analyzed. A survey was then conducted with the manager of the hotel.
The survey addressed such issues as the
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American Appraisal Associates Page 9
ownership interest; the physical and functional attributes of the tangible
property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
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American Appraisal Associates Page 10
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Biscayne Bay Marriott
Hotel & Marina, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of THIRTY-EIGHT MILLION FIVE HUNDRED
THOUSAND DOLLARS ($38,500,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
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American Appraisal Associates Page 11
Ken P. Wilson, MAI
036131
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
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American Appraisal Associates Page 3
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
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American Appraisal Associates Page 3
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Principles of Appraisal Practice
and Code of Ethics of the American Society of Appraisers.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
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American Appraisal Associates Page 2
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
________________________________
Steven Zenkovich
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure
to notify such Hotel Partnership shall not relieve any Hotel Partnership from
any liability
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American Appraisal Associates
which such Hotel Partnership may have on account of this indemnity or otherwise
except to the extent such Hotel Partnership shall have been prejudiced by such
failure. The Hotel Partnerships will, if required by an Indemnified Party,
assume the defense and control of any litigation or proceeding in respect of
which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.14
MARKET VALUE
Marriott's Mountain Shadow Resort
& Golf Club
5641 East Lincoln Drive
Scottsdale, Arizona
Potomac Hotel Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Marriott's Mountain Shadow Resort & Golf Club
located at 5641 East Lincoln Drive, Scottsdale, Arizona, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
Marriott's Mountain Shadow Resort & Golf Club, located at 5641 East Lincoln
Drive, Scottsdale, Arizona, comprises an owned land parcel; land improvements
consisting mainly of paving, outside lighting, landscaping, outdoor pool, golf
course, and site utilities; a 37-structure,
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American Appraisal Associates Page 4
two-story resort hotel facility of load bearing wall, stucco-covered concrete
block construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; and fire protection. The facility functions adequately in
its capacity. Functional areas include 337 hotel rooms; restaurants; bars;
retail shops; meeting rooms; fitness area; facilities support; hotel laundry;
and office area. Also included are personal property necessary for continued
operation of the hotel and intangible assets. Intangible assets associated with
the operating facility include the time-economic benefit of a going concern.
Opened in 1959, the property is in fair condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property has not transferred within the past three years. There is
reportedly some asbestos within the construction of the hotel. We have not
considered the impact of the asbestos on the hotel's value.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
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American Appraisal Associates Page 5
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment
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American Appraisal Associates Page 6
can be utilized in the direct capitalization technique within the income
capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
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American Appraisal Associates Page 8
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from
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American Appraisal Associates Page 9
the estimate provided here. Specifically, we applied only the following
procedures. We requested and were provided historical, and budgeted 1998 income
and expense data associated with the hotel, in addition to general market
intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
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American Appraisal Associates Page 10
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in Marriott's Mountain Shadow
Resort & Golf Club, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of THIRTY-EIGHT MILLION SIX HUNDRED
THOUSAND DOLLARS ($38,600,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificate within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
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American Appraisal Associates Page 11
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
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American Appraisal Associates Page 2
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.15
MARKET VALUE
Southfield Marriott Hotel
27033 Northwestern Highway
Southfield, Michigan
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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American Appraisal Associates Page 1
July 8, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Southfield Marriott Hotel
located at 27033 Northwestern Highway, Southfield, Michigan, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart
C - Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Southfield Marriott Hotel, located at 27033 Northwestern Highway,
Southfield, Michigan, comprises a 5.4-acre owned land parcel; land improvements
consisting mainly of landscaping, site utilities, paving, concrete sidewalks and
lighting; a one-structure, six-story hotel facility of reinforced concrete and
steel frame construction, in addition to fixed building services including
plumbing; sewerage; heating, ventilating, and air conditioning; electric power
and lighting; and fire protection. The facility functions very well in its
capacity. Functional areas include 226 hotel rooms; restaurant; bar; retail
shop; meeting rooms; fitness area; facilities support; and office area. Also
included are personal property necessary for continued operation of the hotel
and intangible assets. Intangible assets associated with the operating facility
include the time-economic benefit of a going concern. Opened in August 1989, the
property is reportedly in very good condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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American Appraisal Associates Page 8
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Southfield Marriott
Hotel, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of SIXTEEN MILLION TWO HUNDRED THOUSAND DOLLARS
($16,200,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
Scott Kellenberger made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Scott Kellenberger made a personal inspection of the property that is the
subject of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
The American Society of Appraisers has a mandatory recertification program for
all of its senior members. I am in compliance with the requirements of that
program.
-----------------------------
Michael D. Larson
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
Scott Kellenberger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
---------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.16
MARKET VALUE
Marriott At Research Triangle Park
4700 Guardian Drive
Durham, North Carolina
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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American Appraisal Associates Page 1
July 8, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
MARRIOTT AT RESEARCH TRIANGLE PARK
located at 4700 Guardian Drive, Durham, North Carolina, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Marriott at Research Triangle Park, located at 4700 Guardian Drive, Durham,
North Carolina, comprises an owned land parcel; land improvements consisting
mainly of site utilities, paving, lighting, and landscaping; a single-structure,
six-story hotel facility of steel frame and stucco exterior wall finish
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; security system; and fire protection. The facility
functions well in its capacity. Functional areas include 224 hotel rooms;
restaurant; bar; retail shop (gift shop); meeting rooms; fitness area; indoor
pool; business center; facilities support; and office area. Also included are
personal property necessary for continued operation of the hotel and intangible
assets. Intangible assets associated with the operating facility include the
time-economic benefit of a going concern. Opened in 1988, the property is
reportedly in good condition overall. At the date of this valuation, the
property was managed by an affiliate of Marriott International, Inc. The subject
property is located in an improving neighborhood adjacent to the Research
Triangle Park. Ownership of the subject property has not transferred within the
past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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American Appraisal Associates Page 8
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Marriott at Research
Triangle Park, assuming it to be offered for sale in the open market, is
reasonably represented by the amount of TWENTY MILLION NINE HUNDRED THOUSAND
DOLLARS ($20,900,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
Scott Kellenberger made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and represent the
unbiased professional analyses, opinions, and conclusions of American
Appraisal Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present
or prospective interest in the property that is the subject of this
report and have no personal interest or bias with respect to the
parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent
on an action or event resulting from the analyses, opinions, or
conclusions in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the requirements of the Uniform
Standards of Professional Appraisal Practice, the Code of Professional
Ethics and the Standards of Professional Practice of the Appraisal
Institute, and the Principles of Appraisal Practice and Code of Ethics
of the American Society of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
Scott Kellenberger made a personal inspection of the property that is
the subject of this report.
Anyone providing significant professional assistance is identified on
this signature page.
The assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
________________________________
Philip R. Cook
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
Scott Kellenberger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and represent the
unbiased professional analyses, opinions, and conclusions of American
Appraisal Associates, Inc.
I personally have no present or prospective interest in the property
that is the subject of this report and have no personal interest or
bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent
on an action or event resulting from the analyses, opinions, or
conclusions in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the requirements of the Uniform
Standards of Professional Appraisal Practice and the Code of
Professional Ethics and the Standards of Professional Practice of the
Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the
subject of this report.
Anyone providing significant professional assistance is identified in
this report.
The assignment was not based on a requested minimum valuation, a
specific valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
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American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.17
MARKET VALUE
Tampa Marriott Westshore
1001 North Westshore Boulevard
Tampa, Florida
Potomac Hotel Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Tampa Marriott Westshore
located at 1001 North Westshore Boulevard, Tampa, Florida, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
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Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
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The Tampa Marriott Westshore, located at 1001 North Westshore Boulevard, Tampa,
Florida, comprises a leased land parcel; land improvements consisting mainly of
paving, landscaping, lighting, indoor/outdoor pool, and site utilities; a single
structure, 14-story hotel facility of concrete frame and stucco wall
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; and fire protection. The facility functions very well in
its capacity. Functional areas include 310 hotel rooms; restaurants; bar; retail
shop; meeting rooms; fitness area; facilities support; hotel laundry; and office
area. Also included are personal property necessary for continued operation of
the hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in June
1981, the property is in good condition overall. At the date of this valuation,
the property was managed by an affiliate of Marriott International, Inc. The
subject property is located in a suburban commercial neighborhood. Ownership of
the subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue. The discounted cash flow analysis consists of estimating annual
future cash flows and individually discounting them back to their present value.
