<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO. 333-55807
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS GOVERNING INSTRUMENT)
DELAWARE 7011 52-2095412
MARYLAND 7011 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(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. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited
Partnership Interest.. 19,223,800(2) $15.00 $288,357,000 $85,065.32(3)
- --------------------------------------------------------------------------------------------------
Common Shares of
Beneficial Interest,
par value $.01 per
share................. 19,223,800(2) $15.00 $288,357,000 $-0-(3)
- --------------------------------------------------------------------------------------------------
6.56% Callable Notes due
December 15, 2005..... $ (2) N/A $247,971,597(3) $-0-(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) promulgated under the Securities Act of 1933, as
amended.
(2) Represents the expected number of OP Units, Common Shares or Notes (as
applicable) issuable upon consummation of the transactions described
herein.
(3) $85,086.85 previously paid. Investors whose securities are exchanged or
canceled will receive OP Units, which may be retained or exchanged for
Common Shares or Notes. To the extent Common Shares or Notes are issued in
exchange for OP Units, the proposed maximum aggregate offering price of
the OP Units will be proportionately reduced and vice versa. Accordingly,
no further fee is due for the registration of the Common Shares or Notes.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a) may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DATED SEPTEMBER 11, 1998
PROSPECTUS/CONSENT SOLICITATION STATEMENT
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
THE CONSENT SOLICITATION PERIOD EXPIRES AT 5:00 P.M., EASTERN TIME,
ON NOVEMBER , 1998, UNLESS EXTENDED (THE "SOLICITATION PERIOD").
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 taxable year
commencing after closing of the REIT Conversion, which Host REIT currently
expects to be the year beginning January 1, 1999.
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 OP Units 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"). Limited Partners
may elect to exchange such OP Units received in connection with the Mergers for
either common shares of beneficial interest, par value $.01 per share, of Host
REIT ("Common Shares") or unsecured 6.56% Callable Notes due December 15, 2005
issued by the Operating Partnership ("Notes"). Beginning one year after the
Mergers, Limited Partners who retain OP Units will have the right to redeem
their OP Units at any time and receive, at the election of Host REIT, either
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 32 FOR MATERIAL RISKS RELEVANT TO AN
INVESTMENT IN THE OP UNITS, COMMON SHARES OR 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, but not the Limited
Partners, will benefit from any appreciation in the value of the shares of
Crestline common stock distributed in connection with the REIT Conversion.
. There is no assurance that the value of the OP Units, Common Shares 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
and of not being able to sell in the event of a falling market.
. There will be no public market for the Notes. The deemed value of the OP
Units (or the Common Shares issued in exchange therefor) will exceed the
principal amount of the corresponding Notes in all Partnerships.
. The receipt of Common Shares or a Note in exchange for OP Units will be a
fully taxable transaction and will result in "phantom income" for a
Limited Partner with a "negative capital account" with respect to his
Partnership Interest.
. There is no assurance as to the amount or source of funds for the
estimated initial cash distributions of the Operating Partnership or Host
REIT, and 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.
<PAGE>
. 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 ongoing 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, Marriott International, Inc. and other companies that
manage the Hotels and upon the Non-Controlled Subsidiaries, and the
Operating Partnership will have limited control over the operations of the
Hotels and no control over the Non-Controlled Subsidiaries.
. Approval of the Merger and the related amendments to the partnership
agreement 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 and Host REIT.
. Actual or constructive ownership of more than 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 substantial 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 in the future 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 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 AND FOR THE
RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENTS. SEE "BACKGROUND AND REASONS
FOR THE MERGERS AND THE REIT CONVERSION--REASONS FOR THE MERGERS."
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 will it be less than $ or greater than $ per OP Unit)
and will not be known at the time of voting. The number of Common Shares a
Limited Partner may elect to receive in connection with the Mergers will equal
the number of OP Units received. The principal amount of Notes that Limited
Partners may elect to receive will be based upon their Partnership's Note
Election Amount (as defined herein). See "Determination of Exchange Values and
Allocation of OP Units." 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").
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 STATEMENT. 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 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. SEE "AVAILABLE
INFORMATION."
THE DATE OF THIS PROSPECTUS/CONSENT SOLICITATION STATEMENT IS SEPTEMBER ,
1998.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
Forward-Looking Statements.............................................. 1
Certain Key Definitions................................................. 1
Overview................................................................ 4
Risk Factors............................................................ 6
The REIT Conversion..................................................... 13
The Mergers............................................................. 17
Reasons for the Mergers................................................. 21
Determination of Exchange Values and Allocation of OP Units............. 22
Description of the Common Share Election................................ 24
Description of the Note Election........................................ 25
Fairness Analysis and Opinion........................................... 25
Recommendation.......................................................... 26
Solicitation Materials.................................................. 26
Voting Procedures....................................................... 26
Federal Income Tax Consequences......................................... 27
Summary Financial Information........................................... 30
RISK FACTORS.............................................................. 32
Risks and Effects of the Mergers......................................... 32
Conflicts of Interest................................................... 32
Absence of Arm's Length Negotiations; Independent Representatives....... 33
Exchange Value May Not Equal Fair Market Value of the Partnerships'
Hotels................................................................. 33
Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships.............................................. 34
Allocations of OP Units to Blackstone Entities and Private Partnerships
were not Determined by the Exchange Value Methodologies................ 34
Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Partnership Interests..................................... 34
Inability of Limited Partners Who Retain OP Units to Redeem OP Units for
One Year............................................................... 34
Value of the Notes Will Be Less than the Exchange Value................. 34
Cash Distributions; Reduced Cash Distributions for Certain Limited
Partners................................................................ 34
Changes in the Fairness Opinion......................................... 35
Fundamental Change in the Nature of Investment; Potential
Underperformance ...................................................... 35
Exposure to Market and Economic Conditions of Other Hotels.............. 35
Limited Partners Have No Cash Appraisal Rights.......................... 36
Uncertainties as to the Size and Leverage of the Operating Partnership.. 36
Other Uncertainties at the Time of Voting Include Number of OP Units to
be Received............................................................ 36
Lack of Control over Hotel Operations................................... 36
Lack of Control over Non-Controlled Subsidiaries........................ 36
Expiration of the Leases and Possible Inability to Find Other Lessees... 37
Requisite Vote of Limited Partners of Partnerships Binds All Limited
Partners............................................................... 37
Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect................................................................. 37
Substantial Indebtedness of the Operating Partnership................... 37
No Limitation on Debt................................................... 38
Timing of the REIT Conversion........................................... 38
Individual Assets May Outperform the Operating Partnership's Portfolio.. 38
Leases Could Impair the Sale or Other Disposition of the Operating
Partnership's Hotels................................................... 38
Management Agreements Could Impair the Sale or Other Disposition of the
Operating Partnership's Hotels......................................... 38
No Control over Major Decisions......................................... 39
Foregoing Potential Benefits of Alternatives to the REIT Conversion..... 39
No Partner Liability.................................................... 39
Dilution................................................................ 39
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Risks of Ownership of OP Units and Common Shares......................... 40
Inability to Remove Host REIT as General Partner of the Operating
Partnership............................................................ 40
Restrictions on Transfer of OP Units.................................... 40
Limitations on Acquisition of OP Units and Common Shares and Change in
Control................................................................ 40
Possible Adverse Consequences of Limits on Ownership of Common Shares... 43
Possible Differing Fiduciary Duties of General Partners and Host REIT... 44
Effect on Common Share Price of Shares Available for Future Sale........ 44
Current Host Common Stock Price May Not Necessarily Be Indicative of the
Price of Host REIT Common Shares Following the REIT Conversion......... 44
Effect on Common Share Price of Market Conditions....................... 45
Effect on Common Share Price of Earnings and Cash Distributions......... 45
Effect on Common Share Price of Market Interest Rates................... 45
Effect on Common Share Price of Unrelated Events........................ 45
Dependence on External Sources of Capital............................... 45
Risks of Ownership of the Notes.......................................... 46
The Notes are Unsecured................................................. 46
No Public Market for the Notes.......................................... 46
Limited Protection for Noteholders in the Event of a Restructuring or
Similar Transaction.................................................... 46
Risks of Operation....................................................... 46
Competition in the Lodging Industry..................................... 46
General Real Estate Investment Risks.................................... 46
Rental Revenues from Hotels Subject to Prior Rights of Lenders.......... 47
Possible Underperformance of New Acquisitions........................... 47
Seasonality............................................................. 47
Illiquidity of Real Estate.............................................. 47
Limitations on Sale or Refinancing of Certain Hotels.................... 47
Hotels Subject to Ground Leases May Affect the Operating Partnership's
Revenues............................................................... 48
Dependence of the Operating Partnership upon Crestline.................. 48
Federal Income Tax Risks................................................. 48
Tax Consequences of the Mergers......................................... 48
Effects of Subsequent Events upon Recognition of Gain................... 49
Sale of Personal Property May Result in Gain to Limited Partners in
Certain Partnerships................................................... 50
Election to Exchange OP Units for Common Shares......................... 50
Election to Exchange OP Units for Notes................................. 50
Exercise of Unit Redemption Right....................................... 51
Limited Partners Need to Consult with Their Own Tax Advisors............ 51
Failure of Host REIT to Qualify as a REIT................................ 51
General................................................................. 51
Required Distributions and Payments..................................... 51
Consequences of Failure to Qualify as a REIT............................ 52
Earnings and Profits Attributable to "C" Corporation Taxable Year....... 52
Treatment of Leases..................................................... 52
Other Tax Liabilities................................................... 53
Failure of the Operating Partnership to Qualify as a Partnership........ 53
Miscellaneous Risks...................................................... 53
Dependence upon Key Personnel........................................... 53
Potential Litigation Related to the REIT Conversion..................... 53
Risk Involved in Investments through Partnerships or Joint Ventures..... 54
Changes in Laws......................................................... 54
Uninsured Loss.......................................................... 54
Americans with Disabilities Act......................................... 54
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Other Regulatory Issues................................................. 55
Possible Environmental Liabilities...................................... 55
CONFLICTS OF INTEREST..................................................... 56
Substantial Benefits to Related Parties.................................. 56
Affiliated General Partners.............................................. 56
Leasing Arrangements..................................................... 56
Different Tax Consequences upon Sale or Refinancing of Certain Hotels.... 57
Partnership Agreement.................................................... 57
Absence of Arm's Length Negotiations; No Independent Representative...... 57
Potential AAA Conflicts.................................................. 57
Policies with Respect to Conflicts of Interest........................... 57
BACKGROUND AND REASONS FOR THE MERGERS AND THE REIT CONVERSION............ 58
Background of the Partnerships........................................... 58
Background of the Mergers and the REIT Conversion........................ 62
Reasons for the Mergers.................................................. 63
Reimbursements and Distributions to the General Partners and Marriott
International........................................................... 66
Alternatives to the Mergers.............................................. 67
Recommendation of the General Partners................................... 70
DETERMINATION OF EXCHANGE VALUES AND ALLOCATION OF OP UNITS............... 71
Overview................................................................. 71
Methodology for Determining Exchange Values.............................. 71
Price of OP Units to Pay Exchange Values to Limited Partners............. 79
Determination of Value of General Partners' Interests in the Partnerships
and Allocation of OP Units to the General Partners...................... 80
FAIRNESS ANALYSIS AND OPINION............................................. 81
Fairness Analysis........................................................ 81
Fairness Opinion......................................................... 83
THE MERGERS AND THE REIT CONVERSION....................................... 86
General.................................................................. 86
The REIT Conversion...................................................... 86
The Mergers.............................................................. 91
Conditions to Consummation of the Mergers................................ 94
Extension, Amendment and Termination of the Mergers...................... 94
Effect of REIT Conversion on Non-Participating Partnerships.............. 95
Expenses................................................................. 95
Accounting Treatment..................................................... 95
BUSINESS AND PROPERTIES................................................... 96
Business of the Operating Partnership.................................... 96
General.................................................................. 96
Business Objectives...................................................... 97
Business Strategy........................................................ 97
Hotel Lodging Industry................................................... 100
Hotel Lodging Properties................................................. 101
Hotel Properties......................................................... 105
1998 Acquisitions........................................................ 107
Blackstone Acquisition................................................... 107
Investments in Affiliated Partnerships................................... 107
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Marketing................................................................ 108
Competition.............................................................. 108
Relationship with HM Services............................................ 109
Relationship with Marriott International; Marriott International
Distribution............................................................ 109
Employees................................................................ 110
Environmental and Regulatory Matters..................................... 110
Legal Proceedings........................................................ 110
The Leases............................................................... 111
The Management Agreements................................................ 116
Noncompetition Agreements................................................ 119
Indebtedness............................................................. 120
DISTRIBUTION AND OTHER POLICIES........................................... 123
Distribution Policy...................................................... 123
Investment Policies...................................................... 125
Financing Policies....................................................... 126
Lending Policies......................................................... 126
Conflicts of Interest Policies........................................... 126
Policies with Respect to Other Activities................................ 127
SELECTED FINANCIAL DATA................................................... 128
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION...................................................... 130
Lack of Comparability Following the REIT Conversion...................... 130
Historical Results of Operations......................................... 130
First Two Quarters 1998 Compared to First Two Quarters 1997
(Historical)............................................................ 130
1997 Compared to 1996 (Historical)....................................... 132
1996 Compared to 1995 (Historical)....................................... 134
Pro Forma Results of Operations.......................................... 135
100% Participation with No Notes Issued--First Two Quarters 1998 Compared
to First Two Quarters 1997 (Pro Forma).................................. 136
100% Participation with Notes Issued--First Two Quarters 1998 Compared to
First Two Quarters 1997 (Pro Forma)..................................... 137
100% Participation with No Notes Issued--1997 Compared to 1996 (Pro
Forma).................................................................. 138
100% Participation with Notes Issued--1997 Compared to 1996 (Pro Forma).. 139
Liquidity and Capital Resources.......................................... 140
MANAGEMENT................................................................ 149
Trustees and Executive Officers of Host REIT............................. 149
Committees of the Board of Trustees...................................... 151
Compensation of Trustees................................................. 152
Executive Compensation................................................... 152
Employment Agreements.................................................... 154
1998 Employee Benefits Allocation Agreement.............................. 154
Comprehensive Stock Incentive Plan....................................... 154
Stock Purchase Plan...................................................... 155
401(k) Plan.............................................................. 156
Deferred Compensation Plan............................................... 156
Limitation of Liability and Indemnification.............................. 156
Indemnification Agreements............................................... 157
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 158
Relationship Between Host and Marriott International..................... 158
Relationship Between Host and Host Marriott Services Corporation......... 161
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRINCIPAL SECURITY HOLDERS................................................ 163
DESCRIPTION OF OP UNITS................................................... 165
General.................................................................. 165
Formation................................................................ 165
Purposes, Business and Management........................................ 165
Host REIT May Not Engage in Other Businesses; Conflicts of Interest...... 166
Distributions; Allocations of Income and Loss............................ 166
Borrowing by the Operating Partnership................................... 167
Reimbursement of Host REIT; Transactions with Host REIT and its
Affiliates.............................................................. 167
Liability of Host REIT and Limited Partners.............................. 167
Exculpation and Indemnification of Host REIT............................. 168
Sales of Assets.......................................................... 168
Removal or Withdrawal of Host REIT; Transfer of Host REIT's Interests.... 168
Certain Voting Rights of Holders of OP Units During the First Year
Following the Mergers................................................... 169
Restrictions on Transfers of Interests by Limited Partners............... 169
Unit Redemption Right.................................................... 170
No Withdrawal by Limited Partners........................................ 171
Issuance of Limited Partnership Interests................................ 171
Meetings; Voting......................................................... 171
Amendment of the Partnership Agreement................................... 171
Books and Reports........................................................ 172
Power of Attorney........................................................ 172
Dissolution, Winding Up and Termination.................................. 173
Ownership Limitation..................................................... 173
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.............................. 174
General.................................................................. 174
Common Shares............................................................ 174
Preferred Shares......................................................... 175
Power to Issue Additional Common Shares and Preferred Shares............. 175
Restrictions on Ownership and Transfer................................... 176
Transfer Agent and Registrar............................................. 178
Certain Provisions of Maryland Law and Host Reit's Declaration of Trust
and Bylaws.............................................................. 178
Maryland Asset Requirements.............................................. 183
DESCRIPTION OF THE NOTES.................................................. 184
General.................................................................. 184
Principal and Interest................................................... 184
Redemption............................................................... 185
Limitation on Incurrence of Indebtedness................................. 185
Merger, Consolidation or Sale............................................ 186
Events of Default, Notice and Waiver..................................... 187
Modification of the Indenture............................................ 188
Satisfaction and Discharge............................................... 188
No Conversion Rights..................................................... 188
Governing Law............................................................ 188
COMPARISON OF OWNERSHIP OF PARTNERSHIP INTERESTS, OP UNITS AND
COMMON SHARES............................................................ 189
ERISA CONSIDERATIONS...................................................... 213
Status of Host REIT and the Operating Partnership Under ERISA............ 213
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FEDERAL INCOME TAX CONSEQUENCES........................................... 214
Introduction............................................................. 214
Summary of Tax Opinions.................................................. 217
Tax Status of the Operating Partnership.................................. 217
Tax Consequences of the Mergers.......................................... 219
Tax Treatment of Limited Partners Who Exercise Their Right to Make the
Common Share Election or the Note Election.............................. 233
Tax Treatment of Limited Partners Who Hold OP Units Following the
Mergers................................................................. 234
Federal Income Taxation of Host REIT Following the Mergers............... 245
Taxation of Taxable U.S. Shareholders of Host REIT Generally............. 257
Backup Withholding for Host REIT Distributions........................... 259
Taxation of Tax-Exempt Shareholders of Host REIT......................... 259
Taxation of Non-U.S. Shareholders of Host REIT........................... 260
Tax Aspects of Host REIT's Ownership of OP Units......................... 262
Other Tax Consequences for Host REIT and Its Shareholders................ 264
VOTING PROCEDURES......................................................... 265
Distribution of Solicitation Materials................................... 265
Form W-9 and FIRPTA Certification or Withholding Certificate Required.... 265
No Special Meetings...................................................... 266
Required Vote and Other Conditions....................................... 266
EXPERTS................................................................... 270
LEGAL MATTERS............................................................. 270
AVAILABLE INFORMATION..................................................... 271
GLOSSARY.................................................................. 272
INDEX TO 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--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
viii
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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 Common Shares or Notes (as defined herein) are
issued (the "Full Participation Scenario").
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein or delivered in connection with this Consent
Solicitation 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,"
"estimates" 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
or Host REIT to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. The cautionary statements set forth under the caption "Risk
Factors" and elsewhere in this Consent Solicitation identify important factors
with respect to such forward-looking statements, including the following
factors that could affect such forward-looking statements: (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 or Host REIT to compete effectively in areas such as access,
location, quality of accommodations and room rate structures; (iv) the ability
of the Operating Partnership or Host REIT 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 and Host REIT believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, they can give no assurance that their expectations will
be attained or that any deviations will not be material. The Operating
Partnership and Host REIT undertake 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.
CERTAIN KEY DEFINITIONS
The following terms have the meanings set forth below. See the "Glossary" at
page 272 for the definitions of other capitalized terms used in this Consent
Solicitation.
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"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 (to the extent of its business and assets
to be contributed to the Operating Partnership)
with respect to periods prior to the REIT
Conversion, and Host REIT and the Operating
Partnership collectively 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 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.
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"Common Shares"............... Common shares of beneficial interest, par value
$.01 per share, of Host REIT.
"Note"........................ An unsecured 6.56% Callable Note due December
15, 2005 of the Operating Partnership with a
principal amount equal to the Note Election
Amount of the Limited Partner's Partnership
Interest.
"Crestline"................... Crestline Capital Corporation (formerly 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.
"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 Consent
Solicitation, in which the Partnership will be
the surviving entity and will become a
subsidiary of the Operating Partnership.
"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 or Host REIT of Crestline common stock
and possibly cash and other consideration to
Host REIT's shareholders and the Blackstone
Entities, (viii) the leasing of the
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<PAGE>
Hotels to subsidiaries of Crestline 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 Limited Partners of each
Partnership consent to a Merger of their respective Partnership and to certain
related amendments to the respective Partnership's partnership agreement 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. The
number of OP Units to be received by the Limited Partners in the Mergers will
be based upon 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 will it be less than $ or greater than $ per OP Unit even if
such average trading price is less than $ or greater than $ per Common
Share). The Limited Partners can elect, prior to the end of the Solicitation
Period, to receive either Common Shares or Notes in exchange for OP Units
received in the Mergers.
The General Partners, the Operating Partnership and Host REIT 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;
. The ability to participate in the operations of a larger, more diverse
enterprise with growth opportunities and lower leverage;
. The ability to receive, in exchange for their OP Units, freely tradeable
Host REIT Common Shares in connection with the Mergers;
. The ability of Limited Partners who retain OP Units, at any time
beginning one year following the Mergers, to liquidate their investment
in the Operating Partnership for cash based upon the price of Host REIT
Common Shares or, at the election of Host REIT, Host REIT Common Shares;
and
. The deferral, for Limited Partners who retain OP Units, of recognition of
at least a substantial portion of any built-in taxable gain attributable
to their Partnership Interests generally until such time as each Limited
Partner elects to trigger such gain.
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, as a more tax efficient structure, will
provide improved operating results through changing economic conditions
and all phases of the hotel economic cycle.
4
<PAGE>
. Host believes the REIT Conversion, which will reduce corporate-level
taxes and the need to incur debt to reduce corporate taxes through
interest deductions, 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
125 full-service hotels, located throughout the United States and Canada
containing approximately 58,500 rooms and operating primarily under the
Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names (the
"Hotels").
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
or Host REIT distributes the common stock of Crestline and any cash and other
consideration to its existing shareholders and the Blackstone Entities in
connection with the distribution of Host's 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 Crestline will become separately traded securities and
the companies will operate independently. There will be no overlap between the
boards of Host REIT and Crestline. There will be a substantial overlap of
shareholders of the two companies initially, but this overlap will diverge over
time.
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 Crestline 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 Crestline and will continue to be managed under their existing
management agreements. See "Business and Properties--Blackstone Acquisition."
5
<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 AVERAGE
CURRENT OWNER OF HOTELS OF ROOMS DAILY 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).... 126 58,603 146.18 77.8 113.67
</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 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 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. The benefits to
Host of the REIT Conversion will be reduced if one or more of the
Partnerships do not participate in a Merger.
. 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 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, Host REIT, the
Operating Partnership, the General Partners and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that
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<PAGE>
determination include Host's belief that the REIT Conversion is advisable
for its shareholders, the benefits of the REIT Conversion to Host will be
greater if the Partnerships participate and Host REIT will benefit if the
value of the OP Units received by the Limited Partners in the Mergers is
less than the value of their Partnership Interests. In addition, the terms
of the Leases of the Hotels, including the Participating Partnerships'
Hotels, will be determined by Host and 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 or elects to exchange OP Units for Common Shares 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 the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from Limited Partners who elect
to receive Common Shares in connection with the Mergers) 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. Host REIT's OP Units, in the aggregate, 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
to Host REIT and the Partnerships 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."
. Allocations of OP Units to Blackstone Entities and Private Partnerships
were not Determined by the Exchange Value Methodologies. The price and
other terms of the acquisitions of certain Private Partnerships and the
Blackstone Acquisition (and thus the allocation of OP Units resulting
therefrom) were determined by arm's length negotiations. If the partners'
interests in the Private Partnerships and the assets of the Blackstone
Entities had been valued by the same methodologies used to determine
Exchange Values in the Mergers, the value of the OP Units to be allocated
to such partners or the Blackstone Entities may have been less that they
actually will receive. The different methods of allocating OP Units may
result in the Limited Partners receiving relatively less for their
interests than such partners and the Blackstone Entities.
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Partnership Interests. The price of an OP Unit for purposes
of the Mergers 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 will it be less than $
or greater than $ per OP Unit). This pricing mechanism has the effect
of fixing the minimum and maximum number of OP Units to be issued in the
Mergers. It is likely that, either initially or 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 or Common Shares 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 Who Retain OP Units to Redeem OP Units for
One Year. Limited Partners who retain OP Units received in the Mergers
will be unable to redeem such OP Units for one year
7
<PAGE>
following the Mergers. Until then, Limited Partners will bear the risk of
illiquidity and of not being able to sell in a falling market.
. Value of the Notes Will be Less than the Exchange Value. Each Limited
Partner may elect to receive in exchange for OP Units received in a
Merger, 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
ranks equally with such Notes.
. Cash Distributions; Reduced Cash Distributions for Certain Limited
Partners. There is no assurance as to the amount or source of funds for
the estimated initial cash distributions of the Operating Partnership and
Host REIT. In addition, the expected initial annual cash distributions of
the Operating Partnership or Host REIT to the Limited Partners of MHP and
MHP2 per Partnership Unit ($7,618 and $12,816, respectively) will be less
than the estimated cash distributions of MHP and MHP2 per Partnership
Unit ($9,500 and $21,564, respectively) made in 1998 (excluding amounts,
if any, to be distributed in 1999 from third and fourth quarter
operations).
. 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 a direct or indirect interest in the
Operating Partnership, an ongoing real estate company with a portfolio of
approximately 125 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 and (iii) is able to reinvest
proceeds from sales or refinancings of existing Hotels in other hotels.
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 who
retains OP Units likely would realize a return of capital only through
the exercise of the Unit Redemption Right. Those Limited Partners who
elect to receive Common Shares in connection with the Mergers will hold
an equity interest in a publicly traded REIT that (i) provides immediate
liquidity, (ii) intends to make distributions to its shareholders in an
amount equal to at least 95% of its taxable income, (iii) allows
shareholders to influence management by participation in the election of
Trustees and (iv) realizes substantial corporate tax savings as long as
certain requirements are met. 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, the sale of Common Shares received in connection with
the Mergers 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 or Host REIT 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 retain
OP Units or elect to receive Common Shares in
8
<PAGE>
connection with the Mergers 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 (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 Mergers and the REIT Conversion.
. Other Uncertainties at the Time of Voting Include the Number of OP Units
to be Received. 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 (but will not be
less than $ or greater than $ ) and which, together with the Exchange
Value, will determine the number of OP Units (or Common Shares) 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 Note Election Amount
is determined. 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 Crestline common stock and
possibly cash and other consideration to be distributed in connection
with the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
Lack of Control over Hotel Operations and Non-Controlled Subsidiaries. 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 existing long-term management agreements (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. The Operating Partnership also will
not own any of the voting stock of the Non-Controlled Subsidiaries, which
may own up to 20% by value of the Operating Partnership's assets.
Therefore, the Operating Partnership will be dependent for its revenue
upon the ability of the Lessees and the Managers
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to operate and manage the Hotels and the Non-Controlled Subsidiaries to
operate and manage their businesses.
. Expiration of the Leases and Possible Inability to Find Other
Lessees. The Leases generally will expire seven to ten years after the
Effective Date, and there can be no assurance that the affected Hotels
will be relet to the Lessees (or if relet, will be relet on terms as
favorable to the Operating Partnership). If the Hotels are not relet to
the Lessees, the Operating Partnership will be required to find other
lessees, which lessees must meet certain requirements set forth in the
Management Agreements and the Code. 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 relet the Hotels or
enter into new leases with such lessees, which could result in a failure
of Host REIT to qualify as a REIT or in reduced cash available for
distribution.
. Requisite Vote of Limited Partners of Partnerships Binds All Limited
Partners. For each Partnership, approval of a Merger and the related
amendments to its partnership agreement 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 and the related amendments to its partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain such
consents could cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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 an approximately 53% 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 $15.00). 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 (including Host REIT), (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.
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. Rental Revenues from Hotels Subject to Prior 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 (including Host REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural and
other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder Rights
Plan to replace the existing stockholder rights plan of Host. Host REIT
also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest--Certain Provisions of Maryland Law and Host REIT's Declaration
of Trust and Bylaws."
. 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 substantial
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 Common Shares or a Note in exchange for OP Units in
connection with the Mergers) 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 (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. 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
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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 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 Common Shares. A Limited Partner who
elects to receive Common Shares in exchange for his OP Units in
connection with the Mergers will be treated as having made a fully
taxable disposition of his OP Units. If such Limited Partner has a
"negative capital account" with respect to his Partnership Interest, he
will recognize "phantom income" (i.e., the income recognized would exceed
the value of the Common Shares by the amount of his negative capital
account). See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Exercise Their Right to Make the Common Share Election or
the Note Election." Limited Partners who elect to receive Common Shares
in connection with the Mergers will not receive the Crestline common
stock or any other portion of the E&P distribution made before they
become shareholders of Host REIT.
. Election to Exchange OP Units for Notes. A Limited Partner who elects to
receive a Note in exchange for his OP Units in connection with the
Mergers will be treated as having made a taxable disposition of his OP
Units. 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 until principal on the Note is paid. A Limited Partner with a
"negative capital account" with respect to his Partnership Interest who
elects to receive a Note in connection with the Mergers will recognize
"phantom income" in that amount in any event. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Exercise Their Right
to Make the Common Share Election or 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 and Common Shares, 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 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 and the Common Shares.
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. 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
(including the decision whether to elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Mergers) and the
subsequent ownership and disposition of OP Units, Common Shares or Notes,
it is essential that each Limited Partner consult with his own tax
advisors regarding the application of federal, foreign, 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 REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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 shareholder and partner 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 (other than its interests in the
General Partners, who will remain in existence as subsidiaries of Host
REIT and will receive OP Units in the Mergers) and its other assets
(excluding its senior living assets and the cash and possibly other
consideration that may be distributed to shareholders of Host or Host
REIT) 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 (reduced by the number of OP Units to
be received by the General Partners and other subsidiaries of Host in the
Mergers), (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 contingent liabilities), other than liabilities of Crestline.
Following these contributions, the Operating Partnership and its
subsidiaries will directly own all of Host's wholly owned hotels,
substantially all of Host's interests in the Hotel Partnerships and all
of Host's other assets (excluding its senior living assets and the cash
and other consideration that may be distributed to shareholders of Host
or Host REIT).
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. 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 facilitate 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. In the REIT Conversion,
the Operating Partnership will assume primary liability for repayment of
the $550 million of convertible subordinated debentures of Host
underlying the outstanding Quarterly Income Preferred Securities
("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 Crestline common stock and any cash and other
consideration to Host REIT shareholders in connection with the REIT
Conversion, the conversion ratio of the Convertible Preferred Securities
will be adjusted pursuant to the anti-dilution provisions of the
debentures (as they may be modified). 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 a
Limited Partner elects to receive Common Shares or a Note in exchange for
OP Units in connection with the Mergers, such Limited Partner will, upon
receipt of his OP Units, tender (or be deemed to tender) such OP Units to
Host REIT in exchange for an equal number of Common Shares or to the
Operating Partnership in exchange for a Note with a principal amount
equal to the Note Election Amount of his Partnership Interests. If a
Limited Partner elects to tender his OP Units for Common Shares or Notes,
such Limited Partner must tender all of the OP Units he receives in the
Mergers. The General Partners and other subsidiaries of Host will also
receive OP Units in exchange for their interests in the Partnerships and
the General Partners will continue as wholly owned direct or indirect
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 Crestline in connection with the distribution of Crestline
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 Crestline common stock to the Blackstone Entities.
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. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold various
assets (not exceeding, in the aggregate, 20% by value of the assets of
the Operating Partnership) contributed by Host and its subsidiaries to
the Operating Partnership. The direct ownership of most of these assets
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, Atlanta Marquis, Hanover, MHP and
PHLP (assuming they participate in the Mergers) 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 Employee Statutory Trust, the beneficiaries of which
will be certain employees of Host REIT and a designated charity (the
"Host Employee Trust"), and possibly certain other investors 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 long-term 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. In connection with the REIT
Conversion, Host or Host REIT will make one or more taxable distributions
to their shareholders consisting of shares of common stock of Crestline
and possibly cash or other consideration in an amount to be determined.
The aggregate value of the Crestline common stock and any cash or other
consideration to be distributed to Host or Host REIT shareholders and the
Blackstone Entities is currently estimated to be approximately $525
million to $625 million (approximately $2.10 to $2.50 per share to the
Host or Host REIT shareholders). The actual amount of the distribution
will be based in part 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. To the extent that the
distributions made in connection with the REIT Conversion are not
sufficient to eliminate Host's estimated accumulated earnings and
profits, Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions. See "The REIT Conversion and the Mergers--The REIT
Conversion--Host REIT Merger and Shareholder Distribution." Limited
Partners who elect to receive Common Shares in connection with the
Mergers will not receive the Crestline common stock or any other portion
of the E&P distribution made before they become shareholders of Host
REIT. In addition, under the terms of the Blackstone Acquisition, the
Blackstone Entities are entitled to receive a pro rata distribution of
the same consideration received by Host REIT's shareholders except to the
extent they elected to receive additional OP Units in lieu thereof. The
distribution to the Blackstone Entities of common stock of Crestline and
other consideration will be approximately $90 million to $110 million if
the REIT Conversion is consummated.
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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) Represents Limited Partners and others who retain OP Units and do not
receive Common Shares or Notes; excludes Host and its subsidiaries.
Percentage ownership in the Operating Partnership assumes all Limited
Partners elect to retain OP Units.