If the cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured
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American Appraisal Associates Page 8
equipment, contractors' overhead and profit, and fees, but without provision for
overtime, bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment
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American Appraisal Associates Page 9
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going-forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Tampa Marriott Westshore,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of TWENTY-ONE MILLION FOUR HUNDRED THOUSAND DOLLARS ($21,400,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
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American Appraisal Associates Page 12
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
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The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Principles of Appraisal Practice
and Code of Ethics of the American Society of Appraisers.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
--------------------------------
Steven Zenkovich
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
Mark Winger
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American Appraisal Associates Page 2
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
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American Appraisal Associates
GENERAL SERVICE CONDITIONS
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American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.18
MARKET VALUE
Albuquerque Marriott
2101 Louisiana N.E.
Albuquerque, New Mexico
Potomac Hotel Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Albuquerque Marriott
located at 2101 Louisiana N.E., Albuquerque, New Mexico, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Potomac
Hotel Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Albuquerque Marriott, located at 2101 Louisiana N.E., Albuquerque, New
Mexico, comprises a leased land parcel; land improvements consisting mainly of
paving, outside lighting, landscaping, indoor/outdoor pool, and site utilities;
a single-structure, 16-story hotel facility of concrete panel walls and steel
frame construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; and fire protection. The facility functions adequately in
its capacity. Functional areas include 411 hotel rooms; restaurant; bar; retail
shop; meeting rooms; fitness area; facilities support; hotel laundry; and office
area. Also included are personal property necessary for continued operation of
the hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in July
1982, the property is reportedly in good condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity
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American Appraisal Associates Page 8
and utility of the existing property at current market prices for materials,
labor and manufactured equipment, contractors' overhead and profit, and fees,
but without provision for overtime, bonuses for labor, and premiums for
materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP
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American Appraisal Associates Page 9
Standards Rule 1-4. The results of our investigation should be treated as an
informed judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical, and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These data
were analyzed. A survey was then conducted with the manager of the hotel. The
survey addressed such issues as the ownership interest; the physical and
functional attributes of the tangible property; locational attributes; property
tax issues; market conditions including business mix, demand generators, future
trends and predictability of the business, and anticipated additions and
deletions of hotels to the subject's competitive market; the property's direct
competitors, their estimated average daily rates, occupancies, rank in
comparison to the subject property, and trends in that rank; most probable
buyers; marketing periods; income and expenses including their quantity,
quality, and durability; and risk factors considering location, hotel market
volatility, competition, guest mix, reputation, product/amenities, level of
operations, workforce, and management issues. Considering the above-referenced
data, a projection of net operating income prior to incentive management fees
was made. The resulting gross margin was checked against our database of similar
hotel's gross margins for reasonableness. The impact of incentive management
fees on the subject hotel was then estimated and deducted to arrive at the
estimated net operating income of the property. The capitalization rate to be
applied to the latest 12 months net operating income associated with the subject
property, in addition to the capitalization rates and, if appropriate, the
discount rates to be applied to the projected net operating income associated
with the property, was then estimated. The rates were based upon the review of
current published surveys reflecting the opinions of such investors or
participants as Real Estate Investment Trusts (REIT's), pension funds, hotel
acquisition/management companies, insurance companies, lenders, brokers, and
consultants in combination with the capitalization rates reflected in
transactions, adjusted for the interest analyzed, locational influences, reserve
policies, functional attributes of the property, property tax issues, local
market volatility and competition, guest mix, renovation influences, workforce
and management issues, other income characteristics and the like. The value of
the hotel, based on the application of the income capitalization approach with
an appropriate adjustment for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Albuquerque Marriott,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of TWENTY-ONE MILLION SIX HUNDRED THOUSAND DOLLARS ($21,600,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have not made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
-------------------------------
Mark Martin, MAI
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.19
MARKET VALUE
Fullerton Marriott Hotel
2701 East Nutwood Avenue
Fullerton, California
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Fullerton Marriott Hotel
located at 2701 East Nutwood Avenue, Fullerton, California, and submit our
findings in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34,
Subpart C - Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed
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American Appraisal Associates Page 3
by an engineer retained by Host Marriott Corporation. We did not consider the
costs that might be incurred in selling the property, as this is also addressed
elsewhere with regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
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American Appraisal Associates Page 4
Property Valued
- ---------------
The Fullerton Marriott Hotel, located at 2701 East Nutwood Avenue, Fullerton,
California, comprises a leased land parcel; land improvements consisting mainly
of site utilities, paving, lighting, outdoor pool, and landscaping; a one-
structure, six-story hotel facility of steel frame and concrete panel
construction, in addition to fixed building services including plumbing;
sewerage; heating, ventilating, and air conditioning; electric power and
lighting; elevators; security system; and fire protection. The facility
functions very well in its capacity. Functional areas include 224 hotel rooms;
a restaurant; bar; retail shop; meeting rooms; fitness area; parking structure;
facilities support; and office area. Also included are personal property
necessary for continued operation of the hotel and intangible assets.
Intangible assets associated with the operating facility include the time-
economic benefit of a going concern. Opened in 1989, the property is reportedly
in excellent condition overall. At the date of this valuation, the property was
managed by an affiliate of Marriott International, Inc. The subject property is
located in a suburban, highway commercial neighborhood. Ownership of the
subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
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Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a
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American Appraisal Associates Page 6
good indication of the range of value, as the data represent typical actions and
reactions of buyers and sellers in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from
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American Appraisal Associates Page 7
such ownership. To this extent, prior operating performance provides a guide
only to the extent that conditions are not anticipated to appreciably change.
In developing income and expense projections, therefore, consideration has been
given to the established trends of sales and expenses, as well as to discussions
with management and others concerning perceptions of future trends, prospects,
or changing economic conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
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American Appraisal Associates Page 8
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
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American Appraisal Associates Page 9
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed judgment
based on a review of limited data and the application of sound appraisal theory,
logic, and experience. If we were to conduct a complete appraisal, our estimate
of value could vary from the estimate provided here. Specifically, we applied
only the following procedures. We requested and were provided historical, and
budgeted 1998 income and expense data associated with the hotel, in addition to
general market intelligence, such as the STAR report, for the subject's market.
Also requested and provided, if applicable, were lease, contractual, and
management agreement information associated with the hotel. The historical
income and expense data were restated to provide a format expediting ratio and
other trend analysis. The hotel was inspected if so noted on the certificate of
appraiser provided as Exhibit B of this report. These data were analyzed. A
survey was then conducted with the manager of the hotel. The survey addressed
such issues as the ownership interest; the physical and functional attributes of
the tangible property; locational attributes; property tax issues; market
conditions including business mix, demand generators, future trends and
predictability of the business, and anticipated additions and deletions of
hotels to the subject's competitive market; the property's direct competitors,
their estimated average daily rates, occupancies, rank in comparison to the
subject property, and trends in that rank; most probable buyers; marketing
periods; income and expenses including their quantity, quality, and durability;
and risk factors considering location, hotel market volatility, competition,
guest mix, reputation, product/amenities, level of operations, workforce, and
management issues. Considering the above-referenced data, a projection of net
operating income prior to incentive management fees was made. The resulting
gross margin was checked against our database of similar hotel's gross margins
for reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon
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American Appraisal Associates Page 10
the review of current published surveys reflecting the opinions of such
investors or participants as Real Estate Investment Trusts (REIT's), pension
funds, hotel acquisition/management companies, insurance companies, lenders,
brokers, and consultants in combination with the capitalization rates reflected
in transactions, adjusted for the interest analyzed, locational influences,
reserve policies, functional attributes of the property, property tax issues,
local market volatility and competition, guest mix, renovation influences,
workforce and management issues, other income characteristics and the like. The
value of the hotel, based on the application of the income capitalization
approach with an appropriate adjustment for owner-funded capital expenditures,
was then estimated, and its conclusion was checked for reasonableness with our
database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going-forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Fullerton Marriott Hotel,
assuming it to be offered for sale in
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American Appraisal Associates Page 11
the open market, is reasonably represented by the amount of NINE MILLION EIGHT
HUNDRED THOUSAND DOLLARS ($9,800,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have not made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition,
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American Appraisal Associates
an Indemnified Party shall promptly notify the Hotel Partnerships after any
action is commenced (by way of service with summons or other legal process
giving information as to the nature and basis of the claim) against such person.
In any event, failure to notify such Hotel Partnership shall not relieve any
Hotel Partnership from any liability which such Hotel Partnership may have on
account of this indemnity or otherwise except to the extent such Hotel
Partnership shall have been prejudiced by such failure. The Hotel Partnerships
will, if required by an Indemnified Party, assume the defense and control of any
litigation or proceeding in respect of which indemnity may be sought hereunder,
including the employment of counsel selected by the Hotel Partnerships and the
payment of reasonable fees and expenses of such counsel, in which event, except
as provided below, no Hotel Partnership shall be liable for the fees and
expenses of any other counsel retained by an Indemnified Party in connection
with such litigation or proceeding. In any such litigation or proceeding the
defense of which the Hotel Partnerships shall have assumed, any Indemnified
Party shall have the right to participate in such litigation proceeding and to
retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party unless (i) the Hotel Partnerships and the
Indemnified Party shall have mutually agreed in writing to the retention of such
counsel or (ii) the named parties to any such litigation or proceeding
(including impleaded parties) include any Hotel Partnership and the Indemnified
Party and such parties reasonably determine that the representation of both
parties by the same counsel involves a conflict due to actual or potential
differing interests between them. In any event, the Hotel Partnerships shall not
in connection with any one claim, action, or proceeding or any separate but
substantially similar related claims, actions or proceedings in any
jurisdictions, be liable for the fees and expenses for more than one firm of
attorneys (in addition to local counsel) at the time for all Indemnified
Parties. The Hotel Partnerships shall not be liable for any settlement of any
litigation or proceeding effected without their written consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.20
MARKET VALUE
Dayton Marriott
1414 South Patterson Boulevard
Dayton, Ohio
Marriott Diversified
American Hotels, L.P.
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Dayton Marriott
located at 1414 South Patterson Boulevard, Dayton, Ohio, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Diversified American Hotels, L.P. and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
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American Appraisal Associates Page 4
The Dayton Marriott, located at 1414 South Patterson Boulevard, Dayton, Ohio,
comprises an owned land parcel; land improvements consisting mainly of
landscaping, paving, site lighting, a combination indoor/outdoor pool, and site
utilities; a one-structure, six-story hotel facility of concrete frame and
elastomer-covered concrete block wall construction, in addition to fixed
building services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; and fire protection. The facility
functions very well in its capacity. Functional areas include 399 hotel rooms;
restaurant; bar; retail shop and business center; meeting rooms; fitness area;
indoor/outdoor pool and spa; hotel laundry; facilities support; and office area.
Also included are personal property necessary for continued operation of the
hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in 1981,
the property is reportedly in good condition overall. At the date of this
valuation, the property was managed by an affiliate of Marriott International,
Inc. The subject property is located in a suburban neighborhood. Ownership of
the subject property has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
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American Appraisal Associates Page 5
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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American Appraisal Associates Page 6
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity
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American Appraisal Associates Page 8
and utility of the existing property at current market prices for materials,
labor and manufactured equipment, contractors' overhead and profit, and fees,
but without provision for overtime, bonuses for labor, and premiums for
materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP
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American Appraisal Associates Page 9
Standards Rule 1-4. The results of our investigation should be treated as an
informed judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These data
were analyzed. A survey was then conducted with the manager of the hotel. The
survey addressed such issues as the ownership interest; the physical and
functional attributes of the tangible property; locational attributes; property
tax issues; market conditions including business mix, demand generators, future
trends and predictability of the business, and anticipated additions and
deletions of hotels to the subject's competitive market; the property's direct
competitors, their estimated average daily rates, occupancies, rank in
comparison to the subject property, and trends in that rank; most probable
buyers; marketing periods; income and expenses including their quantity,
quality, and durability; and risk factors considering location, hotel market
volatility, competition, guest mix, reputation, product/amenities, level of
operations, workforce, and management issues. Considering the above-referenced
data, a projection of net operating income prior to incentive management fees
was made. The resulting gross margin was checked against our database of similar
hotel's gross margins for reasonableness. The impact of incentive management
fees on the subject hotel was then estimated and deducted to arrive at the
estimated net operating income of the property. The capitalization rate to be
applied to the latest 12 months net operating income associated with the subject
property, in addition to the capitalization rates and, if appropriate, the
discount rates to be applied to the projected net operating income associated
with the property, was then estimated. The rates were based upon the review of
current published surveys reflecting the opinions of such investors or
participants as Real Estate Investment Trusts (REIT's), pension funds, hotel
acquisition/management companies, insurance companies, lenders, brokers, and
consultants in combination with the capitalization rates reflected in
transactions, adjusted for the interest analyzed, locational influences, reserve
policies, functional attributes of the property, property tax issues, local
market volatility and competition, guest mix, renovation influences, workforce
and management issues, other income characteristics and the like. The value of
the hotel, based on the application of the income capitalization approach with
an appropriate adjustment for owner-funded capital
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American Appraisal Associates Page 10
expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Dayton Marriott, assuming
it to be offered for sale in the open market, is reasonably represented by the
amount of FORTY MILLION FIVE HUNDRED THOUSAND DOLLARS ($40,500,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who investigated and reported on the property are
identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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American Appraisal Associates Page 11
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have not made a physical inspection of the property.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
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American Appraisal Associates Page 3
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
________________________________
Scott C. Kellenberger
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
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American Appraisal Associates Page 2
Jim Budyak
Mark Winger
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Ken P. Wilson, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.21
MARKET VALUE
Marriott's Harbor Beach Resort
3030 Holiday Drive
Fort Lauderdale, Florida
Marriott Hotel Properties
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Marriott's Harbor Beach Resort
located at 3030 Holiday Drive, Fort Lauderdale, Florida, and submit our findings
in this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties Limited Partnership and the other addressees hereof. It is
entirely inappropriate to use this analysis for any purpose other than that
specified.
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American Appraisal Associates Page 2
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might
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American Appraisal Associates Page 3
be incurred in selling the property, as this is also addressed elsewhere with
regard to the fairness opinions.
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
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American Appraisal Associates Page 4
Marriott's Harbor Beach Resort, located at 3030 Holiday Drive, Fort Lauderdale,
Florida, comprises a leased land parcel; land improvements consisting mainly of
beachfront and private cabanas, asphalt and concrete paving, outdoor lighting,
outdoor pool and spas, extensive landscaping, tennis courts, and site utilities;
a single-structure, 14-story resort hotel facility of prefabricated glass fiber
or concrete panel walls and reinforced concrete and steel frame construction, in
addition to fixed building services including plumbing; sewerage; heating,
ventilating, and air conditioning; electric power and lighting; elevators;
escalators; and fire protection. The facility functions very well in its
capacity. Functional areas include 624 hotel rooms; restaurants; bars; retail
shops; meeting rooms; fitness area; subterranean parking garage; facilities
support; and office area. Also included are personal property necessary for
continued operation of the hotel and intangible assets. Intangible assets
associated with the operating facility include the time-economic benefit of a
going concern. Opened in October 1984, the property is in excellent condition
overall. At the date of this valuation, the property was managed by an affiliate
of Marriott International, Inc. The subject property is located in a beachfront
resort neighborhood. Ownership of the subject property in its entirety has not
transferred in the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
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American Appraisal Associates Page 5
Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a
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American Appraisal Associates Page 6
good indication of the range of value, as the data represent typical actions and
reactions of buyers and sellers in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
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American Appraisal Associates Page 7
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in Marriott's Harbor Beach Resort
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of ONE HUNDRED TWENTY-TWO MILLION THREE HUNDRED THOUSAND DOLLARS
($122,300,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
<PAGE>
American Appraisal Associates
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
036131
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American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We made a physical inspection of the property in May of 1996. This inspection
was made by individuals generally familiar with real estate and building
construction. However, these individuals are not architectural or structural
engineers who would have detailed knowledge of building design and structural
integrity. Accordingly, we do not opine on, nor are we responsible for, the
structural integrity of the property including its conformity to specific
governmental code requirements, such as fire, building and safety, earthquake,
and occupancy, or any physical defects which were not readily apparent to the
appraisers during their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report at this time. The property was personally inspected by me
in May of 1996.