(2) Also will include Limited Partners who elect to receive Common Shares in
exchange for the OP Units received in the Mergers. Immediately following
the merger of Host into Host REIT and the distribution of Crestline common
stock to Host REIT's shareholders and the Blackstone Entities, the
shareholders of Crestline will consist of the shareholders of Host REIT
(other than Limited Partners who elect to receive Common Shares in
connection with the Mergers) and the Blackstone Entities. The common
ownership of the two public companies, however, will diverge over time.
(3) Percentage ownership in the Operating Partnership assumes no Limited
Partners elect to receive either Common Shares or Notes in connection with
the Mergers and that the price per Common Share is $ , which is the
maximum price per OP Unit for purposes of the Mergers.
(4) 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.
16
<PAGE>
Ownership Interests in the Operating Partnership Following the Mergers and
the REIT Conversion. Following the Mergers and the REIT Conversion, the
Operating Partnership is expected to be owned as set forth below:
OWNERSHIP OF THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
ENTITY PERCENTAGE INTEREST(1)
------ ----------------------
<S> <C>
Host REIT............................................. 75.6%
Limited Partners of the Partnerships.................. 7.1
Private Partnerships.................................. 1.1
Blackstone Entities................................... 16.2
-----
TOTAL............................................... 100.0%
=====
</TABLE>
- --------
(1) Assumes all Limited Partners elect to retain OP Units and that all
Partnerships participate in the Mergers and assumes the price of an OP Unit
is $ , which is the maximum price for purposes of the Mergers. The
percentage interest of Host REIT will increase if Limited Partners elect to
receive Common Shares or Notes in exchange for their OP Units in connection
with the Mergers.
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 and
certain related amendments to the Partnership's partnership agreement, 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 a 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, respectively. 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."
Unit Redemption Right. Beginning one year after the Mergers, Limited Partners
who retain OP Units will have the right to redeem their OP Units at any time,
upon ten business days' notice to the Operating Partnership, and receive, at
the election of Host REIT, either 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"). Limited Partners must redeem 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) each time the Unit Redemption Right is exercised.
See "Description of OP Units--Unit Redemption Right."
Right to Exchange OP Units for Common Shares. During the Solicitation Period,
Limited Partners can elect (or revoke any such election previously made) to
tender the OP Units they will receive in the Merger (if their Partnership
approves the Merger) to Host REIT in exchange for an equal number of Common
Shares. The Common Shares, which will be issued promptly following the
twentieth trading day after the Effective Date of the Mergers, will be freely
tradeable and listed on the NYSE. Such election will, however, cause a Limited
Partner to recognize taxable gain (which would be in 1998 if the Effective Date
of the Merger is in 1998). See "Description of Shares of Beneficial Interest"
and "Federal Income Tax Consequences--Tax Treatment of Limited Partners Who
Exercise Their Right to Make the Common Share Election or the Note Election."
Right to Exchange OP Units for Notes. During the Solicitation Period, Limited
Partners can elect (or revoke any such election previously made) 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
17
<PAGE>
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). The
Notes will be issued promptly after the Effective Date of the Mergers. Holders
of Notes will receive interest payments on a semi-annual basis on June 15 and
December 15 of each year at the rate of 6.56% per annum from and after the
Effective Date of the Mergers. Such election will, however, cause a Limited
Partner to recognize taxable gain (which would be in 1998 if the Effective Date
of the Merger is in 1998). See "Description of the Notes" and "Federal Income
Tax Consequences--Tax Treatment of Limited Partners Who Exercise Their Right to
Make the Common Share Election or 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, 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 Common Shares in exchange for OP Units in connection with
the Mergers will participate in the same distributions from the Partnerships as
Limited Partners who retain OP Units and will receive distributions from Host
REIT with respect to periods after the Effective Date of the Mergers, which
distributions are expected to equal the amount distributed with respect to the
OP Units for such periods. Limited Partners at the Effective Date of the
Mergers who receive a Note in exchange for OP Units in connection with the
Mergers 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 because they will be entitled to receive interest on their Notes for
such period.
Distribution Policy. The Operating Partnership and Host REIT intend to pay
regular quarterly distributions to holders of OP Units and Common Shares,
respectively. The distributions to shareholders per Common Share are expected
to be in an amount equal to the amount distributed by the Operating Partnership
per OP Unit. The Operating Partnership intends to distribute an amount that
will enable Host REIT to distribute to its shareholders for each year an amount
equal to 100% of its taxable income (other than capital gains, which will be
addressed on a case-by-case basis). The Operating Partnership anticipates that
distributions will be paid from cash available for distribution (generally
equal to cash from operations less capital expenditures and principal
amortization on indebtedness); however, to the extent that cash available for
distribution is insufficient to make such distributions, the Operating
Partnership intends to borrow funds in order to make distributions to holders
of OP Units in an amount sufficient to allow Host REIT to distribute 100% of
its taxable income for each year (within a certain period after the end of such
year). Distributions will be made in the discretion of the Board of Trustees of
Host REIT and will be affected by a number of factors, many of which are beyond
the control of Host REIT and the Operating Partnership. In order to maintain
its qualification as a REIT under the Code, Host REIT is required to distribute
(within a certain period after the end of each year) at least 95% of its REIT
taxable income for such year. See "Distribution and Other Policies--
Distribution Policy." Host REIT and the Operating Partnership intend to
establish a dividend reinvestment plan.
18
<PAGE>
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 owned by the Operating Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP LIMITED PARTNER INTERESTS GENERAL PARTNER INTERESTS
----------- ------------------------- -------------------------
<S> <C> <C>
Atlanta Marquis.......... Class A 0.28% 1.00%
Class B 100.00
Chicago Suites........... 0.00 1.00
Desert Springs........... 0.00 1.00
Hanover.................. 47.62 5.00
MDAH..................... 0.60 1.00
MHP...................... 48.33 1.00
MHP2..................... 52.75 1.00
PHLP..................... 0.06 1.00
</TABLE>
Vote Required for the Mergers. In the case of Atlanta Marquis, a majority of
Class A limited partner interests must be present in person or by proxy to
establish a quorum and must vote to approve the Merger. Host and its affiliates
own 0.28% of the outstanding Class A limited partner interests and will vote
them in favor of the Merger. 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. Host owns no limited partner interests
in Chicago Suites and will vote its 0.06% limited partner interests in PHLP in
favor of the Merger. In MDAH, a majority of limited partner interests must vote
to approve the Merger. Host is not entitled to vote its 0.60% 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 a 47.62%, 48.33% and 52.75% limited partner interest 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 so long as the amendments to the
partnership agreement are also approved 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--Vote Required for the Mergers."
Amendments to the 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. Limited Partners must vote
separately on the Merger and the amendments to the partnership agreements, but
the Merger will not be consummated unless both the Merger and the amendments to
the partnership agreements are approved. 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 allow the transactions constituting the Mergers or
otherwise necessary or desirable to consummate the Mergers and the REIT
Conversion.
Vote Required for the Amendments to the Partnership Agreements. In the case
of Atlanta Marquis, a majority of Class A limited partner interests must vote
to approve the amendments to the partnership agreement. Host and its affiliates
own 0.28% of the outstanding Class A limited partner interests and will vote
them in favor of the amendments. In the case of each of Chicago Suites and
PHLP, the approval required for the amendments
19
<PAGE>
to the partnership agreement is a majority of the outstanding limited partner
interests in such Partnership. Host owns no limited partner interests in
Chicago Suites and will vote its 0.06% limited partner interests in PHLP in
favor of the amendments. In MDAH, a majority of limited partner interests must
vote to approve the amendments to the partnership agreement. Host is not
entitled to vote its 0.60% limited partner interest in MDAH on the amendments.
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 amendments to the partnership agreements must
vote for the amendments to the partnership agreements to approve them. 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 a 47.62%, 48.33% and
52.75% limited partner interest in Hanover, MHP and MHP2, respectively. Host
does not own any limited partner interests in Desert Springs. See "Voting
Procedures--Required Vote and Other Conditions--Vote Required for the
Amendments to the Partnership Agreements."
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 and the Crestline shares and possibly other consideration are
distributed to Host REIT's shareholders (but within one day thereof), which is
expected to occur during the final stage of the REIT Conversion. This currently
is expected to occur on or about December 30, 1998, subject to satisfaction or
waiver of the conditions to the Mergers.
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 others:
. Limited Partner Approvals. Limited Partners holding the requisite
percentage of Partnership Interests in such Partnership shall have
approved the Merger and the amendments to the partnership agreement (as
described above).
. 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 and such merger shall have been consummated.
. 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, and Host
REIT shall have received an opinion of counsel substantially to such
effect.
. NYSE Listing. The Common Shares shall have been listed on the NYSE.
. Third-Party Consents. All required governmental and other third-party
consents to the Mergers and 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, shall have been received, except
for such consents as would not reasonably be expected to have a material
adverse effect on the business, financial condition or results of
operations of such Partnership or of Host REIT, the Operating Partnership
and their subsidiaries taken as a whole.
. 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.
Merger Expenses. All costs and expenses incurred in connection with the
proposed Mergers (the "Merger Expenses"), whether or not the Mergers are
approved by the Partnerships, will be borne by the Operating Partnership,
although in certain instances, transfer and recordation taxes and fees are
reflected in the Exchange Values and Note Election Amounts. The Operating
Partnership also will 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."
20
<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,
liquidating the Partnership, reorganizing the Partnership into a separate
REIT or pursuing a merger of one or more Partnerships with another REIT
or UPREIT, especially in light of the opportunity to receive OP Units,
Common Shares or Notes in connection with the Mergers. 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:
. Liquidity. The REIT Conversion will offer Limited Partners liquidity with
respect to their investments in the Partnerships because Limited Partners
can receive freely tradeable Host REIT Common Shares in connection with
the Mergers or, for those Limited Partners who retain OP Units, at any
time commencing one year following the Mergers, by exercising their Unit
Redemption Right, 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 $3.6 billion after giving effect to the E&P distribution
(based on a price of $15.00 per Host REIT Common Share). The election to
exchange OP Units for Common Shares in connection with the Mergers or 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. The General Partners expect that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. 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 for Limited Partners Not Electing to Exchange OP
Units for Common Shares or Notes. The General Partners expect that
Limited Partners of the Participating Partnerships who do not elect to
receive Common Shares or Notes in exchange for OP Units in connection
with the Mergers 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 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
21
<PAGE>
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 generally will have a lower leverage to value
ratio, approximately 53%, than the Partnerships, which have leverage
ratios that typically average between 65% and 80% (calculated as a
percentage of Exchange Value), resulting in interest and debt service
savings and greater financial stability.
. Growth Potential. The General Partners believe that the Limited Partners,
by directly or indirectly 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 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.
. 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. 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 ongoing 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 (although not currently), has
resulted at various times 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 they will not trade at a discount to private
market values. 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.
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 own a number of OP Units equal to the number of
outstanding Common Shares of Host REIT. These OP Units will consist of
(i) the OP Units to be acquired in exchange for the contribution of
Host's full-service hotel assets and other assets (excluding its senior
living assets and any cash and other consideration to be distributed to
shareholders of Host or Host REIT), subject to all liabilities of Host
(including past and future contingent liabilities), other than
liabilities of Crestline,
22
<PAGE>
(ii) the OP Units to be received by the General Partners and their
affiliates with respect to their interests in the Partnerships and (iii)
the OP Units to be acquired from Limited Partners who elect to receive
Common Shares in connection with the Mergers. The OP Units received by the
General Partners and other Host subsidiaries attributable to their
interests in the Partnerships will be valued in 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, of which the General Partners and other Host subsidiaries would
have received approximately 18.3 million OP Units with respect to their
interests in the Partnerships. 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 and the price per OP Unit (other than
Limited Partners who elect to exchange such OP Units for Common Shares or
Notes).
. 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 will it
be less than $ or greater than $ per OP Unit). The Limited Partners will
become partners in the Operating Partnership at the Effective Time and OP Units
will be delivered to the Limited Partners promptly after the twentieth trading
day following the Effective Date of the Mergers (which would be promptly after
January 29, 1999 if the Effective Date of the Mergers is December 30, 1998).
The Exchange Value of each 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").
. 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
23
<PAGE>
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 estimated Adjusted Appraised Value,
estimated Continuation Value and estimated Liquidation Value), the estimated
minimum number of OP Units to be received (based upon the maximum price of $
per OP Unit) and the estimated Note Election Amount for each Partnership, all
on a per Partnership Unit basis as of the Initial Valuation Date. The number of
Common Shares received in exchange for OP Units by a Limited Partner who elects
to receive Common Shares will equal the number of OP Units received by such
Limited Partner. 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. 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 (but will not be less than $ or greater
than $ per OP Unit) and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUES, NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
(ALL AMOUNTS ON A PER PARTNERSHIP UNIT BASIS)(/1/)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED MINIMUM ESTIMATED
ADJUSTED ESTIMATED ESTIMATED ESTIMATED NUMBER OF NOTE
APPRAISED CONTINUATION LIQUIDATION EXCHANGE OP ELECTION
PARTNERSHIP VALUE VALUE VALUE VALUE(2) UNITS(3) AMOUNT(4)
----------- --------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $ 41,570 $ 45,425 $ 402 $ 45,425 3,028 $ 36,340
Chicago Suites.......... 33,133 24,184 31,149 33,133 2,209 31,149
Desert Springs.......... 40,880 33,536 27,617 40,880 2,725 32,704
Hanover................. 123,202 98,090 88,474 123,202 8,213 98,562
MDAH.................... 109,216 89,340 98,343 109,216 7,281 98,343
MHP..................... 140,032 141,074 124,261 141,074 9,405 124,261
MHP2.................... 237,334 211,263 205,140 237,334 15,822 205,140
PHLP.................... 0(/5/) 5,040 0(/5/) 5,040 336 4,032
</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) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
(5) The estimated Adjusted Appraised Value and the estimated Liquidation Value
for PHLP are zero because PHLP's outstanding debt is greater than the
Appraised Value of the Hotels and the value of other assets, net of
liabilities, owned by PHLP.
DESCRIPTION OF THE COMMON SHARE ELECTION
Limited Partners who prefer to exchange their OP Units for Common Shares must
indicate their election on the Consent Form and deliver such Consent Form to
the Operating Partnership prior to the end of the Solicitation Period. Even if
a Limited Partner votes against the Merger, he may still choose to exchange his
OP Units for Common Shares in the event the Merger is approved. A Limited
Partner of a Participating Partnership who fails to vote will receive and
retain the OP Units. Each Limited Partner in a Participating Partnership who
timely and properly elects to exchange his OP Units for Common Shares (and who
has not timely revoked such election during the Solicitation Period) will
immediately tender (or be deemed to have tendered) all of the OP Units he
24
<PAGE>
receives upon consummation of the Merger to Host REIT for an equal number of
Common Shares. The Common Shares will be issued to the Limited Partner promptly
after the twentieth trading day after the Effective Date of the Mergers (which
would be promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998). The Common Shares represent beneficial interests in Host
REIT and are expected to receive quarterly distributions in the same amount as
the distributions with respect to each OP Unit. See "Description of Shares of
Beneficial Interest--Common Shares."
DESCRIPTION OF THE NOTE ELECTION
Limited Partners who prefer to exchange their OP Units for a Note must
indicate their election on the Consent Form and deliver such Consent Form to
the Operating Partnership prior to the end of the Solicitation Period. 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 Participating Partnership who timely and properly
elects to exchange his OP Units for a Note (and who has not timely revoked such
election during the Solicitaion Period) will immediately tender (or be deemed
to have tendered) all of the OP Units he receives upon consummation of the
Merger to the Operating Partnership for the Note. The Note will be issued to
the Limited Partner promptly after the Effective Date of the Mergers (which
currently is expected to be December 30, 1998). 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 6.56% per annum, which was determined based on
120% of the applicable federal rate as of the Record Date (which was 5.47%),
payable semi-annually on June 15 and December 15 each year commencing from and
after the Effective Date of the Mergers, (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."
25
<PAGE>
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 AND
FOR THE RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENTS. 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") and the Questions and
Answers (the "Q & A"), constitute the "Solicitation Materials" being
distributed to Limited Partners to obtain their consents to the Mergers and the
amendments to the partnership agreements.
The date of first distribution of this Consent Solicitation is September ,
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." LIMITED PARTNERS ARE BEING ASKED TO VOTE
SEPARATELY ON THE MERGER AND THE PROPOSED AMENDMENTS TO THE PARTNERSHIP
AGREEMENT OF HIS PARTNERSHIP, BUT A PARTNERSHIP WILL NOT PARTICIPATE IN A
MERGER UNLESS BOTH PROPOSALS ARE APPROVED.
A Limited Partner may mark the Consent Form to vote "FOR," "AGAINST" or
"ABSTAIN" with respect to participation in a Merger by his Partnership and
"FOR," "AGAINST" or "ABSTAIN" with respect to the amendments to the partnership
agreement of 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 AND "AGAINST" THE AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.
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
AND "AGAINST" THE AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.