Anyone providing significant professional assistance is identified on this
signature page.
-----------------------------------
Alice MacQueen
Florida Certified General Appraiser
#RZ-0002202
Significant Professional Assistance By:
Les Kiehnau
Jim Budyak
Mark Winger
Denise Schilling
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American Appraisal Associates Page 2
Denise Schilling
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.22
MARKET VALUE
Marriott's Orlando World Center
8701 World Center Drive
Orlando, Florida
Marriott Hotel Properties
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Marriott's Orlando World Center
located at 8701 World Center Drive, Orlando, Florida, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Marriott
Hotel Properties Limited Partnership. It is entirely inappropriate to use this
analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does consider
projected capital expenditures commonly referred to as owner-funded items, based
in part on projected owner-funded capital expenditure estimates developed by an
engineer retained by Host Marriott Corporation. We did not consider the costs
that might be incurred in selling the property, as this is also addressed
elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers. The
depth of discussion contained in this report is specific solely to your needs as
the client and for the intended use stated above. American Appraisal Associates,
Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
Marriott's Orlando World Center, located at 8701 World Center Drive, Orlando,
Florida, comprises an owned land parcel, which allows for expansion of the
facility; land improvements consisting mainly of asphalt and concrete paving,
outdoor lighting, outdoor pools and spas,
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American Appraisal Associates Page 4
landscaping, golf course and driving range, tennis and volleyball courts, and
site utilities; a single-structure, 27-story convention hotel facility of
prefabricated glass fiber, "Dryvit" panel, reinforced concrete block, or poured-
in-place concrete walls and reinforced concrete and steel frame construction, in
addition to fixed building services including plumbing; sewerage; heating,
ventilating, and air conditioning; electric power and lighting; elevators;
escalators; and fire protection. The facility functions very well in its
capacity. Approval has been received for an expansion including 500 rooms at an
estimated cost of over $73,000,000. Construction is anticipated to be completed
in the year 2000. Existing functional areas include 1,503 hotel rooms;
restaurants; bars; retail shops; meeting rooms; fitness area; indoor pool and
spa; facilities support; and office area. Also included are personal property
necessary for continued operation of the hotel and intangible assets. Intangible
assets associated with the operating facility include the time-economic benefit
of a going concern. Opened in March 1986, the property is reportedly in
excellent condition overall. At the date of this valuation, the property was
managed by an affiliate of Marriott International, Inc. The subject property is
located in a suburban neighborhood. Ownership of the subject property in its
entirety has not transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
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American Appraisal Associates Page 5
Nature of the business and history of the property
Economic condition and outlook for the hotel
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a
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American Appraisal Associates Page 6
good indication of the range of value, as the data represent typical actions and
reactions of buyers and sellers in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to provide
a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These factors
include a review of the subject's operating plan and projections, an analysis of
the hotel industry's historical performance and forecast investment reports, and
other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
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American Appraisal Associates Page 7
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the cash
flow will continue beyond the foreseeable future, an estimate of the stabilized
annual future cash flow attributable to the operation is capitalized and
discounted to its present value. The summation of the discounted annual cash
flows and the stabilized annual cash flow after capitalization and discounting
gives an indication of the current market value of the enterprise. The
discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
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Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of
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American Appraisal Associates Page 9
sale transactions, as these are the most direct and appropriate valuation
approaches for the subject property. As such, we have invoked the allowable
departure provision as it relates to USPAP Standards Rule 1-4. The results of
our investigation should be treated as an informed judgment based on a review of
limited data and the application of sound appraisal theory, logic, and
experience. If we were to conduct a complete appraisal, our estimate of value
could vary from the estimate provided here. Specifically, we applied only the
following procedures. We requested and were provided historical, and budgeted
1998 income and expense data associated with the hotel, in addition to general
market intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel was
then estimated and deducted to arrive at the estimated net operating income of
the property. The capitalization rate to be applied to the latest 12 months net
operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
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American Appraisal Associates Page 10
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in Marriott's Orlando World
Center, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of TWO HUNDRED NINETY-TWO MILLION FIVE HUNDRED
THOUSAND DOLLARS ($292,500,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
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American Appraisal Associates Page 11
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Mark Martin, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Mark Martin, MAI
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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American Appraisal Associates Page 3
development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the property
together with a detailed analysis of the requirements of the ADA could reveal
that the property is not in compliance with one or more of the requirements of
the act. If so, this fact could have a negative effect on the value of the
property. Since we have no direct evidence relating to this issue, we did not
consider the possible noncompliance with the requirements of ADA (other than
those reported by the engineer) in estimating the value of the property.
We made a physical inspection of the property in May of 1996. This inspection
was made by individuals generally familiar with real estate and building
construction. However, these individuals are not architectural or structural
engineers who would have detailed knowledge of building design and structural
integrity. Accordingly, we do not opine on, nor are we responsible for, the
structural integrity of the property including its conformity to specific
governmental code requirements, such as fire, building and safety, earthquake,
and occupancy, or any physical defects which were not readily apparent to the
appraisers during their inspection.
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American Appraisal Associates Page 3
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report at this time. The property was personally inspected by me in
May of 1996.
Anyone providing significant professional assistance is identified on this
signature page.
-----------------------------------
Alice MacQueen
Florida Certified General Appraiser
#RZ-0002202
Significant Professional Assistance By:
Les Kiehnau
Jim Budyak
Mark Winger
<PAGE>
American Appraisal Associates Page 2
Denise Schilling
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
I personally have no present or prospective interest in the property that
is the subject of this report and have no personal interest or bias with
respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
---------------------------------
Mark Martin, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.23
MARKET VALUE
Chicago Marriott Suites O'Hare
6155 North River Road
Rosemont, Illinois
Mutual Benefit Chicago
Marriott Suite Hotel
Partners, L.P.
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Chicago Marriott Suites O'Hare
located at 6155 North River Road, Rosemont, Illinois, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Mutual
Benefit Chicago Marriott Suite Hotel Partners, L.P. and the other addressees
hereof. It is entirely inappropriate to use this analysis for any purpose other
than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34,
Subpart C - Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going-forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Leasehold Estate which is defined as the
interest held by the lessee (the tenant or renter) through a lease conveying the
rights of use and occupancy for a stated term under certain conditions. In the
case of the subject facility, the improvements and personal property were built
and installed on leased land.
Property Valued
- ---------------
The Chicago Marriott Suites O'Hare, located at 6155 North River Road, Rosemont,
Illinois, comprises a leased land parcel; land improvements consisting mainly
of landscaping, paving,
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American Appraisal Associates Page 4
site lighting, and site utilities; a single-structure, 11-story suite hotel
facility of concrete frame and brick wall construction, in addition to fixed
building services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; elevators; security cameras; and fire
protection. The facility functions very well in its capacity. Functional areas
include 256 hotel suites; restaurant; bar; retail shop; meeting rooms; fitness
area; indoor pool and spa; business center; facilities support; and office area.
Also included are personal property necessary for continued operation of the
hotel and intangible assets. Intangible assets associated with the operating
facility include the time-economic benefit of a going concern. Opened in
November 1988, the property is in excellent condition overall. At the date of
this valuation, the property was managed by an affiliate of Marriott
International, Inc. The subject property is located in an airport neighborhood.
Ownership of the subject property has not transferred within the past three
years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is as its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
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American Appraisal Associates Page 5
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment
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American Appraisal Associates Page 6
can be utilized in the direct capitalization technique within the income
capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and expenses, as well as to discussions with management and others
concerning perceptions of future trends, prospects, or changing economic
conditions which may affect the hotel operations.
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American Appraisal Associates Page 7
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue. The discounted cash flow analysis consists of estimating annual future
cash flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual cash
flows and the stabilized annual cash flow after capitalization and discounting
gives an indication of the current market value of the enterprise. The
discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity and utility of the existing property
at current market prices for materials, labor and manufactured equipment,
contractors' overhead and profit, and fees, but without provision for overtime,
bonuses for labor, and premiums for materials or equipment.