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) November , 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 AND "FOR" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS. 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
26
<PAGE>
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 elect to receive Common Shares or a Note in
exchange for his OP Units in connection with the Mergers; (ii) 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; (iii) 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; (iv) who is not required
to recognize gain by reason of an election by other Limited Partners in his
Partnership to receive Common Shares or Notes in exchange for their 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.
With respect to the foregoing potential exceptions to nonrecognition
treatment, Hogan & Hartson L.L.P. has opined as follows: (i) it is more likely
than not that a Limited Partner's exercise of the Unit Redemption Right more
than one year after the date of consummation of the 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 exchange his OP Units for Common Shares or a Note
in connection with the Mergers should not be required to recognize gain by
reason of another Limited Partner's exercise of either 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") and who does not elect to exchange
the OP Units will recognize taxable gain at the time of the Mergers as a result
either of relief from Partnership liabilities
27
<PAGE>
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 who does not elect to exchange his OP Units and
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 such a
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 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.
A Limited Partner who elects to exchange his OP Units for Common Shares in
connection with the Mergers will be treated as having made a fully taxable
disposition of his OP Units (which would be in 1998 if the Effective Date of
the Mergers is in 1998). The amount realized in connection with such
disposition will equal the sum of the fair market value of the Common Shares
received, plus the portion of the Operating 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 OP
Units, the Limited Partner will recognize gain. Such Limited Partner will not
be able to defer any portion of the gain realized from the exchange of OP Units
for Common Shares under the "installment sale" rules. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Exercise Their Right to
Make the Common Share Election or the Note Election."
A Limited Partner who elects to receive a Note in connection with the Mergers
will be treated as having made a taxable disposition of his OP Units (which
would be in 1998 if the Effective Date of the Mergers is in 1998). 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 Operating 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 OP Units, 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 Common Share Election or 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.
28
<PAGE>
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 Common Share Election or 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 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 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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<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial and other
information for the Company and combined consolidated historical financial
information for the Company. 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 Company's financial
position or results of operations at any future date or for any future period.
In addition, the historical information contained in the following table is
not comparable to the operations of the Company on a going-forward basis
because the historical information relates to an operating entity which owns
and operates its hotels, while the Company will own the Hotels but will lease
them to the Lessees and receive rental payments in connection therewith.
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<PAGE>
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........ 1,182 1,182 -- 639 639 --
Other revenues......... 15 15 17 9 9 56
------ ------ ------ ---- ----- ----
Total revenues....... 1,197 1,197 1,110 648 648 708
------ ------ ------ ---- ----- ----
OPERATING COSTS AND
EXPENSES:
Hotel.................. 640 638 649 294 293 343
Other.................. 11 11 29 5 5 10
------ ------ ------ ---- ----- ----
Total operating costs
and expenses........... 651 649 678 299 298 353
------ ------ ------ ---- ----- ----
Operating profit........ 546 548 432 349 350 355
Minority interest....... (9) (9) (32) (11) (11) (30)
Corporate expenses...... (44) (44) (45) (20) (20) (20)
REIT Conversion
expenses............... -- -- -- -- -- (6)
Interest expense........ (441) (458) (287) (204) (212) (151)
Dividends on Convertible
Preferred Securities... (37) (37) (37) (17) (17) (17)
Interest income......... 20 20 52 13 13 26
------ ------ ------ ---- ----- ----
Income before income
taxes.................. 35 20 83 110 103 157
Provision for income
taxes.................. (2) (1) (36) (6) (5) (64)
------ ------ ------ ---- ----- ----
Income before
extraordinary items ... $ 33 $ 19 $ 47 $104 $ 98 $ 93
====== ====== ====== ==== ===== ====
</TABLE>
AS OF JUNE 19, 1998
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------
100% PARTICIPATION 100% PARTICIPATION
WITH NO NOTES WITH NOTES
ISSUED ISSUED(1) HISTORICAL
------------------ ------------------ ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net.. $7,091 $7,050 $5,054
Total assets................. 8,247 8,207 6,194
Debt......................... 5,133 5,381 3,570
Total liabilities............ 5,942 6,190 4,628
Convertible Preferred
Securities.................. 550 550 550
Equity....................... 1,755 1,467 1,016
</TABLE>
- --------
(1) Assumes that all the Limited Partners of each Partnership elect to
exchange their OP Units for Notes.
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<PAGE>
RISK FACTORS
In considering whether to approve a Merger, 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, Host REIT, the Operating Partnership, the
General Partners and Crestline.
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), but not the Limited Partners, will own the common stock of
Crestline 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. The benefits to Host of the REIT Conversion
will be reduced if one or more of the Partnerships do not participate in a
Merger.
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 Merger
is fair and equitable to and advisable for the Limited Partners of its
Partnership. This assessment involves considerations that are different
from those relevant to the determination of whether the Mergers and the
REIT Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of the
REIT Conversion to Host will be greater if the Partnerships participate and
Host REIT will benefit if the value of the OP Units received by the Limited
Partners in the Mergers is less than the value of their Partnership
Interests). 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 Host or its subsidiaries are the General Partners,
since no arm's length negotiations are possible because Host is on both
sides of the transaction.
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 Crestline will be distributed to Host
REIT's shareholders and the Blackstone Entities. Accordingly, Host REIT's
shareholders and the Blackstone Entities, as the initial shareholders of
Crestline, will potentially benefit from the terms of the Leases to the
extent net revenues exceed rental payments and other expenses but Limited
Partners will not because they will not receive shares of Crestline common
stock.
POTENTIAL AAA CONFLICTS. A conflict of interest may exist in that AAA has
been retained to perform the Appraisals and also provide the Fairness
Opinion which, among other things, opines as to the methodologies and
underlying assumptions that AAA used in performing the Appraisals. 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.
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<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 provided in the Partnership Agreement, 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 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.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL. Marriott International
currently serves as manager for all but 16 of Host's Hotels, and will
continue to manage those Hotels pursuant to the Management Agreements that
will be assigned to the Lessees. In addition, Marriott International acts
as manager of hotels that will compete with Host REIT's Hotels. As a
result, Marriott International may make decisions regarding competing
lodging facilities which it manages that would not necessarily be in the
best interests of Host REIT or the Lessees. Further, J.W. Marriott, Jr. and
Richard E. Marriott, who are brothers, currently serve as directors of Host
and directors (and, in the case of J.W. Marriott, Jr., also the Chief
Executive Officer) of Marriott International. After the REIT Conversion,
J.W. Marriott, Jr. will serve as a trustee of Host REIT and will continue
to serve as a director of Marriott International, and Richard E. Marriott
will serve as Chairman of the Board of Host REIT and continue to serve as a
director of Marriott International. J.W. Marriott, Jr. and Richard E.
Marriott also beneficially own approximately 10.6% and 10.2%, respectively,
of the outstanding shares of common stock of Marriott International, and
will beneficially own % and %, respectively, of the outstanding shares
of common stock of Crestline (but neither will serve as an officer or
director thereof). As a result, J.W. Marriott, Jr. and Richard E. Marriott
may have a potential conflict of interest with respect to their obligations
as trustees of Host REIT in connection with any decisions regarding
Marriott International itself (including decisions relating to the
Management Agreements involving the Hotels), Marriott International's
management of competing lodging properties and Crestline's leasing and
other businesses that would not necessarily be in the best interests of
Host REIT.
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. 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 value 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 or elects to exchange OP Units for Common Shares 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."
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ALLOCATION OF OP UNITS TO HOST REIT IS DIFFERENT FROM ALLOCATION OF OP UNITS
TO THE PARTNERSHIPS. Following the REIT Conversion, Host REIT will own a number
of OP Units equal to the number of shares of Host common stock outstanding on
the Effective Date (including the OP Units to be received by the General
Partners and Host subsidiaries in the Mergers and the OP Units to be acquired
from the Limited Partners who elect to receive Common Shares in connection with
the Mergers) 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. Host REIT's OP Units, in the aggregate,
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 to Host REIT and the
Partnerships 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."
ALLOCATIONS OF OP UNITS TO BLACKSTONE ENTITIES AND PRIVATE PARTNERSHIPS WERE
NOT DETERMINED BY THE EXCHANGE VALUE METHODOLOGIES. The price and other terms
of the acquisitions of certain Private Partnerships and the Blackstone
Acquisition (and thus the allocation of OP Units resulting therefrom) were
determined by arm's length negotiations. If the partners' interests in the
Private Partnerships and the assets of the Blackstone Entities had been valued
by the same methodologies used to determine Exchange Values in the Mergers, the
value of the OP Units to be allocated to such partners or the Blackstone
Entities may have been less that they actually will receive. The different
methods of allocating OP Units may result in the Limited Partners receiving
relatively less for their interests than such partners and the Blackstone
Entities.
PRICE OF OP UNITS OR COMMON SHARES MIGHT BE LESS THAN THE FAIR MARKET VALUE
OF THE PARTNERSHIP INTERESTS. The price of an OP Unit for purposes of the
Mergers 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 will it be less than $ or greater than $ per OP
Unit). The pricing mechanism has the effect of fixing the minimum and maximum
number of OP Units to be issued in the Mergers. It is likely that, either
initially or 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 or Common Shares 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 WHO RETAIN OP UNITS TO REDEEM OP UNITS FOR ONE
YEAR. Limited Partners who 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 and of not being able to
sell in a falling market.
VALUE OF THE NOTES WILL BE LESS THAN THE EXCHANGE VALUE. Each Limited Partner
may elect to receive in connection with 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 ranks equally with such Notes.
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CASH DISTRIBUTIONS; REDUCED CASH DISTRIBUTIONS FOR CERTAIN LIMITED
PARTNERS. Distributions will be made at the discretion of Host REIT's Board of
Trustees and 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. To the extent that cash available for distribution
(generally cash from operations less capital expenditures and principal
amortization of indebtedness) is insufficient to pay distributions in
accordance with the Operating Partnership's distribution policy or to maintain
the REIT qualification of Host REIT, the Operating Partnership intends to
borrow to make such distributions. There is no assurance that the expected
initial cash distributions of the Operating Partnership and Host REIT will be
funded entirely from cash available for distribution or at any particular
level. In addition, the expected initial annual cash distributions of the
Operating Partnership or Host REIT to the Limited Partners of MHP and MHP2 per
Partnership Unit ($7,618 and $12,816, 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 THE 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; 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
that expires between the years 2063 and 2106 and which own only one or a fixed
portfolio of (or controlling interests in) Hotels and distribute the cash flow
from the operation of such Hotels to its partners, to holding a direct or
indirect interest in the Operating Partnership, an ongoing operating real
estate company, that (i) will initially own interests in up to approximately
125 Hotels, (ii) 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), (iii) has the ability to acquire additional
hotels (including hotels with additional brands) and (iv) will be able to
reinvest proceeds from sales or refinancings of existing Hotels in additional
hotels.
Those Limited Partners who elect to receive Common Shares in connection with
the Mergers will hold an equity interest in a publicly traded REIT that
(i) provides immediate liquidity, (ii) intends to make distributions to its
shareholders in an amount equal to at least 95% of its taxable income,
(iii) allows shareholders to influence management by participation in the
election of Trustees and (iv) realizes substantial corporate tax savings as
long as certain requirements are met.
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
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, the sale of Common Shares received in
connection with the Mergers or payments on any Note received by a Limited
Partner in connection with the Mergers. An investment in the Operating
Partnership or Host REIT 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 retain OP
Units or elect to receive Common Shares in connection with the Mergers will
own interests in a much larger enterprise with a broader range of assets than
any of the
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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 INCLUDE NUMBER OF OP UNITS TO BE
RECEIVED. 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 (but will not be less than $ or greater than $ )
and which, together with the Exchange Value, will determine the number of OP
Units (or Common Shares) 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 Note Election Amount has been determined. 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 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.
LACK OF CONTROL OVER NON-CONTROLLED SUBSIDIARIES. The Non-Controlled
Subsidiaries will hold various assets (not exceeding in the aggregate 20% by
value of the assets of the Operating Partnership), consisting primarily
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of interests in hotels which are not leased, certain furniture, fixtures and
equipment used in the Hotels and certain international hotels, the ownership
or 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 Host Employee Trust
and possibly certain other Investors 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 Host Employee Trust and possibly certain
other investors 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 principal debt facilities).
EXPIRATION OF THE LEASES AND POSSIBLE INABILITY TO FIND OTHER LESSEES. The
Leases generally will expire seven to ten years after the Effective Date, and
there can be no assurance that the affected Hotels will be relet to the
Lessees (or if relet, will be relet on terms as favorable to the Operating
Partnership). If the Hotels are not relet to the Lessees, the Operating
Partnership will be required to find other lessees, which lessees must meet
certain requirements set forth in the Management Agreements and the Code.
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
relet the Hotels or enter into new leases with such lessees, which could
result in a failure of Host REIT to qualify as a REIT or in reduced cash
available for distribution.
REQUISITE VOTE OF LIMITED PARTNERS OF PARTNERSHIPS BINDS ALL LIMITED
PARTNERS. For each Partnership, approval of a Merger and the related
amendments to its partnership agreement 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 and the
related amendments to its partnership agreement.
INABILITY TO OBTAIN THIRD-PARTY CONSENTS MAY HAVE A MATERIAL ADVERSE
EFFECT. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. These
include consents of several hotel project lenders, ground lessors, joint
venture partners, Marriott International and others. Although the Operating
Partnership will not consummate any Merger or the REIT Conversion unless it
believes that the inability of Host, the Operating Partnership or Host REIT to
obtain one or more consents would not reasonably be expected to cause a
default under the cross-default provisions of the Company's principal credit
facilities or otherwise have a material adverse effect on the Company's
business, financial condition or results of operations, there can be no
assurance that such a material adverse effect will not occur, which could
reduce the value of the OP Units and Common Shares.
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 an approximately 53% 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 $15.00). 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 (including Host REIT), (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
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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 60% 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.
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 substantial corporate-level
income taxes in 1999 and could cause the 1Blackstone 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 the 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 generally 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 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 Leases upon Disposition
of 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 or another
manager may, depending upon the structure of such transactions, result in a
need to modify the Management Agreements with Marriott International or such
other manager with respect to such property. Any such modification proposed by
the Operating Partnership may not be acceptable to Marriott International or
such other manager, and the lack of consent from Marriott International or
such other manager could adversely affect the Operating Partnership's ability
to consummate such financing, refinancing or sale. In addition, certain
situations
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could arise where actions taken by Marriott International or another manager
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 or another manager 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 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--
Removal or Withdrawal of Host REIT; Transfer of Host REIT's Interests," "--
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 separate REIT or merger of the Partnership
with an existing REIT or UPREIT. 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 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 at the time of
liquidation. Reorganization of a Partnership as a separate REIT would allow
certain Limited Partners to receive REIT shares immediately and achieve
liquidity (but such REIT shares would be for a substantially smaller company
with substantially fewer publicly held shares) and to continue their
investment only in their existing Hotel(s) (although Limited Partners with
negative capital accounts would be required to recognize gain to the extent
thereof upon formation of the separate REIT). 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. See
"Background and Reasons for 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 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.
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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 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 and Bylaws, the Partnership
Agreement, the Shareholder Rights Plan to be adopted by Host REIT to replace
Host's existing shareholder rights plan and Maryland law 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 Declaration of Trust will provide that the Board of
Trustees initially shall consist of eight members and may be thereafter
increased or decreased in accordance with the Bylaws of Host REIT, provided
that the total number of trustees may not be fewer than three nor more than
13. Pursuant to Host REIT's Bylaws, the number of trustees shall be fixed
by the Board of Trustees within the limits set forth in the Declaration of
Trust. The Board of Trustees of Host REIT will be divided into 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.
REMOVAL OF BOARD OF TRUSTEES. Host REIT's Declaration of Trust will
provide that, except for any trustees who may be elected by holders of a
class or series of shares of beneficial interest other than the Common
Shares, trustees may be removed only for cause and only by the affirmative
vote of shareholders holding at least two-thirds of the shares then
outstanding and entitled to be cast for the election of trustees. Vacancies
on the Board of Trustees may be filled by the concurring vote of a majority
of the remaining trustees and, in the case of a vacancy resulting from the
removal of a trustee by the shareholders, by shareholders.
PREFERRED SHARES OF BENEFICIAL INTEREST; RECLASSIFICATION OF SHARES AND
THE ABILITY OF THE BOARD OF TRUSTEES TO INCREASE OR DECREASE THE AUTHORIZED
NUMBER OF COMMON OR PREFERRED SHARES WITHOUT A SHAREHOLDER VOTE. The
Declaration of Trust authorizes the Board of Trustees of Host REIT to issue
up to 50,000,000 preferred shares of beneficial interest and to establish
the preferences and rights of any preferred
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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. Because the Board of
Trustees will have the power to establish the preferences and rights of
additional series of beneficial interest without a shareholder vote, the
Board of Trustees may afford the holders of any series of senior shares of
beneficial interest preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Shares. The Board of Trustees
also will have the ability, without a vote of shareholders, (i) to classify
or reclassify any issued shares into another class and (ii) to increase or
decrease the authorized number of common or preferred shares.
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 holder of a
majority of the OP Units, would be able to control the outcome of such
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.
Host REIT will be subject to the Maryland business combination provisions.
MARYLAND CONTROL SHARE ACQUISITION LAW. Under the MGCL, as applicable to
real estate investment trusts, "control shares" acquired in a "control
share acquisition" have no voting rights except to the extent approved by a
vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares owned by the acquiror and by officers or 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 the 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.
Host REIT will be subject to these control share provisions of Maryland
Law.
AMENDMENTS TO THE DECLARATION OF TRUST AND BYLAWS. The Declaration of
Trust, including its provisions on classification of the Board of Trustees
and restrictions on transferability of Common Shares and removal of
trustees, generally may be amended only by a resolution adopted by the
Board of Trustees and approved at an annual or special meeting of the
shareholders by the affirmative vote of the holders of not less than two-
thirds of all the votes entitled to be cast on the matter. Under the
Maryland REIT Law, a declaration of trust may permit the trustees by a two-
thirds vote to amend the declaration to qualify as a REIT under the Code or
the Maryland REIT Law without the affirmative vote or written consent of
shareholders. The Declaration of Trust will permit such action by the Board
of Trustees.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS. The Bylaws of
Host REIT provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of
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Trustees and the proposal of business to be considered by shareholders may
be made only (A) pursuant to Host REIT's notice of meeting, (B) by the
Board of Trustees or (C) by a shareholder who is entitled to vote at the
meeting and has complied with the advance notice procedures set forth in
the Bylaws and (ii) with respect to special meetings of the shareholders,
only the business specified in Host REIT's notice of meeting may be brought
before the meeting of shareholders and nominations of persons for election
to the Board of Trustees may be made only (A) pursuant to Host REIT's
notice of the meeting, (B) by the Board of Trustees or (C) provided that
the Board of Trustees has determined that trustees shall be elected at such
meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws. The
advance notice provisions contained in the Bylaws generally require
nominations and new business proposals by shareholders to be delivered to
the Secretary of Host REIT not later than the close of business on the 60th
day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting of shareholders.
MEETINGS OF SHAREHOLDERS; CALL OF SPECIAL MEETINGS; SHAREHOLDER ACTION IN
LIEU OF MEETING BY UNANIMOUS WRITTEN CONSENT. Host REIT's Bylaws provide
that annual meetings of shareholders shall be held on a date and at the
time set by the Board of Trustees during the month of May each year
(commencing in May 1999). Special meetings of the shareholders may be
called by the Board of Trustees of Host REIT. Pursuant to the Declaration
of Trust and Bylaws of Host REIT, any action required or permitted to be
taken by the shareholders must be effected at a duly called annual or
special meeting of shareholders and may not be effected by any consent in
writing by shareholders, unless such consent is unanimous.
MERGER, CONSOLIDATION AND TRANSFER OF ALL OF SUBSTANTIALLY ALL OF THE
ASSETS OF HOST REIT. Pursuant to the Declaration of Trust, subject to the
terms of any class or series of shares at the time outstanding, Host REIT
may merge with or into another entity, but any such merger must be approved
(i) by the Board of Trustees in the manner provided in the Maryland REIT
Law and (ii) by shareholders to the extent required in the Maryland REIT
Law. In general, under the Maryland REIT Law, mergers of a Maryland real
estate investment trust, such as Host REIT, with or into another entity
must first be approved by a majority of the entire Board of Trustees and
thereafter approved by shareholders by the affirmative vote of two-thirds
of all the votes entitled to be cast on the matter. Subject to the terms of
any class or series of shares at the time outstanding, under the
Declaration of Trust Host REIT also may (a) to the extent permitted by law,
consolidate Host REIT with one or more other entities into a new entity or
(b) sell, lease, exchange, or otherwise transfer all or substantially all
of the assets of Host REIT, but any such action must be approved by the
Board of Trustees and, after notice to all shareholders entitled to vote on
the matter, by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter (or such higher vote as may be required by law),
subject to certain exceptions as set forth in the Declaration of Trust. The
voluntary dissolution of Host REIT also would require the affirmative vote
of two-thirds of all the votes entitled to be cast on the matter under the
Declaration of Trust.
DETERMINATION OF ADVISABILITY OF MERGERS, CONSOLIDATIONS, TRANSFERS OF
ALL OF SUBSTANTIALLY ALL OF THE ASSETS OF HOST REIT AND OTHER BUSINESS
COMBINATIONS. The Declaration of Trust will provide that in determining
whether a merger, consolidation, transfer of all or substantially all of
the assets of Host REIT and other business combinations involving Host REIT
is advisable, a trustee shall consider the interests of shareholders of
Host REIT, and, in his sole discretion, may consider (i) the interests of
Host REIT's employees, suppliers, creditors and customers, (ii) the economy
of the nation, (iii) community and societal interests and (iv) the long-
term as well as short-term interests of Host REIT and its shareholders,
including the possibility that such interests may be best served by the
continued independence of Host REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND THE
DECLARATION OF TRUST AND BYLAWS. The business combination and control share
provisions of the MGCL, the provisions of the Declaration of Trust on
classification of the Board of Trustees, the provisions fixing the size of
the Board within a specified range and removal of trustees, the provisions
authorizing the Board of Trustees, without a shareholder vote, to increase
or decrease the authorized number of common or preferred shares and to
classify or reclassify any unissued class or series of shares into another
class or series of shares, the requirement that shareholders acting in lieu
of a meeting may do so only by unanimous written consent,
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and the provisions relating to mergers, consolidations and transfers of all
or substantially or all the assets of Host REIT, the provisions for
amending the Declaration of Trust and Bylaws, the advance notice provisions
of the Bylaws, the inability of shareholders to call special meetings, as
well as the transfer restrictions that will be contained in the Declaration
of Trust which are intended to permit Host REIT to satisfy certain
requirements under the Code to qualify as a REIT for federal income tax
purposes, could 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 interests.
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 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.
SHAREHOLDER RIGHTS PLAN. Host REIT intends to adopt a Shareholder Rights
Plan to replace the existing Host shareholder rights plan. The new
Shareholder Rights Plan is expected to provide, among other things, that
upon the occurrence of certain events, shareholders will be entitled to
purchase from Host REIT a newly created series of junior preferred stock,
subject to Host REIT's Ownership Limit. The preferred share purchase rights
will be triggered by the earlier to occur of (i) ten days following the
date of a public announcement that a person or group acting in concert has
acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding Common Shares or (ii) ten business days following
the commencement of or announcement of an intention to make a tender or
exchange offer, the consummation of which would result in the acquiring
person becoming the beneficial owner of 30% or more of such outstanding
Common Shares. The preferred share purchase rights would cause substantial
dilution to a person or group that attempts to acquire Host REIT on terms
not approved by the Board of Trustees. See "Description of Shares of
Beneficial Interest" and "Certain Provisions of Maryland Law and Host
REIT's Declaration of Trust and Bylaws."
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 Mergers--
Requirements for Qualification." In addition, a person who owns, directly or
by attribution, 10% or more of an interest in 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
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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, Crestline 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 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 Common
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.
Limited Partners who elect to receive Common Shares in connection with the
Mergers will be able to sell such shares at any time after they are received
(unless held by an affiliate of Host REIT). 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 who retain OP Units
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 retain OP Units
received 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. Further, 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 granted prior to the Mergers and 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
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of the distribution of the Crestline common stock and possibly cash or other
consideration in connection with the REIT Conversion, 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
Crestline common stock and any cash or other consideration that may be
distributed in connection with the REIT Conversion), a significant portion of
which (except for the Crestline common stock and cash or other consideration
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. Host's common stock price is also affected by general
market conditions.
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 at the time of or 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 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.
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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 ranks 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, 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
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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 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 the
holders of OP Units (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 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). 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
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resulting adverse tax consequences. 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 125 Hotels in which the Operating Partnership
will initially hold an interest, approximately 45 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 CRESTLINE. Crestline 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. Crestline'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, Crestline would have had
approximately $230 million of indebtedness (not including guarantees of
obligations of Crestline's subsidiaries under the Leases and the Management
Agreements) and Crestline can incur additional indebtedness in the future.
There can be no assurance that Crestline 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 Crestline.
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 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 elect to receive Common Shares or a Note in
exchange for his OP Units in connection with the Mergers; (ii) 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; (iii) 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; (iv) who is not required to recognize gain by reason of the
election by another Limited Partner in his Partnership to receive Common
Shares or 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
either 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, who has held that Interest at all times since the offering and who
does not elect to exchange the OP Units, 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 exchange his OP Units
for Common Shares or a Note in connection with the Mergers
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should not be required to recognize gain by reason of another Limited
Partner's exercise of either such election. 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 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 who retain OP Units 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 retains OP Units to recognize part or
all of the taxable gain that otherwise has been deferred pursuant to the
Mergers.
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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 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 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 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.
ELECTION TO EXCHANGE OP UNITS FOR COMMON SHARES. A Limited Partner who
elects to exchange his OP Units for Common Shares in connection with the
Mergers will be treated as having made a fully taxable disposition of his OP
Units (which would be in 1998 if the Effective Date of the Mergers is in
1998). The amount realized in connection with such disposition will equal the
sum of the fair market value of the Common Shares received, plus the portion
of the Operating 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 OP Units, the Limited Partner will
recognize gain. If a Limited Partner has a "negative capital account" with
respect to his OP Units, he will recognize "phantom income" (i.e., the income
recognized would exceed the value of the Common Shares by the amount of his
negative capital account). See "Federal Income Tax Consequences--Tax Treatment
of Limited Partners Who Exercise Their Right to Make the Common Share Election
or the Note Election."
ELECTION TO EXCHANGE OP UNITS FOR NOTES. A Limited Partner who elects to
receive a Note in exchange for his OP Units in connection with the Mergers
will be treated as having made a taxable disposition of his OP Units (which
would be in 1998 if the Effective Date of the Mergers is in 1998). 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 Operating 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 OP Units, 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 until principal on the Note is
paid (see "Federal Income Tax Consequences--Tax Treatment of Limited Partners
Who Exercise Their Right to Make the Common Share Election or 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
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respect to his Partnership Interest who elects to receive a Note will
recognize "phantom income" in that amount 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 fair market 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.
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 (including the
decision whether to elect to receive Common Shares or Notes in exchange for OP
Units in connection with the Mergers) and the subsequent ownership and
disposition of OP Units, Common Shares or Notes, 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.
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 Host Employee
Compensation Trust and Crestline 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. As
discussed below in "--Earnings and Profits Attributable to "C' Corporation
Taxable Years," to qualify as a REIT, Host REIT also will have to distribute
to its shareholders not later than the end of its first taxable year as a REIT
an amount equal to the earnings and profits ("E&P") accumulated by Host and
its subsidiaries and not distributed before or at the time of the REIT
Conversion (including any
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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 (and therefore to maintain its REIT status) and to avoid the
nondeductible excise tax. 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 E&P (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.
EARNINGS AND PROFITS ATTRIBUTABLE TO "C" CORPORATION TAXABLE YEARS. In
order to qualify as a REIT, Host REIT cannot have at the end of any taxable
year any undistributed E&P that is 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 prior to the Effective Date an opinion to the
effect that, based upon certain representations of Host REIT regarding the
Leases 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
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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 applicable to REITs 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 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."
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 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,
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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, Desert Springs, 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.
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 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, including Host REIT.
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
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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, Host REIT, 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, Host REIT, 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 related amendments to the partnership agreements 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), but not the Limited
Partners, will own the common stock of Crestline 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. The benefits to Host of the REIT
Conversion will be reduced if one or more of the Partnerships do not
participate in a Merger.
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 Merger is fair and equitable to and advisable
for the Limited Partners of its Partnership. This assessment involves
considerations that are different from those relevant to the determination of
whether the Mergers and the REIT Conversion are advisable for Host and its
shareholders. The considerations relevant to such determination include Host's
belief that the REIT Conversion is advisable for its shareholders, the
benefits of the REIT Conversion to Host will be greater if the Partnerships
participate and Host REIT will benefit if the value of the OP Units received
by the Limited Partners in the Mergers is less than the value of their
Partnership Interests. 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 Host or its subsidiaries are the General Partners,
since no arm's length negotiations are possible because Host is on both sides
of the transaction.
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 Crestline will be
distributed to Host REIT's shareholders and the Blackstone Entities.
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Accordingly, Host REIT's shareholders and the Blackstone Entities, as the
initial shareholders of Crestline, will potentially benefit from the terms of
the Leases to the extent net revenues exceed rental payments and other
expenses but Limited Partners will not because they will not receive shares of
Crestline 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
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, including provisions which benefit Host REIT, 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 because the Mergers contain both substantive protections for
the Limited Partners (the Appraisals and the Fairness Opinion) and procedural
protections for the Limited Partners (the vote required in all instances is a
majority of limited partner interests and in those Partnerships where Host or
its affiliates own significant percentages of limited partner interest, a
majority of unaffiliated Limited Partners have the ability to approve or
disapprove the Mergers, including the related amendments to the partnership
agreements). In addition, none of the partnership agreements or applicable law
impose such a requirement. 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 value of the OP Units might not have been more favorable to the Limited
Partners.
POTENTIAL AAA CONFLICTS
A conflict of interest may exist in that AAA has been retained to perform
the Appraisals and also provide the Fairness Opinion which, among other
things, opines as to the methodologies and underlying assumptions that AAA
used in performing the Appraisals. 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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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 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
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 23,671 6
MHP..................... 100,000 59,824 59,824 2(/5/)
MHP2.................... 73,115 120,452(/6/) 161,681(/6/) 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 payments related to
the reallocation of tax losses resulting from the 1990 debt refinancing.
(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) Aggregate Distributions do not include $5 million ($6,700 per Partnership
Unit) distributed in August 1998. Number of Hotels owned 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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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 $35,127, tax credits of up to $7,500 and
allocations of tax losses of approximately $208,700 (which have been offset in
part by subsequent allocations of taxable income of approximately $4,600),
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 1997, 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
$23,671 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.
In addition, $8,000 per Partnership Unit was distributed in August 1998. 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 1997, 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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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 addition, $6,700 per Partnership Unit was
distributed from cash flow in August 1998. 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 anticipated holding period, although the offering
documents included hypothetical assumed sale dates for purposes of providing
illustrative financial forecasts. Based upon the disclosure, which contained
appropriate cautionary language, limited partners could reasonably have
expected that they would receive substantial benefits through distributions
from some combination (depending upon the particular Partnership) of
operations, tax benefits and refinancing proceeds and, at some indefinite
future date when market conditions were favorable, and assuming a sale would
be advisable for the partners, from a sale of the Partnership's assets.
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 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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PARTNERSHIP UNIT PRICES
(ALL PRICE INFORMATION ON A PER PARTNERSHIP UNIT BASIS)
<TABLE>
<CAPTION>
TRANSACTION NUMBER OF
PERIOD PARTNERSHIP WEIGHTED ESTIMATED
ORIGINAL 12 MONTHS UNITS HIGHEST LOWEST AVERAGE EXCHANGE
PARTNERSHIP COST ENDED TRADED PRICE PRICE PRICE VALUE(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 33,133
Desert Springs.......... 100,000 4/15/98 31.0 42,200(2) 10,000 23,526 40,880
Hanover................. 100,000 4/15/98 41.0 40,000(3) 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 68,150 141,074
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 price per Partnership Unit 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, as a more tax efficient structure, will
provide improved operating results through changing economic conditions
and all phases of the hotel economic cycle.
. Host believes the REIT Conversion, which will reduce corporate-level
taxes and the need to incur debt to reduce corporate taxes through
interest deductions, 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, Santa Anita, in December 1996 and January 1997.
Based upon an analysis of potential costs, the pricing of the transaction and
the time required to complete such a transaction, Host decided not to pursue
such a transaction. During the fourth quarter of 1997, Host began to explore
internally 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
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<PAGE>
REIT and offer to the Partnerships the opportunity to participate in the REIT
Conversion through the Mergers. Host did not consult with any investors in the
Partnerships regarding the Mergers prior to the April 1998 public announcement
of the proposed REIT Conversion.