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American Appraisal Associates Page 8
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP Standards Rule
1-4. The results of our investigation should be treated as an informed
judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from
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American Appraisal Associates Page 9
the estimate provided here. Specifically, we applied only the following
procedures. We requested and were provided historical, and budgeted 1998 income
and expense data associated with the hotel, in addition to general market
intelligence, such as the STAR report, for the subject's market. Also
requested and provided, if applicable, were lease, contractual, and management
agreement information associated with the hotel. The historical income and
expense data were restated to provide a format expediting ratio and other trend
analysis. The hotel was inspected if so noted on the certificate of appraiser
provided as Exhibit B of this report. These data were analyzed. A survey was
then conducted with the manager of the hotel. The survey addressed such issues
as the ownership interest; the physical and functional attributes of the
tangible property; locational attributes; property tax issues; market conditions
including business mix, demand generators, future trends and predictability of
the business, and anticipated additions and deletions of hotels to the subject's
competitive market; the property's direct competitors, their estimated average
daily rates, occupancies, rank in comparison to the subject property, and trends
in that rank; most probable buyers; marketing periods; income and expenses
including their quantity, quality, and durability; and risk factors considering
location, hotel market volatility, competition, guest mix, reputation,
product/amenities, level of operations, workforce, and management issues.
Considering the above-referenced data, a projection of net operating income
prior to incentive management fees was made. The resulting gross margin was
checked against our database of similar hotel's gross margins for
reasonableness. The impact of incentive management fees on the subject hotel
was then estimated and deducted to arrive at the estimated net operating income
of the property. The capitalization rate to be applied to the latest 12 months
net operating income associated with the subject property, in addition to the
capitalization rates and, if appropriate, the discount rates to be applied to
the projected net operating income associated with the property, was then
estimated. The rates were based upon the review of current published surveys
reflecting the opinions of such investors or participants as Real Estate
Investment Trusts (REIT's), pension funds, hotel acquisition/management
companies, insurance companies, lenders, brokers, and consultants in combination
with the capitalization rates reflected in transactions, adjusted for the
interest analyzed, locational influences, reserve policies, functional
attributes of the property, property tax issues, local market volatility and
competition, guest mix, renovation influences, workforce and management issues,
other income characteristics and the like. The value of the hotel, based on the
application of the income capitalization approach with an appropriate adjustment
for owner-funded capital expenditures, was then estimated, and its conclusion
was checked for reasonableness with our database of comparable sale
transactions.
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American Appraisal Associates Page 10
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going-forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the leasehold estate in the Chicago Marriott Suites
O'Hare, assuming it to be offered for sale in the open market, is reasonably
represented by the amount of THIRTY-FOUR MILLION THREE HUNDRED THOUSAND DOLLARS
($34,300,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
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American Appraisal Associates Page 11
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
<PAGE>
American Appraisal Associates
EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
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American Appraisal Associates Page 3
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the development of
the conclusion of value. The stated value estimate is predicated on the
assumption that there is no material on or in the property that would cause such
a loss in value. No responsibility is assumed for any such conditions, and the
client has been advised that the appraiser is not qualified to detect such
substances, quantify the impact on values, or develop the remedial cost.
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American Appraisal Associates Page 3
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We have made a physical inspection of the property. This inspection was made by
individuals generally familiar with real estate and building construction.
However, these individuals are not architectural or structural engineers who
would have detailed knowledge of building design and structural integrity.
Accordingly, we do not opine on, nor are we responsible for, the structural
integrity of the property including its conformity to specific governmental code
requirements, such as fire, building and safety, earthquake, and occupancy, or
any physical defects which were not readily apparent to the appraisers during
their inspection.
The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
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American Appraisal Associates Page 3
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
<PAGE>
American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
<PAGE>
American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice, the Code of Professional Ethics and the
Standards of Professional Practice of the Appraisal Institute, and the
Principles of Appraisal Practice and Code of Ethics of the American Society
of Appraisers.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have made a personal inspection of the property that is the subject of
this report.
Anyone providing significant professional assistance is identified on this
signature page.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
--------------------------------
Scott C. Kellenberger
Significant Professional Assistance By:
Les Kiehnau
Denise Schilling
Jim Budyak
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American Appraisal Associates Page 2
Mark Winger
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American Appraisal Associates Page 1
Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
--------------------------------
Ken P. Wilson, MAI
<PAGE>
American Appraisal Associates
GENERAL SERVICE CONDITIONS
<PAGE>
American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
<PAGE>
Exhibit 99.24
MARKET VALUE
Hanover Marriott Hotel
1401 Route 10 East
Whippany, New Jersey
Hanover Marriott
Limited Partnership
March 1, 1998
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American Appraisal Associates Page 1
May 27, 1998
Atlanta Marriott Marquis II Limited Partnership
Desert Springs Marriott Limited Partnership
Hanover Marriott Limited Partnership
Marriott Diversified American Hotels, L.P.
Marriott Hotel Properties Limited Partnership
Marriott Hotel Properties II Limited Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
Potomac Hotel Limited Partnership
Bethesda, Maryland
We have completed an investigation and valuation of the designated interest in
the subject hotel exhibited to us as the
Hanover Marriott Hotel
located at 1401 Route 10 East, Whippany, New Jersey, and submit our findings in
this report.
We made this investigation to express an opinion, as of March 1, 1998, of the
market value of the property as if available for sale in the open market. It is
understood that this opinion of value will be considered in the issuance of
fairness opinions relating to the limited partners interests in the Hanover
Marriott Limited Partnership and the other addressees hereof. It is entirely
inappropriate to use this analysis for any purpose other than that specified.
Market Value means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting
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American Appraisal Associates Page 2
prudently and knowledgeably, and assuming the price is not affected by undue
stimulus. Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what
they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.*
*Office of the Comptroller of the Currency under 12 CFR, Part 34, Subpart C
- Appraisals, 34.42 Definitions [f]
Our valuation considered the real estate comprising land, land improvements,
buildings, and building service equipment; furniture, fixtures, and equipment;
and any intangible assets associated with the hotel. The value conclusion does
not include existing long-term debt, working capital, or any other assets or
liabilities (such as deferred incentive management fees) which may exist and are
not specifically delineated herein, as these items will be addressed elsewhere
with regard to the fairness opinions. We have, however, considered all
management fees encumbering the property on a going- forward basis. The value
conclusion assumes all furniture, fixtures and equipment (F.F. & E.) reserves
for replacements are adequate and furthermore does not consider any deferred
maintenance (such as environmental concerns). The value conclusion does
consider projected capital expenditures commonly referred to as owner-funded
items, based in part on projected owner-funded capital expenditure estimates
developed by an engineer retained by Host Marriott Corporation. We did not
consider the costs that might be incurred in selling the property, as this is
also addressed elsewhere with regard to the fairness opinions.
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American Appraisal Associates Page 3
Together with the market value, we have provided an estimate of exposure time.
Exposure Time is defined as follows: The estimated length of time the property
interest being valued would have been offered on the market prior to the
hypothetical consummation of a sale at market value on the effective date of the
valuation; a retrospective estimate based upon an analysis of past events
assuming a competitive and open market.
This report is intended to comply with the purpose and reporting requirements
set forth by the Uniform Standards of Professional Appraisal Practice ("USPAP")
for a restricted appraisal report. As such, it does not present discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the opinion of value of American Appraisal Associates, Inc. Supporting
documentation concerning these matters has been retained in our work papers.
The depth of discussion contained in this report is specific solely to your
needs as the client and for the intended use stated above. American Appraisal
Associates, Inc., is not responsible for the unauthorized use of this report.
This report comprises:
This letter, identifying the property valued, stating the nature and extent
of the investigation, and presenting the conclusion of value
Exhibits consisting of:
Exhibit A - Assumptions and Limiting Conditions
B - Certificates
A statement of general service conditions
For the subject property, we valued the Fee Simple Estate which is defined as an
absolute ownership, unencumbered by any other interest or estate, subject to the
limitations imposed by the governmental powers of taxation, eminent domain,
police power, and escheat.
Property Valued
- ---------------
The Hanover Marriott Hotel, located at 1401 Route 10 East, Whippany, New Jersey,
comprises an owned land parcel; land improvements consisting mainly of asphalt,
concrete, and brick paving, outdoor lighting, indoor/outdoor pool, landscaping,
and site utilities; a single-structure,
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American Appraisal Associates Page 4
eight-story, and basement hotel facility of "Dryvit" panel or poured-in-place
concrete walls and steel and concrete frame construction, in addition to fixed
building services including plumbing; sewerage; heating, ventilating, and air
conditioning; electric power and lighting; elevators; and fire protection. The
facility functions very well in its capacity. Functional areas include 353 hotel
rooms; restaurants; bar; retail shop; meeting rooms; fitness area; facilities
support; and office area. Also included are personal property necessary for
continued operation of the hotel and intangible assets. Intangible assets
associated with the operating facility include the time-economic benefit of a
going concern. Opened in July 1986, the property is reportedly in excellent
condition overall. At the date of this valuation, the property was managed by an
affiliate of Marriott International, Inc. The subject property is located in a
suburban neighborhood. Ownership of the subject property in its entirety has not
transferred within the past three years.
Highest and Best Use Analysis
- -----------------------------
Highest and Best Use is defined as the reasonably probable and legal use of
property, which is physically possible, appropriately supported, financially
feasible, and results in the highest value.
Based on an analysis of the above criteria, the highest and best use of the
subject property is its current use.
Scope of the Investigation and Valuation
- ----------------------------------------
Before arriving at our opinion of value, we reviewed information regarding the
designated property, studied market conditions, and considered:
Continuation of use in the present location
Extent, character, and utility of the property
Highest and best use of the facilities
Comparison of the subject hotel with other hotels that have recently sold
Nature of the business and history of the property
Economic condition and outlook for the hotel
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American Appraisal Associates Page 5
Income expectancy from the property and capitalization of the projected
income into an indication of value
We have consulted with management and reviewed other data sources concerning
historical industry operating results and prospective revenues and earnings.
In completing this valuation, we considered the three traditional approaches to
value (sales comparison, income capitalization, and cost) and limited our
analysis to only the most direct and appropriate techniques.
In the sales comparison approach to valuation, similar properties which have
recently sold or are currently offered for sale in the market are analyzed and
compared with the property being valued. The sales comparison approach has its
greatest value in appraisal situations involving land or improved properties
with common elements and similar amenities.
Hotels contain both tangible and intangible assets. Intangible asset factors
normally included in each sale consist of a favorable reputation, assembled and
trained workforce, assembled management team, and the fact that the facility is
constructed and available for operation. This last factor eliminates a delay to
find a site and design and construct the facility.
In the absence of sales with sufficient similarity to allow direct comparison,
other reasonably comparable improved properties are considered because they
provide a range of unit prices within which the subject property would be
expected to sell. The reliability of this technique is dependent on the degree
of comparability of each sale with the property valued; the dates of sale in
relation to the date of valuation, taking into account market changes in the
interim; and consideration of any unusual conditions affecting price or terms of
sale.
The price a purchaser pays usually results from an extensive investigation in
which available alternatives are compared, and the property purchased represents
the best available balance between the buyer's specifications and the purchase
price. Hence, sales data generally provide a good indication of the range of
value, as the data represent typical actions and reactions of buyers and sellers
in the market.
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In addition, researching and analyzing sale transactions provides overall
capitalization rates ("OAR"), the relationship between net operating income and
sale price, which after adjustment can be utilized in the direct capitalization
technique within the income capitalization approach to value.
Investment properties are normally valued in proportion to their ability to
produce income. Hence, analysis of a property in terms of its ability to
provide a sufficient net annual return on investment capital through the income
capitalization approach is an important means of developing a value indication.
This estimate is developed by discounting or capitalizing the projected net
income at a rate commensurate with investment risks inherent to the ownership of
the property. Such a conversion of income considers competitive returns offered
by alternative investment opportunities. When properly applied, the income
capitalization approach is generally considered to provide the most reliable
value indication for income-producing properties. The income streams generated
by the subject are the result of the assemblage of land, buildings, labor,
equipment, and marketing operations.
The income capitalization approach involves making estimates of the gross income
that might be generated by the property and of expenses that might be incurred
in the operation. Under the income capitalization approach, two methods of
valuation were considered. In the first method, a market-based direct
capitalization technique, a net operating income is capitalized at an
appropriate rate to indicate the value of the subject property. In the second
method, a discounted cash flow analysis, the present value of the anticipated
stream of cash flows generated by the property over a specified projection
period was estimated.
In projecting operating data, many factors which may individually or
collectively influence the conclusion of value must be considered. These
factors include a review of the subject's operating plan and projections, an
analysis of the hotel industry's historical performance and forecast investment
reports, and other industry studies.
Prior operating performance is normally the basis for earnings projections,
although a potential investor must look to the future in assessing the financial
benefits which will be derived from such ownership. To this extent, prior
operating performance provides a guide only to the extent that conditions are
not anticipated to appreciably change. In developing income and expense
projections, therefore, consideration has been given to the established trends
of sales and
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American Appraisal Associates Page 7
expenses, as well as to discussions with management and others concerning
perceptions of future trends, prospects, or changing economic conditions which
may affect the hotel operations.
The direct capitalization technique of estimating value utilizes an OAR
abstracted from the market. The OAR is estimated through various means such as
comparing the sales prices of other hotels to the reported net operating incomes
or pro forma net operating incomes at the time of sale. Net operating income is
earnings before interest, taxes, depreciation, and amortization. Most weight is
given to the direct capitalization technique when a property has reached a
mature level of operations and this mature level of operations is anticipated to
continue.
The discounted cash flow analysis consists of estimating annual future cash
flows and individually discounting them back to their present value. If the
cash flow will continue beyond the foreseeable future, an estimate of the
stabilized annual future cash flow attributable to the operation is capitalized
and discounted to its present value. The summation of the discounted annual
cash flows and the stabilized annual cash flow after capitalization and
discounting gives an indication of the current market value of the enterprise.
The discounted cash flow analysis is a useful gauge of value when volatility is
reasonably predictable with regard to the property's cash flow.
Because the projected earnings used in the valuation were debt-free or earnings
which do not reflect the cost of debt (interest), the resulting indication is
the value of the total invested capital (long-term debt plus equity) in the
enterprise.
Prices paid for operating hotels normally include all tangible and intangible
assets associated with the facility. The income capitalization approach and the
sales comparison approach to value do not segregate the tangible assets from the
inherent intangible assets in a going concern.
In the cost approach to valuation, an estimate is made of the current cost of
replacement new of the improvements. This amount is then adjusted to reflect
depreciation resulting from physical deterioration, wear and tear, and utility,
on the basis of personal inspection and comparison with component parts of
similar new units. This analysis also recognizes factors of functional and
external obsolescence. Cost of replacement new and the differing types of
depreciation are defined in the following paragraphs.
Cost of Replacement New is defined as the amount required to replace the entire
property at one time using the most current technology and construction
materials that will duplicate the capacity
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and utility of the existing property at current market prices for materials,
labor and manufactured equipment, contractors' overhead and profit, and fees,
but without provision for overtime, bonuses for labor, and premiums for
materials or equipment.
Physical Deterioration is defined as a form of depreciation and is the loss in
value resulting from wear and tear in operation and exposure to the elements.
Functional Obsolescence is defined as a loss in value caused by factors inherent
within a building or building equipment unit, such as changes in construction
materials and techniques, which result in excess capital costs in existing
facilities, lack of full use of space, and inability to expand or update the
property.
External Obsolescence is defined as an incurable loss in value caused by
negative influences outside the property itself, such as general economic
conditions, availability of financing, or inharmonious property uses.
The adjusted indicated cost of the improvements is then added to the estimated
market value of the land rights.
The cost approach is appropriate in the valuation of a proposed property or a
property which is easily reproduced, is economically viable, and has little
intangible asset value associated with it. It is also used to allocate an
enterprise value to the various components of the enterprise such as land, land
improvements, buildings, equipment, furniture, and other tangible assets.