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, reorganizing the Partnership into a separate
REIT or pursuing a merger of one or more Partnerships with another REIT
or UPREIT because (i) the Limited Partners will have the opportunity to
receive OP Units, Common Shares or Notes and to acquire an interest in a
large, diversified hotel company, (ii) the Exchange Value is equal to the
highest estimated value that would be derived by Limited Partners from
the three valuation alternatives, (iii) for all but three Partnerships,
the estimated Adjusted Appraised Value is substantially higher than
either the estimated Continuation Value or the estimated Liquidation
Value, (iv) Limited Partners will obtain liquidity by electing to
exchange the OP Units they receive for freely tradeable Host REIT Common
Shares or, if they elect to retain such OP Units, such OP Units will be
redeemable for Common Shares or cash, at Host REIT's option, commencing
one year after the Effective Date and (v) Limited Partners will receive
regular quarterly distributions which, for all Partnerships except for
MHP and MHP2, are expected to 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:
Liquidity. 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 liquidity with respect to their investments in the
Partnerships because Limited Partners can receive freely tradeable Host REIT
Common Shares by electing to exchange OP Units for Common Shares in connection
with the Mergers or by exercising their Unit Redemption Right, at any time
after one year following the Mergers. Limited Partners thereby would be able
to receive, at Host REIT's election, either 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 $3.6 billion after giving effect to the
earnings and profits distribution (based on a price of $15.00 per Host REIT
Common Share). The election to exchange OP Units for Common Shares in
connection with the Mergers or 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 Chicago Suites, 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
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<PAGE>
General Partners expect that the Operating Partnership will make regular
quarterly cash distributions to holders of OP Units (including Host REIT) and
that Host REIT will make regular quarterly cash distributions to holders of
Common Shares. 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 expected 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 Common Shares would be entitled to receive cash distributions with
respect to such Common Shares in an amount per Common Share expected to be
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 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 $ 5,000(3) $ 2,453
Chicago Suites..................... 0 0 1,789
Desert Springs..................... 25,000(4) 2,500 2,208
Hanover............................ 0 0 6,653
MDAH............................... 3,453 0 5,898
MHP................................ 7,700 9,500 7,618
MHP2............................... 29,880 21,564 12,816
PHLP............................... 0 0 272
</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 annual distributions from pro forma cash available for
distribution for the Last Twelve Months ended June 19, 1998 of $.81 per OP
Unit. Limited Partners are cautioned that this amount may change and the
changes may be material. See "Distribution and Other Policies--
Distribution Policy."
(3) Represents a distribution of $5,000 per Partnership Unit from excess funds
that had been accumulated for refinancing costs.
(4) Includes a return of capital of approximately $25,000 per Partnership
Unit.
Substantial Tax Deferral for Limited Partners Not Electing to Exchange OP
Units for Common Shares or Notes. The General Partners expect that Limited
Partners of the Participating Partnerships who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Mergers
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
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
64
<PAGE>
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 125 Hotels and
will have a total market capitalization of approximately $3.6 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 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 generally will have a lower leverage to value ratio, approximately
53%, than the Partnerships, which have leverage ratios that typically average
between 65% and 80% (calculated as a percentage of Exchange 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
or Host REIT will allow Limited Partners to participate in growth
opportunities that would not otherwise be available to them. Host REIT will be
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. The General Partners believe that by exchanging
interests in their existing, non-traded, finite-life limited partnerships with
a fixed portfolio for
65
<PAGE>
interests in an ongoing 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
(although not currently), has resulted at various times 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 or Common Shares (and, for Limited Partners who
retain OP Units, upon the exercise of the Unit Redemption Right at any time
commencing one year following the Mergers, Common Shares) whose public market
valuation in the future 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 they will not trade at a discount to private market values.
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.
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MARRIOTT
INTERNATIONAL
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). Marriott International receives management fees
and other reimbursements from the Partnerships under the Management
Agreements.
The following table sets forth the reimbursements and distributions paid by
all of the Partnerships to the General Partners and their affiliates and the
payments made to Marriott International 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 by the Partnerships
to the General Partners and their affiliates and Marriott International 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 $.81 per year during such period, which
is the estimated pro forma distribution from cash available for distribution
for the Last Twelve Months ended June 19, 1998.
HISTORICAL AND PRO FORMA
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS
AND THEIR AFFILIATES AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(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>
Principal and Interest
payment on loans and
advances from the
General Partner and
Affiliates............. $18,926 $ -- $16,579 $ -- $13,962 $15,351
Reimbursements to the
General Partners and
Affiliates(/1/)........ 1,799 -- 1,657 -- 1,168 568
Distributions to the
General Partners and
Affiliates(/2/)........ 6,716 7,397 15,881 14,794 8,202 338
Payments to Marriott In-
ternational............ 36,579 36,579 64,554 64,554 59,554 57,891
------- ------- ------- ------- ------- -------
Total................. $64,020 $43,976 $98,623 $79,348 $82,886 $74,148
======= ======= ======= ======= ======= =======
</TABLE>
66
<PAGE>
- --------
(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 in each period shown assumes payment of
distributions at a rate of $.81 per annum per OP Unit (which represents
the pro forma cash available for distribution for the twelve months ended
June 19, 1998) 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 REIT will receive in connection with the
REIT Conversion. The pro forma distributions payable to the General
Partner and its affiliates are not necessarily indicative of the amounts
that would have been distributed per OP Unit in such periods if the REIT
Conversion and Mergers had been consummated as of the beginning of each
period shown.
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 separate REIT and merging one or more Partnerships with
another REIT or UPREIT.
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 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 interest;
. 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 averaging 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
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<PAGE>
. 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 all
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 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 as holders of OP Units. 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 all
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,
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<PAGE>
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 believe that these disadvantages
generally outweigh 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
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 believe
that these disadvantages generally outweigh 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 forth the minimum number of OP Units to be received by the
Limited Partners in the Partnerships based upon the estimated Exchange Value
and the maximum price per OP Unit of $ . For a detailed explanation of the
calculation of each value, see "Determination of Exchange Values and
Allocation of OP Units." The determination of the valuation of the
reorganization of each Partnership as a Separate REIT or the merger of the
Partnerships with another REIT or UPREIT is highly speculative and the General
Partners believe that neither of these alternatives would obtain for the
Limited Partners a higher value than the Exchange Value, since the Exchange
Value is based on independent appraisals, which are intended to be equal to
the fair
69
<PAGE>
market value of the properties if they were sold in the market. Therefore, the
valuations for the reorganization of each Partnership as a Separate REIT and
for the merger of one or more Partnerships into another REIT or UPREIT are not
included in the table below.
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
ADJUSTED ESTIMATED ESTIMATED ESTIMATED MINIMUM
APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF
PARTNERSHIP VALUE VALUE VALUE VALUE(2) OP UNITS(3)
----------- --------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Atlanta Marquis.... $ 41,570 $ 45,425 $ 402 $ 45,425 3,028
Chicago Suites..... 33,133 24,184 31,149 33,133 2,209
Desert Springs..... 40,880 33,536 27,617 40,880 2,725
Hanover............ 123,202 98,090 88,474 123,202 8,213
MDAH............... 109,216 89,340 98,343 109,216 7,281
MHP................ 140,032 141,074 124,261 141,074 9,405
MHP2............... 237,334 211,263 205,140 237,334 15,822
PHLP............... 0(4) 5,040 0(4) 5,040 336
</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 and thus results in the minimum number of OP Units
that may be issued.
(4) The estimated Adjusted Appraised Value and the estimated Liquidation Value
for PHLP are zero because PHLP's outstanding debt is greater than the
Appraised Value of the Hotels and the value of other assets, net of
liabilities, owned by PHLP.
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 AND
FOR THE RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENTS. SEE "FAIRNESS
ANALYSIS AND OPINION--FAIRNESS ANALYSIS."
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<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 own a number of OP Units equal to the number of
outstanding Common Shares of Host REIT. These OP Units will consist of
(i) the OP Units to be acquired in exchange for the contribution of
Host's full-service hotel assets and other assets (excluding its senior
living assets and any cash and other consideration to be distributed to
shareholders of Host or Host REIT), subject to all liabilities of Host
(including past and future contingent liabilities), other than
liabilities of Crestline, (ii) the OP Units to be received by the
General Partners and other Host subsidiaries with respect to their
interests in the Partnerships and (iii) the OP Units to be acquired from
Limited Partners who elect to receive Common Shares in connection with
the Mergers. The OP Units received by the General Partners and other
Host subsidiaries attributable to their interests in the Partnerships
will be determined in the same manner as the number of OP Units to be
received by 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,
of which the General Partners and other Host subsidiaries would have
received approximately 18.3 million OP Units with respect to their
interests in the Partnerships. 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 and the price per OP Unit (other than
Limited Partners who elect to exchange such OP Units for Common Shares
or Notes).
. 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
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<PAGE>
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 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. The General Partners do not believe
that any adjustments to the Exchange Value will be material; however, if any
such changes are deemed to be material, the General Partners will provide the
Limited Partners in any Partnership so affected with an opportunity to change
their vote on the Merger.
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. Neither AAA nor
the General Partners believe that the lack of site visits to these Hotels
affects the determination of market value because, as part of the Appraisals,
AAA reviewed financial information of the Hotels as well as conducted
extensive interviews with the managers of the Hotels. See "Fairness Analysis
and Opinion--Fairness Opinion--Summary of Materials Considered and
Investigation Undertaken."
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
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<PAGE>
(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 (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>
PARTNERSHIP APPRAISED VALUE
- ----------- ---------------
<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.
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<PAGE>
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>
. 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
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<PAGE>
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 (including participating interest that would accrue as a result
of the Mergers) 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 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.
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<PAGE>
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-
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) (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(3)
========= ======== ========= ======== ======== ========= ========= =========
Estimated General Part-
ner's share(4)......... $ 75,223(7) $ 113 $ 372 $ 442 $ 533 $ 25,803 $ 26,330 $ 0
Estimated limited part-
ner share of Host sub-
sidiaries(5)........... $ 0 $ 0 $ 0(8) $ 4,928 $ 273 $ 67,670 $ 93,272 $ 0
Estimated total Limited
Partners' share(6)..... $ 22,032 $ 11,213 $ 36,792 $ 10,349 $ 45,215 $ 140,032 $ 176,814 $ 0
Per Partnership Unit.... $ 41,570 $ 33,133 $ 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 wholly responsible.
(3) The estimated Adjusted Appraised Value for PHLP is zero because PHLP's
outstanding debt is greater than the Appraised Value of the Hotels and the
value of other assets, net of liabilities, owned by PHLP.
(4) Excludes amounts attributable to limited partner interests of General
Partner, except as noted.
(5) Includes limited partner interests held by a General Partner.
(6) Includes estimated limited partner share of Host subsidiaries.
(7) Includes Class B limited partner interest held by the General Partner.
(8) Excludes $73.2 million attributable to the participating subordinated loan
held by Host.
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 30-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
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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% 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponded to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partners
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
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 ESTIMATED
ESTIMATED GENERAL LIMITED ESTIMATED
EXIT CAPITALIZATION CONTINUATION PARTNER'S PARTNERS' CONTINUATION VALUE
PARTNERSHIP GROWTH RATE RATE (2009) VALUE SHARE(1) SHARE (PER PARTNERSHIP UNIT)
- ----------- ----------- ------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... 4.40% 9.8% $ 93,889 $64,587 $ 24,075 $ 45,425
Chicago Suites.......... 3.70% 9.9% 8,962 558 8,404 24,184
Desert Springs.......... 4.50% 9.7% 31,007 824 30,183 33,536
Hanover................. 3.70% 9.9% 9,873 1,633 8,240 98,090
MDAH.................... 3.40% 10.1% 40,245 3,258 36,987 89,340
MHP..................... 3.65%(1) 9.9% 153,031 11,957 141,425 141,425
MHP2.................... 3.40% 10.4% 167,776 10,385 157,391 211,263
PHLP.................... 3.60% 10.1% 12,096 3,024 9,072 5,040
</TABLE>
- --------
(1) Includes amounts attributable to interests of other Host subsidiaries.
(2) 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).
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
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<PAGE>
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(3)
======== ======== ======== ======== ======== ======== ======== ========
Estimated General Part-
ner's share(4)......... $ 75,002(7) $ 107 $ 251(8) $ 391 $ 487 $ 19,045 $ 20,335 $ 0
Estimated Limited Part-
ner share of Host sub-
sidiaries(5)........... $ $ 0 $ 0 $ 3,539 $ 246 $ 60,049 $ 80,620 $ 0
Estimated total Limited
Partners' share(6)..... $ 213 $ 10,541 $ 24,855 $ 7,432 $ 40,714 $124,261 $152,829 $ 0
Per Partnership Unit.... $ 402 $ 31,149 $ 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 wholly responsible.
(3) The estimated Liquidation Value for PHLP is zero because PHLP's
outstanding debt is greater than the Appraised Value of the Hotels and the
value of other assets, net of liabilities, owned by PHLP.
(4) Excludes amounts attributable to limited partner interests of other Host
subsidiaries.
(5) Includes limited partner interests held by a General Partner, except as
noted.
(6) Includes estimated limited partner share of Host subsidiaries.
(7) Includes Class B limited partner interests held by the General Partner.
(8) Excludes $70.5 million attributable to the participating subordinated loan
held by Host.
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 number of OP Units to be received
(based upon the maximum price of $ per OP Unit) and the estimated Note
Election Amount for each Partnership, all on a per Partnership Unit basis as
of the Initial Valuation Date. The number of Common Shares received in
exchange for OP Units will equal the number of OP Units exchanged. 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, 80% 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 (but will not be less than $ or greater than $ per OP Unit)
and will not be finally determined until such time.
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<PAGE>
ESTIMATED EXCHANGE VALUES,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
PER PARTNERSHIP UNIT(/1/)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED ESTIMATED ESTIMATED MINIMUM ESTIMATED
ADJUSTED APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NOTE ELECTION
PARTNERSHIP VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
----------- ------------------ ------------ ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Atlanta Marquis......... $ 41,991 $ 45,425 $ 406 $ 45,425 3,028 $ 36,340
Chicago Suites.......... 33,133 24,184 31,149 33,133 2,208 31,149
Desert Springs.......... 40,880 33,536 27,617 40,880 2,725 32,704
Hanover................. 123,202 98,090 88,474 123,202 8,213 98,562
MDAH.................... 109,216 89,340 98,343 109,216 7,281 98,343
MHP..................... 140,032 141,425 124,261 141,425 9,405 124,261
MHP2.................... 237,334 211,263 205,140 237,334 15,822 205,140
PHLP.................... 0(5) 5,040 0(5) 5,040 336 4,032
</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 used
for purposes of the Mergers and thus results in the minimum number of OP
Units that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
(5) The estimated Adjusted Appraised Value and the estimated Liquidation Value
for PHLP are zero because PHLP's outstanding debt is greater than the
Appraised Value of the Hotels and the value of other assets, net of
liabilities, owned by PHLP.
PRICE OF OP UNITS TO PAY EXCHANGE VALUES TO LIMITED PARTNERS
Each Limited Partner of a Participating Partnership will receive in exchange
for his Partnership Interests a number of OP Units with an aggregate 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 will it
be less than $ or greater than $ per OP Unit). Thus, if the 20-day average
trading price is less than $ , the price per OP Unit in the Mergers would be
$ ; and if such average trading price is greater than $ , the price per OP
Unit in the Mergers would be $ . The OP Units will be delivered to the
Limited Partners promptly after the twentieth trading day following the
Effective Date of the Mergers (which would be promptly after January 29, 1999
if the Effective Date of the Mergers is December 30, 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
Common Shares in exchange for OP Units in connection with the Mergers will
participate in the same distributions from the Partnerships as Limited
Partners who retain OP Units and will receive distributions from Host REIT
with respect to periods after the Effective Date of the Mergers, which
distributions are expected to equal the amount distributed with respect to the
OP Units for such periods. Limited Partners at the Effective Date of the
Mergers who receive Notes in exchange for OP Units in connection with the
Mergers 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 because they will be entitled to receive interest on their
Notes for such period.
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.
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<PAGE>
DETERMINATION OF VALUE 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 determined in the same
manner as the Exchange Value of the Limited Partners' Partnership Interests by
the same methodologies set forth above and 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 following table sets forth the estimated value of the interest of each
General Partner and other Host subsidiaries in each Partnership based upon the
estimated aggregate Exchange Value of the Limited Partners' Partnership
Interests as of the Initial Valuation Date and the minimum number of OP Units
estimated to be received by the General Partners and other Host subsidiaries
in respect thereof.
ESTIMATED VALUES OF GENERAL PARTNERS' AND OTHER HOST SUBSIDIARIES' 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 $153,031 $203,144 $ 12,096
Limited partners' share
of aggregate Exchange
Value.................. 24,075 11,213 36,792 10,349 45,215 141,074 176,814 9,072
-------- -------- -------- -------- -------- -------- -------- --------
Value of General Part-
ner's interest(1)...... 64,587 113 372 442 533 11,957 26,330 3,024
Value of limited partner
interest of Host
subsidiaries .......... 68 0 0(3) 4,928 273 68,174 93,035 5
-------- -------- -------- -------- -------- -------- -------- --------
Total interest of
General Partner and
other Host subsidiaries
....................... $ 64,655 $ 113 $ 372 $ 5,370 $ 751 $ 80,131 $119,365 $ 3,029
======== ======== ======== ======== ======== ======== ======== ========
Minimum Number of OP
Units(2)............... 4,310 8 25 358 50 5,342 7,958 202
</TABLE>
- --------
(1) Excludes limited partners interests owned by a General Partner.
(2) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
(3) Excludes $73.2 million attributable to the participating subordinated loan
held by Host.
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<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 and the related amendments to the
partnership agreements. 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 considerations:
. The General Partners have concluded that the Exchange Value for each
Partnership represents fair consideration for the Partnership Interests
of the Limited Partners in the Mergers in relation to such Partnership
because the Exchange Value is equal to the greatest of the Adjusted
Appraised Value, Continuation Value and Liquidation Value, each of which
is an acceptable method for determining the fair market value of a
Partnership's assets. 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 General Partners' own analysis, as well as the Fairness
Opinions, support these conclusions.
. Individual Limited Partners who retain OP Units will be able to defer
recognition of gain until such time as they choose to realize such gain
based on their own personal circumstances.
. 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 General Partners considered the maximum and minimum deemed values of
OP Units established for purposes of the Mergers. The General Partners
noted that the maximum deemed value, which has the effect of
establishing a minimum number of OP Units that Limited Partners will
receive in any Merger, supports the fairness of the Mergers. With regard
to the minimum deemed value of the OP Units, which has the effect of
establishing a maximum number of OP Units that Limited Partners will
receive in any Merger, the General Partners concluded that such a
provision is customary when there is a maximum exchange price and that
the levels established for the minimum and maximum deemed values
represent a reasonable allocation of the risk of fluctuation in the
trading price of Host REIT Common Shares immediately following the
Mergers. The minimum value was set at a level that is less than the
recent average trading price of Host common stock (after deducting an
amount equal to the estimated per share E&P distribution to be made
before the Mergers) and the maximum is higher than such adjusted trading
price. The Merger Agreements limit the value of the distributions that
Host and
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<PAGE>
Host REIT can make to their stockholders and to the Blackstone Entities
(through the Operating Partnerships) prior to consummation of the
Mergers. Based on these considerations and others, the General Partners
concluded that the maximum and minimum deemed values support the
fairness of the Mergers to the Limited Partners.
. The General Partners considered the method of allocating OP Units
received by each Partnership in the Mergers between its General Partner
and its Limited Partners. Because the OP Units are allocated in
accordance with the distribution provisions in each Partnership's
partnership agreement, the General Partners concluded that this method
supports the fairness of the Mergers to the Limited Partners.
. 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 and does not conclude that
the Exchange Value is the best price that could be obtained. 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.
. 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.
. Host REIT 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. 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 the 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 would 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 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:
. Liquidity. The Mergers and the REIT Conversion will offer Limited
Partners liquidity with respect to their investments in the
Partnerships because Limited Partners can elect to receive freely
tradeable Host REIT Common Shares in connection with the Mergers. In
addition, Limited Partners who elect to retain OP Units, at any time
commencing one year following the Effective Date, will be able to
exercise their Unit Redemption Right, 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 $3.6 billion after giving effect to
the earnings and profits distribution (based upon a price per Common
Share of Host REIT of $15.00). The election to exchange OP Units for
Common Shares in connection with the Mergers or 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. The General Partners expect
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host REIT will make
regular quarterly cash distributions to holders of Common Shares.
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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<PAGE>
. 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 125 Hotels and will have a total market capitalization
of approximately $3.6 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 generally will have a lower leverage to value
ratio, approximately 53%, than the Partnerships, which have leverage
ratios that typically average between 65% and 80% (calculated as a
percentage of Exchange Value), resulting in interest and debt
service savings and greater financial stability.
. Substantial Tax Deferral. The General Partners expect that Limited
Partners of the Participating Partnerships who do not elect to
receive Common Shares or Notes in exchange for OP Units in
connection with the Mergers 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 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 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.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
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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: (i) specifically consider other
methodologies for allocation of the OP Units, (ii) 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, (iii) negotiate with the General Partners or Host, (iv)
participate in establishing the terms of the Mergers, (v) provide an opinion
as to the terms and conditions of the Mergers other than those explicitly
stated in the Fairness Opinion, (vi) make any independent review of the
capital expenditure estimates set forth in the Engineering Study or (vii) make
any estimates of the Partnerships' contingent liabilities.
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, CB Commercial and Hospitality Valuation Services, for purposes of
performing the appraisals and rendering the Fairness Opinion and received
proposals from each. The General Partners selected AAA, on the basis of the
proposals, 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
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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.
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 as of March 1, 1998. AAA did not conduct any subsequent due
diligence or valuation procedures.
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 Host REIT, an equal number of Common Shares
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 125 full-service Hotels located throughout the United States and
Canada, containing approximately 58,500 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 corporate (Board and shareholder) and partnership
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 (other than its interests in the
General Partners, who will remain in existence as subsidiaries of Host
REIT and will receive OP Units in the Mergers) and its other assets
(excluding its senior living assets and possibly cash and other
consideration that may be distributed to shareholders of Host or Host
REIT) 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 (reduced by the number of OP Units to
be received by the General Partners and other subsidiaries of Host in
the Mergers), (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 contingent liabilities), other than liabilities of Crestline.
Following these contributions, the Operating Partnership and its
subsidiaries will directly own all of Host's wholly owned hotels,
substantially all of Host's interests in the Hotel Partnerships and all
of Host's other assets (excluding its senior living assets and any cash
and other consideration that may be distributed to shareholders of Host
or Host REIT).
. 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 facilitate 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. In the REIT Conversion,
the Operating Partnership will assume primary liability for repayment of
the $550 million of 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
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the distribution of Crestline common stock and any cash and other
consideration to Host or Host REIT shareholders and the Blackstone
Entities in connection with the REIT Conversion, the conversion ratio of
the Convertible Preferred Securities will be adjusted pursuant to the
anti-dilution provisions of the debentures (as they may be modified).
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
a Limited Partner elects to receive Common Shares or a Note in exchange
for OP Units in connection with the Mergers, such Limited Partner will,
upon receipt of his OP Units, tender (or be deemed to tender) all of
such OP Units to Host REIT for an equal number of Common Shares or to
the Operating Partnership in exchange for a Note with a principal amount
equal to the Note Election Amount of his Partnership Interests. If a
Limited Partner elects to tender his OP Units for Common Shares or
Notes, such Limited Partner must tender all of the OP Units he receives
in the Mergers. The General Partners and other subsidiaries of Host will
also receive OP Units in exchange for their interests in the
Partnerships and the General Partners will continue as wholly owned
direct or indirect 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 Crestline. 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 Crestline 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 Crestline also are directors of Host REIT, Blackstone will be
entitled to designate a director of Crestline. The Operating Partnership
does not expect that there will be any common directors or trustees of
Crestline and Host REIT.
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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.
Each Blackstone Entity has agreed that, until the earlier of the fifth
anniversary of the closing of the Blackstone Acquisition and the date on
which the Blackstone Entities do not own, in the aggregate, more than 5% of
the outstanding OP Units and Common Shares, such Blackstone Entity will
not, and will use its best efforts to cause its affiliates to not, directly
or indirectly (i) subject to certain exceptions, acquire or agree to
acquire beneficial ownership of any securities or partnership interests of
Host REIT, the Operating Partnership or Crestline, if after giving effect
thereto, such Blackstone Entity and its affiliates (together with the other
members of any group (as defined in Section 13d-1 of the Exchange Act) of
which any of them is a part) would (A) directly or indirectly own more than
9.8% of any class of voting securities of such entity or more than 19.9% of
the aggregate value of all outstanding voting securities of Host REIT and
OP Units or (B) violate the ownership limitations or transfer restrictions
set forth in the Declaration of Trust. The Partnership Agreement of the
Operating Partnership or the Articles of Incorporation of Crestline, (ii)
sell, transfer, pledge or otherwise dispose of any OP Units or any voting
securities of Host REIT or Crestline in violation of such ownership
limitations or transfer restrictions, (iii) participate in any proxy
contest in opposition to the position taken by the directors or general
partner, as applicable, of Host REIT, the Operating Partnership or
Crestline, (iv) seek to cause a disposition (by way of merger, business
combination, sale or otherwise) of a material portion of the assets or
securities or partnership interests, or a change in the composition of the
trustees, directors or management, of Host REIT, the Operating Partnership
or Crestline or (v) initiate or propose to the holders of securities or
partnership interests, as applicable, of Host REIT, the Operating
Partnership or Crestline, or otherwise solicit their approval of, any
proposal to be voted by such holders.
. Contribution of Assets to Non-Controlled Subsidiaries. The Operating
Partnership will organize the Non-Controlled Subsidiaries to hold
various assets (not exceeding, in the aggregate, 20% by value of the
assets of the Operating Partnership) contributed by Host and its
subsidiaries to the Operating Partnership. The direct ownership of most
of these assets 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,
Atlanta Marquis, Hanover, MHP and PHLP (assuming they participate in the
Mergers) 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 Employee Trust, a Delaware statutory
business trust, and possibly certain other investors 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 Host Employee 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 Host Employee
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 long-term Management Agreements, which will be
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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.
In connection with the REIT Conversion, Host or Host REIT will make
one or more taxable distributions to their shareholders of shares of
common stock of Crestline and possibly cash or other consideration in an
amount to be determined. The aggregate value of the Crestline common
stock and any cash or other consideration to be distributed to Host or
Host REIT shareholders and the Blackstone Entities is currently
estimated to be approximately $525 million to $625 million
(approximately $2.10 to $2.50 per share to the Host or Host REIT
shareholders). The actual amount of the distribution will be based in
part 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. To the extent that the distributions made
in connection with the REIT Conversion are not sufficient to eliminate
Host's estimated accumulated earnings and profits, Host REIT will make
one or more additional distributions to its shareholders (in the form of
cash or securities) prior to the last day of its first taxable year as a
REIT (currently expected to be December 31, 1999) in a sufficient amount
to eliminate such earnings and profits, and the Operating Partnership
will make corresponding extraordinary distributions to all holders of OP
Units (including Host REIT) in an amount sufficient to permit Host REIT
to make such additional distributions. Limited Partners who elect to
receive Common Shares will not receive the Crestline common stock or any
other portion of the E&P distribution made before they become
shareholders of Host REIT (approximately 20 trading days after the
Effective Date of the Mergers). In addition, under the terms of the
Blackstone Acquisition, the Blackstone Entities are entitled to receive
a pro rata distribution of the same consideration received by Host
REIT's shareholders except to the extent they elected to receive
additional OP Units in lieu thereof. The distribution to the Blackstone
Entities of common stock of Crestline and other consideration will be
approximately $90 million to $110 million if the REIT Conversion is
consummated.
Following the distribution, Crestline'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 the Lessees. Certain
REITs have spun-off public operating companies to conduct certain
activities which REITs are prohibited from conducting and have described
such structure as a "paper-clip" structure. There is no established
definition of a "paper-clip" structure. While the Operating Partnership
and Crestline clearly expect to have a mutually beneficial, long-term
relationship, they do not believe that their relationship should be
characterized as a "paper-clip" because they will operate as separate
public companies with independent business plans, there will be no
overlap between officers and directors of the two companies and they
expect the shareholders of the two companies to diverge over time.
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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) Represents Limited Partners and others who retain OP Units and do not
receive Common Shares or Notes; excludes Host and its subsidiaries.
Percentage ownership in the Operating Partnership assumes all Limited
Partners elect to retain OP Units.
(2) Also will include Limited Partners who elect to receive Common Shares in
exchange for the OP Units received in the Mergers. Immediately following
the merger of Host into Host REIT and the distribution of Crestline common
stock to Host REIT's shareholders and the Blackstone Entities, the
shareholders of Crestline will consist of the shareholders of Host REIT
(other than Limited Partners who elect to receive Common Shares in
connection with the Mergers) and the Blackstone Entities. The common
ownership of the two public companies, however, will diverge over time.
(3) Percentage ownership in the Operating Partnership assumes no Limited
Partners elect to receive either Common Shares or Notes in connection with
the Mergers and that the price per Common Share is $ , which is the
maximum price per OP Unit for purposes of the Mergers.
(4) 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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Ownership Interests in the Operating Partnership Following the Mergers and
the REIT Conversion. Following the Mergers and the REIT Conversion, the
Operating Partnership is expected to be owned as set forth below:
OWNERSHIP OF THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
ENTITY PERCENTAGE INTEREST(1)
------ ----------------------
<S> <C>
Host REIT............................................. 75.6%
Limited Partners of the Partnerships.................. 7.1
Private Partnerships.................................. 1.1
Blackstone Entities................................... 16.2
-----
Total............................................... 100.0%
=====
</TABLE>
- --------
(1) Assumes all Limited Partners elect to retain OP Units and that all
Partnerships participate in the Mergers. The percentage interest of Host
REIT will increase if Limited Partners elect to receive Common Shares or
Notes in exchange for their OP Units in connection with the Mergers.
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
and certain related amendments to the partnership agreements, 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 a deemed value equal
to the Exchange Value of such Limited Partner's Partnership Interests. The
General Partners and other Host subsidiaries 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, respectively. 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."
Unit Redemption Right. Beginning one year after the Mergers, Limited
Partners who retain OP Units will have the right to redeem their OP Units at
any time, upon ten business days' notice to the Operating Partnership, and
receive, at the election of Host REIT, either 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"). Limited Partners
must redeem 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) each time the Unit Redemption
Right is exercised. See "Description of OP Units--Unit Redemption Right."
Right to Exchange OP Units for Common Shares. During the Solicitation
Period, Limited Partners can elect (or revoke any such election previously
made) to tender the OP Units they will receive in the Merger (if their
Partnership approves the Merger) to Host REIT in exchange for an equal number
of Common Shares. The Common Shares which will be issued promptly following
the twentieth trading day after the Effective Date of the Mergers, will be
freely tradeable and listed on the NYSE. Such election will, however, cause a
Limited Partner to recognize taxable gain (which would be in 1998 if the
Effective Date of the Merger is in 1998). See "Description of Shares of
Beneficial Interest--Common Shares" and "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Exercise Their Right to Make the Common
Share Election or the Note Election."
Right to Exchange OP Units for Notes. During the Solicitation Period,
Limited Partners can elect (or revoke any such election previously made) 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). The Notes will be issued promptly after the
Effective Date of the Mergers. Holders of Notes will receive interest payments
on a semi-annual basis on June 15 and December 15 of each year at the rate of
6.56% per annum from and after the Effective Date of the Merger. Such election
will, however, cause a Limited Partner to recognize taxable gain
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(which would be in 1998 if the Effective Date of the Merger is in 1998). See
"Description of the Notes" and "Federal Income Tax Consequences--Tax Treatment
of Limited Partners Who Exercise Their Right to Make the Common Share Election
or 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 Common Shares in exchange for OP Units in
connection with the Mergers will participate in the same distributions from
the Partnerships as Limited Partners who retain OP Units and will receive
distributions from Host REIT with respect to periods after the Effective Date
of the Mergers, which distributions are expected to equal the amount
distributed with respect to the OP Units. Limited Partners at the Effective
Date of the Mergers who receive a Note in exchange for OP Units in connection
with Mergers 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 because they will be entitled to receive interest on their
Notes for such period.
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 owned by the Operating Partnership.
<TABLE>
<CAPTION>
PARTNERSHIP LIMITED PARTNER INTERESTS GENERAL PARTNER INTERESTS
- ----------- ------------------------- -------------------------
<S> <C> <C>
Atlanta Marquis............. Class A 0.28% 1.00%
Class B 100.00
Chicago Suites.............. 0.00 1.00
Desert Springs.............. 0.00 1.00
Hanover..................... 47.62 5.00
MDAH........................ 0.60 1.00
MHP......................... 48.33 1.00
MHP2........................ 52.75 1.00
PHLP........................ 0.06 1.00
</TABLE>
Amendments to the 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. Limited Partners must vote
separately on the Merger and the amendments to the partnership agreements, but
the Merger will not be consummated unless both the Merger and the amendments
to the partnership agreements are approved. 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 allow the transactions
constituting the Mergers or otherwise necessary or desirable to consummate the
Mergers and the REIT Conversion.
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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 and the Crestline shares and possibly
other consideration are distributed to Host and Host REIT's shareholders (but
within one day thereof), which is expected to occur during the final stage of
the REIT Conversion. This is currently expected to occur on or about December
30, 1998, subject to satisfaction or waiver of the conditions to the Mergers.
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 significant
corporate-level income taxes in 1999 and could cause the Blackstone
Acquisition not to be consummated.
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 others:
. Limited Partner Approvals. Limited Partners holding the requisite
percentage of Partnership Interests in such Partnership shall have
approved the Merger and the amendments to the partnership agreement (as
described above).