The subject hotel is a viable, existing, ongoing enterprise with established
market presence, work force, and management team. Considering these
characteristics and the intangible asset value component generally associated
with the time-economic benefit of going concerns such as the subject hotel, the
cost approach to value would not be relied on by a buyer or a seller in
estimating the value of the subject facility. Therefore, the cost approach to
value is not considered further in our analysis.
This report is the result of a limited appraisal in that we have applied only
the income capitalization approach and broadly applied the sales comparison
approach through a review of sale transactions, as these are the most direct and
appropriate valuation approaches for the subject property. As such, we have
invoked the allowable departure provision as it relates to USPAP
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Standards Rule 1-4. The results of our investigation should be treated as an
informed judgment based on a review of limited data and the application of sound
appraisal theory, logic, and experience. If we were to conduct a complete
appraisal, our estimate of value could vary from the estimate provided here.
Specifically, we applied only the following procedures. We requested and were
provided historical, and budgeted 1998 income and expense data associated with
the hotel, in addition to general market intelligence, such as the STAR report,
for the subject's market. Also requested and provided, if applicable, were
lease, contractual, and management agreement information associated with the
hotel. The historical income and expense data were restated to provide a format
expediting ratio and other trend analysis. The hotel was inspected if so noted
on the certificate of appraiser provided as Exhibit B of this report. These data
were analyzed. A survey was then conducted with the manager of the hotel. The
survey addressed such issues as the ownership interest; the physical and
functional attributes of the tangible property; locational attributes; property
tax issues; market conditions including business mix, demand generators, future
trends and predictability of the business, and anticipated additions and
deletions of hotels to the subject's competitive market; the property's direct
competitors, their estimated average daily rates, occupancies, rank in
comparison to the subject property, and trends in that rank; most probable
buyers; marketing periods; income and expenses including their quantity,
quality, and durability; and risk factors considering location, hotel market
volatility, competition, guest mix, reputation, product/amenities, level of
operations, workforce, and management issues. Considering the above-referenced
data, a projection of net operating income prior to incentive management fees
was made. The resulting gross margin was checked against our database of similar
hotel's gross margins for reasonableness. The impact of incentive management
fees on the subject hotel was then estimated and deducted to arrive at the
estimated net operating income of the property. The capitalization rate to be
applied to the latest 12 months net operating income associated with the subject
property, in addition to the capitalization rates and, if appropriate, the
discount rates to be applied to the projected net operating income associated
with the property, was then estimated. The rates were based upon the review of
current published surveys reflecting the opinions of such investors or
participants as Real Estate Investment Trusts (REIT's), pension funds, hotel
acquisition/management companies, insurance companies, lenders, brokers, and
consultants in combination with the capitalization rates reflected in
transactions, adjusted for the interest analyzed, locational influences, reserve
policies, functional attributes of the property, property tax issues, local
market volatility and competition, guest mix, renovation influences, workforce
and management issues, other income characteristics and the like. The value of
the hotel, based on the application of the income capitalization approach with
an appropriate adjustment for owner-funded capital
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expenditures, was then estimated, and its conclusion was checked for
reasonableness with our database of comparable sale transactions.
In arriving at our final conclusion, we relied on the income capitalization
approach. For reasons previously stated, the sales comparison approach provides
a range of value, and therefore, it was used as a check against the income
capitalization approach conclusion.
We are providing an overall valuation conclusion for the designated facility,
but are not supplying an allocation of the conclusion to the various components
of the property.
As stated previously, the value conclusion does not include existing long-term
debt, working capital, or any other assets or liabilities (such as deferred
incentive management fees) which may exist and are not specifically delineated
herein, as these items will be addressed elsewhere with regard to the fairness
opinions. We have, however, considered all management fees encumbering the
property on a going- forward basis. The value conclusion assumes all furniture,
fixtures and equipment (F.F. & E.) reserves for replacements are adequate and
furthermore does not consider any deferred maintenance (such as environmental
concerns). The value conclusion does consider projected capital expenditures
commonly referred to as owner-funded items, based in part on projected owner-
funded capital expenditure estimates developed by an engineer retained by Host
Marriott Corporation. We did not consider the costs that might be incurred in
selling the property, as this is also addressed elsewhere with regard to the
fairness opinions.
Conclusion
- ----------
Based upon the investigation described, it is our opinion that, as of March 1,
1998, the Market Value of the fee simple estate in the Hanover Marriott Hotel,
assuming it to be offered for sale in the open market, is reasonably represented
by the amount of FORTY-NINE MILLION FOUR HUNDRED THOUSAND DOLLARS ($49,400,000).
The estimated exposure time for the subject is less than 12 months.
The market value stated herein is based upon the premise and for the purpose
stated. The individuals who inspected, investigated, and reported on the
property are identified on the certificates within Exhibit B of this report.
Respectfully submitted,
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AMERICAN APPRAISAL ASSOCIATES, INC.
Les Kiehnau, ASA
Vice President and Managing Principal
I, Ken P. Wilson, MAI, have reviewed the report and agree with the methodology
used and conclusions reached. Furthermore, I certify that the analyses,
opinions, and conclusions were developed, and this report has been prepared, in
conformity with the requirements of the Standards of Professional Practice of
the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
Ken P. Wilson, MAI
036131
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EXHIBIT A
Assumptions and Limiting Conditions
(3 pages)
Assumptions and Limiting Conditions
No responsibility is assumed for matters legal in nature. No investigation has
been made of the title to or any liabilities against the property valued. In
this analysis, it is presumed that, unless otherwise noted, the owner's claim is
valid, the property rights are good and marketable, and there are no
encumbrances which cannot be cleared through normal processes.
To the best of our knowledge, all data set forth in this report are true and
accurate. Although gathered from reliable sources, no guarantee is made nor
liability assumed for the accuracy of any data, opinions, or estimates
identified as being furnished by others which have been used in formulating this
analysis.
The market value estimate contained within this report specifically excludes the
impact of structural damage (other than those reported by the engineer) or
environmental contamination resulting from earthquakes or other causes. It is
recommended that the reader of this report consult a qualified structural
engineer and/or industrial hygienist for the evaluation of possible additional
structural/environmental defects, the existence of which could have a material
impact on market value.
Land areas and descriptions used in this valuation were furnished and have not
been verified by legal counsel or a licensed surveyor.
No soil analysis or geological studies were ordered or made in conjunction with
this report, nor were any water, oil, gas, or other subsurface mineral and use
rights or conditions investigated.
Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals,
toxic wastes, or other potentially hazardous materials could, if present,
adversely affect the value of the property. Unless otherwise stated in this
report, the existence of hazardous substance, which may or may not be present on
or in the property, was not considered by the appraiser in the
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development of the conclusion of value. The stated value estimate is predicated
on the assumption that there is no material on or in the property that would
cause such a loss in value. No responsibility is assumed for any such
conditions, and the client has been advised that the appraiser is not qualified
to detect such substances, quantify the impact on values, or develop the
remedial cost.
No environmental impact study has been ordered or made. Full compliance with
applicable federal, state, and local environmental regulations and laws is
assumed unless otherwise stated, defined, and considered in the report. It is
also assumed that all required licenses, consents, or other legislative or
administrative authority from any local, state, or national government or
private entity organization either have been or can be obtained or renewed for
any use which the report covers.
It is assumed that all applicable zoning and use regulations and restrictions
have been complied with unless a nonconformity has been stated, defined, and
considered in the appraisal report. Further, it is assumed that the utilization
of the land and improvements is within the boundaries of the property described
and that no encroachment or trespass exists unless noted in the report.
The Americans with Disabilities Act (ADA) became effective January 26, 1992. We
have not made a specific compliance survey and analysis of this property to
determine whether or not it is in conformity with the various detailed
requirements of the ADA. It is possible that a compliance survey of the
property together with a detailed analysis of the requirements of the ADA could
reveal that the property is not in compliance with one or more of the
requirements of the act. If so, this fact could have a negative effect on the
value of the property. Since we have no direct evidence relating to this issue,
we did not consider the possible noncompliance with the requirements of ADA
(other than those reported by the engineer) in estimating the value of the
property.
We made a physical inspection of the property on January 27, 1997. This
inspection was made by individuals generally familiar with real estate and
building construction. However, these individuals are not architectural or
structural engineers who would have detailed knowledge of building design and
structural integrity. Accordingly, we do not opine on, nor are we responsible
for, the structural integrity of the property including its conformity to
specific governmental code requirements, such as fire, building and safety,
earthquake, and occupancy, or any physical defects which were not readily
apparent to the appraisers during their inspection.
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The value presented in this report is based upon the premises outlined herein
and is valid only for the purpose stated.
The date of value to which the conclusions and opinions expressed apply is set
forth in this report. The value opinion herein rendered is based on the status
of the national business economy and the purchasing power of the U.S. dollar as
of that date.
Testimony or attendance in court or at any other hearing is not required by
reason of this valuation unless arrangements are previously made within a
reasonable time in advance therefor.
One or more of the signatories of this restricted report is a member or
candidate of the Appraisal Institute. The Bylaws and Regulations of the
Institute require each member and candidate to control the use and distribution
of each appraisal report signed by them.
Possession of this report or any copy thereof does not carry with it the right
of publication. No portion of this report (especially any conclusion to use;
the identity of the appraiser or the firm with which the appraiser is connected;
or any reference to the Appraisal Institute, American Society of Appraisers, or
the designations awarded by these organizations) shall be disseminated to the
public through prospectus, advertising, public relations, news, or any other
means of communication without the written consent and approval of American
Appraisal Associates, Inc.
Furthermore, AAA agrees and acknowledges that all reports and advice whether
written or oral rendered by AAA, and a description or characterization of the
services and advice provided by AAA pursuant to this engagement may be
disclosed, in whole or in part, in any proxy statement, consent solicitation
statement and/or registration statement (or proxy) and related materials
utilized in connection with the Transaction and/or may be provided to and/or
filed with the Securities and Exchange Commission ("SEC") and other regulatory
authorities; provided, however, that the precise language used in any
characterization of the services and advice provided by AAA, prepared by others,
must have the prior consent of AAA, which consent will not be unreasonably
withheld or delayed.
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American Appraisal Associates
EXHIBIT B
Certificates
(2 pages)
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Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
American Appraisal Associates, Inc., and I personally, have no present or
prospective interest in the property that is the subject of this report and
have no personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice.
I have not made a personal inspection of the property that is the subject
of this report at this time. The property was personally inspected by me
on January 27, 1997.
Anyone providing significant professional assistance is identified on this
signature page.
________________________________
Denise Schilling
Significant Professional Assistance By:
Les Kiehnau
Jim Budyak
Mark Winger
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Certificate of Appraiser
I certify that, to the best of my knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and represent the unbiased
professional analyses, opinions, and conclusions of American Appraisal
Associates, Inc.
Wilson Realty Advisors and I personally have no present or prospective
interest in the property that is the subject of this report and have no
personal interest or bias with respect to the parties involved.
Compensation for American Appraisal Associates, Inc., is not contingent on
an action or event resulting from the analyses, opinions, or conclusions
in, or the use of, this report.
The analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the requirements of the Uniform Standards
of Professional Appraisal Practice and the Code of Professional Ethics and
the Standards of Professional Practice of the Appraisal Institute.
The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
I have not made a personal inspection of the property that is the subject
of this report.
Anyone providing significant professional assistance is identified in this
report.
The assignment was not based on a requested minimum valuation, a specific
valuation, or the approval of a loan.
As of the date of this report, I have completed the requirements of the
continuing education program of the Appraisal Institute.
________________________________
Ken P. Wilson, MAI
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American Appraisal Associates
GENERAL SERVICE CONDITIONS
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American Appraisal Associates
General Service Conditions
Each Hotel Partnership agrees that it will indemnify and hold harmless AAA, its
directors, employees, agents, and each person, if any, who controls AAA within
the meaning of Section 20 of the Securities Exchange Act of 1934 and Section 15
of the Securities Act of 1933 (any and all of whom is referred to as
"Indemnified Party") from and against any and all losses, claims, damages, and
liabilities, joint or several, (including all reasonable legal or other expenses
reasonably incurred by any Indemnified Party in connection with preparation for
or defense of any claim, action, or proceeding, whether or not resulting in any
liabilities), to which such party may become subject under any applicable
federal or state law or otherwise (i) caused by or arising out of any untrue
statement or alleged untrue statement of a material fact contained in
information furnished to AAA by such Hotel Partnership or the omission or the
alleged omission to state therein a material fact necessary in order to make the
statement therein not misleading in light of the circumstances under which they
are made or (ii) caused by or arising out of the Mergers or Transactions covered
by AAA performing the services contemplated hereunder or rendering the Opinion
or any use thereof or reference thereto by such Hotel Partnership; provided,
however, that such Hotel Partnership will not be liable thereunder to the extent
that any loss, claim, damage, or liability is found in a final judgment by a
court to have resulted from the gross negligence, bad faith, or willful
misconduct of AAA.
In the event that AAA becomes involved in any capacity in any action,
proceeding, or investigation brought by or against any person in connection with
any matter referred to in this letter, each Hotel Partnership periodically will
reimburse AAA for its reasonable legal and other expenses (including the
reasonable cost of any investigation and preparation) incurred in connection
therewith to the extent provided herein.
If for any reason the foregoing indemnification is unavailable to AAA or
insufficient to hold it harmless, then each Hotel Partnership and AAA shall
contribute to the amount paid or payable to AAA as a result of such loss, claim,
damage, or liability in such proportion as is appropriate to reflect not only
the relative benefits received by such Hotel Partnership and its partners on the
one hand, and AAA on the other hand, but also the relative fault of such Hotel
Partnership and AAA, as well as any relevant equitable considerations. The
reimbursement, indemnity, and contribution obligations of each Hotel Partnership
under this paragraph shall be in addition to any liability which such Hotel
Partnership may otherwise have, shall extend upon the same terms and conditions
to any affiliate of AAA and the directors, employees, and controlling persons
(if any), as the case may be, of AAA and any such affiliate and shall be binding
upon and inure to the benefit of any successors, assigns, heirs, and personal
representatives of the Hotel Partnerships, AAA, any such affiliate, and any such
person.
For purposes of the foregoing indemnity, the following procedures will apply: If
an Indemnified Party has actual notice of a claim or threat to institute an
action or proceeding against such Indemnified Party and in respect of which
indemnity may be sought hereunder then such Indemnified Party shall promptly
notify the Hotel Partnerships with respect hereto. In addition, an Indemnified
Party shall promptly notify the Hotel Partnerships after any action is commenced
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American Appraisal Associates
(by way of service with summons or other legal process giving information as to
the nature and basis of the claim) against such person. In any event, failure to
notify such Hotel Partnership shall not relieve any Hotel Partnership from any
liability which such Hotel Partnership may have on account of this indemnity or
otherwise except to the extent such Hotel Partnership shall have been prejudiced
by such failure. The Hotel Partnerships will, if required by an Indemnified
Party, assume the defense and control of any litigation or proceeding in respect
of which indemnity may be sought hereunder, including the employment of counsel
selected by the Hotel Partnerships and the payment of reasonable fees and
expenses of such counsel, in which event, except as provided below, no Hotel
Partnership shall be liable for the fees and expenses of any other counsel
retained by an Indemnified Party in connection with such litigation or
proceeding. In any such litigation or proceeding the defense of which the Hotel
Partnerships shall have assumed, any Indemnified Party shall have the right to
participate in such litigation proceeding and to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the Hotel Partnerships and the Indemnified Party shall have
mutually agreed in writing to the retention of such counsel or (ii) the named
parties to any such litigation or proceeding (including impleaded parties)
include any Hotel Partnership and the Indemnified Party and such parties
reasonably determine that the representation of both parties by the same counsel
involves a conflict due to actual or potential differing interests between them.
In any event, the Hotel Partnerships shall not in connection with any one claim,
action, or proceeding or any separate but substantially similar related claims,
actions or proceedings in any jurisdictions, be liable for the fees and expenses
for more than one firm of attorneys (in addition to local counsel) at the time
for all Indemnified Parties. The Hotel Partnerships shall not be liable for any
settlement of any litigation or proceeding effected without their written
consent.
Our Opinion is intended to supplement, not to substitute for, the addressees due
diligence to the extent required in this or any related transaction.
AAA is an equal opportunity employer.