. 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 and such merger shall have been consummated.
. 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, and Host
REIT shall have received an opinion of counsel substantially to such
effect.
. NYSE Listing. The Common Shares shall have been listed on the NYSE.
. Third-Party Consents. All required governmental and other third-party
consents to the Mergers and 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, shall have been received, except
for such consents as would not reasonably be expected to have a material
adverse effect on the business, financial condition or results of
operations of such Partnership or of Host REIT, the Operating
Partnership and their subsidiaries taken as a whole.
. 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
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<PAGE>
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.
EXTENSION, AMENDMENT AND TERMINATION OF THE MERGERS
The Operating Partnership, Host REIT 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, Host REIT 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
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 or Host REIT that, in its judgment, materially adversely
affects one or more of the Partnerships, any Merger or the REIT Conversion,
the Operating Partnership and Host REIT reserve 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 the REIT Conversion or any Merger or take such other
actions as may be in their 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 Non-
Controlled Subsidiary.
EXPENSES
The Operating Partnership, Host REIT 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
will be taken into account in determining the Exchange Value for the
applicable Partnership whose Exchange Value is based upon Adjusted Appraised
Value. Those Partnerships which have an Exchange Value equal to their
respective estimated Continuation Values, Atlanta Marquis, MHP and PHLP, will
have their transfer and recordation taxes and fees paid by the Operating
Partnership. 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.
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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>
ACCOUNTING TREATMENT
The contribution by Host of its assets (other than its senior living assets
and any cash or other consideration 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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<PAGE>
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 125 hotels, representing approximately 58,500 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 Minimum Rent plus, to the
extent it would exceed Minimum 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 79 full-service hotels representing more
than 36,000 rooms for an aggregate purchase price of approximately $3.9
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 Crestline 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, relationships
and access to market information provide a competitive advantage with respect
to identifying, evaluating and acquiring hotel assets.
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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. In the third quarter of 1998, the Company
acquired the 308-room Ritz-Carlton, Dearborn for approximately $65 million,
the 336-room Ritz-Carlton, San Francisco for approximately $161 million and
the 404-room Memphis Marriott (which was converted to the Marriott brand upon
acquisition) for approximately $16 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
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may eventually lead to additional international acquisition opportunities. The
Company will acquire international 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.
100
<PAGE>
HOTEL LODGING PROPERTIES
The Company's lodging portfolio, as of the date hereof, consists of 104
upscale and luxury full-service hotels with over 50,000 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 $ 85,397 69.8% $127.36 $ 88.95
Chicago Suites.......... 1 256 6,568 83.2 146.83 122.14
Desert Springs.......... 1 884 33,369 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)
....................... 126 58,603 1,324,601 77.7 133.01 103.30
</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 $ 41,957 69.1% $138.66 $ 95.81
Chicago Suites.......... 1 256 3,358 82.0 159.98 131.18
Desert Springs.......... 1 884 65,051 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)
....................... 126 58,603 715,360 77.8 146.18 113.67
</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.
101
<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 88 of the 104 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 Company 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.
102
<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. REVPAR in 1997 for all of the Company's properties
(including both comparable and non-comparable properties) increased 12.9% as
average room rates increased over 11% and average occupancy increased over one
percentage point. 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. REVPAR for the First Two Quarters 1998 for all of the
Company's properties increased 5.4% as average room rates increased nearly 7%
and average occupancy decreased over 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.
103
<PAGE>
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 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 Crestline. 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>
AGGREGATE
AVERAGE COMPLETED
NUMBER AVERAGE RENOVATION
NUMBER OF GUEST AVERAGE DAILY EXPENDITURES
GEOGRAPHIC REGION OF HOTELS ROOMS OCCUPANCY RATE REVPAR (IN THOUSANDS)
- ----------------- --------- -------- --------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Atlanta................. 7 441 76.5% $131.69 $100.74 $ 4,115
Florida................. 11 511 80.9 131.78 106.64 14,007
Mid-Atlantic............ 12 364 76.1 111.71 85.00 3,477
Midwest................. 10 418 74.3 107.65 79.99 2,751
New York................ 10 708 84.7 173.85 147.22 15,232
Northeast............... 7 367 75.2 96.75 72.72 9,260
South Central........... 15 525 76.5 120.81 92.39 15,190
Western................. 21 519 79.5 140.07 111.39 19,806
Latin America........... 2 436 62.7 129.54 81.17 290
Average-all regions... -- 485 78.4 133.74 104.84 --
</TABLE>
104
<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)(6)............................................ 300
Costa Mesa Suites........................................................ 253
Desert Springs Resort and Spa (3)(4)..................................... 884
Manhattan Beach (5)(6)................................................... 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 (1)(6)(11).............................. 306
The Ritz-Carlton, San Francisco (1)...................................... 336
Torrance................................................................. 487
Colorado
Denver Southeast (6)(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)(6)............................................ 624
Jacksonville (6)(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)(6)....................................... 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 (6)(12)................................................... 681
Indiana
South Bend (6)........................................................... 300
Louisiana
New Orleans (4)(6)....................................................... 1,290
Maryland
Bethesda (6)............................................................. 407
Gaithersburg/Washingtonian Center........................................ 284
Massachusetts
Boston/Newton (3)........................................................ 430
Michigan
Detroit Romulus.......................................................... 245
The Ritz-Carlton, Dearborn (1)........................................... 308
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 (6)........................................................... 289
Saddle Brook (6)(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
Tennesee
Memphis (2)(6)........................................................... 404
Texas
Dallas/Fort Worth........................................................ 492
Dallas Quorum (6)........................................................ 547
El Paso (6).............................................................. 296
Houston Airport (6)...................................................... 566
JW Marriott Houston (6).................................................. 503
Plaza San Antonio (6)(10)................................................ 252
San Antonio Rivercenter (4)(6)........................................... 999
San Antonio Riverwalk (6)................................................ 500
</TABLE>
105
<PAGE>
HOTEL PROPERTIES (CONTINUED)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- ------
<S> <C>
Utah
Salt Lake City (6)..................................................... 510
Virginia
Dulles Airport (6)..................................................... 370
Key Bridge (6)(12)..................................................... 588
Norfolk Waterside (6)(7)............................................... 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner (6).................................... 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.................................................................. 50,067
======
</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 (6)......................................... 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 or 1998.
(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 one or more long-
term lease agreements.
(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.
106
<PAGE>
1998 ACQUISITIONS
In January 1998, the Company acquired an additional 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 the third quarter of 1998,
the Company acquired the 308-room Ritz-Carlton, Dearborn for approximately $65
million, the 336-room Ritz-Carlton, San Francisco for approximately $161
million and the 404-room Memphis Marriott (which was converted to the Marriott
brand upon acquisition) for approximately $16 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 Crestline in connection with the
distribution of Crestline 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 up to 18% of
the shares of Crestline common stock to the Blackstone Entities. The
consideration received by the Blackstone Entities was determined through
negotiations between the Company and Blackstone and was not based upon
appraisals of the assets. 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 16.2% of the outstanding OP Units.
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); 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 Crestline 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
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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.
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, 88 of the Company's 104 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
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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>
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."
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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 approximately 175 employees. The balance of the Company's
current employees are expected to become employees of Crestline following the
REIT Conversion.
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.
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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.
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 indirect subsidiaries of Crestline. 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.
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Lessees. There will be a separate Lessee for each Hotel or group of Hotels
that has separate mortgage financing. 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 an indirect subsidiary of Crestline.
Crestline's principal business following the Effective Date will consist of
owning the senior living facilities and operating hotels leased from the
Company. Crestline will succeed to hotel's current asset management group,
which is responsible for maintaining the performance of the hotel managers and
evaluating requests for capital expenditures.
The Lessees under leases of Hotels that are managed by subsidiaries of
Marriott International will be wholly owned indirect subsidiaries of
Crestline. Marriott International or its appropriate subsidiary will have a
noneconomic membership interest in each Lessee, entitling it to certain voting
rights. The operating agreements for such lessees will provide that the
Crestline 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)
dissolving, liquidating, consolidating, merging, selling, or leasing all or
substantially all of the assets of the Lessee; (ii) 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 (iii) instituting voluntary
bankruptcy or similar proceedings or consenting to involuntary bankruptcy or
similar proceedings. Upon any termination of the applicable Management
Agreement, these special voting rights of Marriott International (or its
subsidiary) will cease.
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").
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 "Personal Property Limitation"
below).
The amount of Minimum Rent and the Percentage Rent thresholds will be
adjusted each year (the "Annual Adjustment"). The Annual Adjustment with
respect to Minimum Rent shall equal a percentage of any increase in the
Consumer Price Index during the previous twelve months. The Annual Adjustment
with respect to Percentage Rent thresholds shall be a percentage equal to the
sum of a percentage of any increase in the Consumer Price Index during the
previous twelve months plus a percentage of any increase in a regional labor
cost index agreed upon by Lessor and Lessee during the previous 12 months.
Neither Minimum Rent nor Percentage Rent thresholds will be decreased because
of the Annual Adjustment.
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 the Manager'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. 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 adjustment in the event of damage,
destruction, partial taking capital expenditure, an FF&E Adjustment, or a loan
by Lessor to fund an increase in the FF&E Reserve.
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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.
Lessor Expenses. The Lessor will be responsible for the following expenses:
real estate taxes, personal property taxes (to the extent Lessor owns the
personal property), 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 capital
expenditures.
The consent of the Lessor will be required for any capital expenditures
(except in an emergency or where the Owner's consent is not required under the
Management Agreement) or a change in the amount of the FF&E reserve payment.
Parent Guarantee. Crestline 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 10% of the aggregate
rents under all Leases in such pool paid with respect to the preceding 12 full
calendar months (with an annualized amount based on the Minimum Rent for such
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. Subject to obtaining lender consent where required, 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), and 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 fair market value of such assets. The purchase price
will be represented by a note evidencing a loan that bears interest at a rate
per annum equal to the "long-term applicable federal rate" in effect on the
commencement of the Lease. A portion of the Minimum Rent under the Lease will
represent payment of interest on the working capital loan. The principal
amount of the working capital loan will be payable upon termination of the
Lease. At the termination or expiration of the Lease, the Lessee will sell to
the Lessor the then existing working capital at a price equal to the book
value of such assets at that time. Landlord may pay the purchase price of the
working capital by offset against the outstanding principal balance of the
working capital loan. To the extent that the value of the working capital
delivered to the Lessor exceeds the outstanding principal balance of the
working capital loan 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 outstanding principal balance of the working
capital loan, 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 average annual
income generated by the Lessee during the three fiscal years preceding the
termination date or if the Hotel has not been in operation for at least three
fiscal years, then the average during the preceding fiscal years that have
elapsed, and if the Hotel has not been in operation for at least twelve
months, then the assumed annual income shall be determined on a pro forma
basis). 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
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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.
Pursuant to a separate agreement, Lessor and Lessee will each have the right
to terminate up to twelve Leases without being required to pay any fee or
other compensation as a result of such termination.
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 Lessor will have the right to terminate the
Leases, in return for paying the Lessees 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 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 reasonably determined by the
Lessor), 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 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 reasonably determined by the Lessor), the
Lessee subject to Landlord agreeing to fund any shortfall in the insurance
proceeds shall apply the insurance proceeds to restore the Hotel to its
preexisting condition. Lessor shall fund any shortfall in insurance proceeds
less than or equal to five percent of the estimated cost of repair. Lessor
shall fund in its sole discretion any shortfall in insurance proceeds greater
than five percent of the estimated cost of the repair, provided that if Lessor
elects not to fund such shortfall Tenant may terminate the Lease and Lessor
shall pay to Lessee a termination fee equal to the difference between Gross
Revenues Received and Rent paid by Lessor for the immediately preceding fiscal
year. 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. Subject to the notice and cure periods in the Lease, the
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 Crestline to maintain minimum net worth or debt service
coverage ratio requirements;
. 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 Crestline, the Lessee or OpCo, a subsidiary of
Crestline.
In addition to all other remedies available to Lessor, in the event
Crestline fails to maintain the minimum net worth or debt service coverage
ratio required, Lessor shall have the right to require that all revenues
payable by Manager to Lessee be paid into a controlled account, and that all
Rent due Lessor be paid therefrom.
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 Crestline or
OpCo, provided Crestline continues to meet the Minimum Net Worth requirements
in the Lease. Transfers to other parties will be permitted if approved by the
Lessor.
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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 described in
"Termination of Leases Upon Disposition of Hotels" above, 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 uncured monetary 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 lost 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 certain 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 gross negligence or willful
misconduct or, with respect to pre-existing conditions, which conditions are
exacerbated by Lessee's act or negligent failure to act after Lessee has
actual knowledge of such conditions.
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 12% of the
aggregate average tax basis of the real and personal property subject to the
applicable Lease, the following procedures will apply, subject to obtaining
lender consent where required:
. 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.
Certain Actions Under the Leases. The Leases 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)
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<PAGE>
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 may be withheld in Lessor's sole discretion; 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, which
consent may be withheld in Lessor's sole discretion.
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."
Relationship with Marriott International
Subsidiaries of Marriott International will serve as Managers for a
substantial 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 Crestline 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
General. 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:
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
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<PAGE>
all of the obligations of the Lessor under the Management Agreement during the
term of its Lease, other than certain retained obligations including, without
limitation, 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.
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.
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
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<PAGE>
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 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.
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<PAGE>
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
Crestline 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."
In addition, the Operating Partnership, Host REIT and Crestline will enter
into a noncompetition agreement under which, among other things, (i) Crestline
will agree not to purchase, finance or otherwise invest in full-service
hotels, except for minimal amounts in connection with its capacity as a lessee
as long as it is a lessee for more than 25% of the hotels owned by the Company
at the time of the REIT Conversion, (ii) the Company will agree not to
purchase, finance or otherwise invest in senior living facilities (except for
facilities which represent an immaterial portion of a portfolio purchase or
merger transaction) until December 31, 2003, and (iii) Crestline will agree
not to manage any hotels owned by the Company and not to own, operate or
otherwise control any full service hotel brand or franchise as long as it is a
lessee for more than 25% of the hotels owned by the Company at the time of the
REIT Conversion. In addition, both the Company and Crestline will agree not to
attempt to hire any of the other company's senior employees until December 31,
2000.
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<PAGE>
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% $14.1
---- -----
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 $73.8
==== =====
</TABLE>
(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.
120
<PAGE>
<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% $ 2.5
------
MDAH
Note A................ 73.1 12/15/99 LIBOR + 1% 5.9
Note B................ 27.8 12/15/99 LIBOR 1.6
Note C................ 9.3 12/15/10 No interest --
------ -----
110.2 7.5(1)
------
PHLP
Mortgage debt......... 168.9 12/22/99 LIBOR + 1.5% 20.2
------
Total unconsolidated
debt............... $303.4
======
</TABLE>
--------
(1) Interest expense is forecast 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 will
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, Inc. ("HMH
Properties"), a subsidiary of Host that will merge into the Operating
Partnership prior to the Effective Date, 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 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 Operating Partnership will assume the New
Senior Notes in connection with the REIT Conversion and the guarantee by Host
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.
New Credit Facility. On August 5, 1998, HMH Properties entered into a $1.25
billion credit facility (the "New Credit Facility") provided by a syndicate of
financial institutions (the "Lenders") led by Bankers Trust Company. The New
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 New Credit Facility will
have an initial term of three years with two one-year options to extend. The
proceeds of the New Credit 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
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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 New 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 New 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 New Credit Facility and (ii) continued accuracy of
representations and warranties in all material respects.
The interest rate applicable to the New Credit Facility and the unused
commitment fee applicable to the revolving portion of the New Credit Facility
are calculated based on a spread over LIBOR that will fluctuate based on the
quarterly recalculation of a leverage ratio set forth in the New Credit
Facility. The New Credit Facility provides 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 New 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
New Credit Facility at the end of the initial three-year term.
The Company's obligations under the New Credit Facility are guaranteed,
subject to certain conditions, on a senior basis by Host, Host Marriott
Hospitality, Inc. and certain of HMH Properties' existing and future
subsidiaries. The New Credit Facility will be assumed by the Operating
Partnership in connection with the REIT Conversion and the guarantee of Host
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 New Credit Facility
in the future. Borrowings under the New Credit Facility will rank pari passu
with the New Senior Notes and other existing and future senior indebtedness of
the Company. The New 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 New
Credit Facility may under certain circumstances in the future be secured by a
pledge of capital stock of certain subsidiaries of Host other than HMH
Properties and its subsidiaries.
The New 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.
122
<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 are expected to be equal to the amount
distributed by the Operating Partnership per OP Unit. Although the Code
generally requires a REIT to distribute 95% of its taxable income for each
year (within a certain period after the end of such year), the Operating
Partnership will establish its initial distribution at a level that will
enable Host REIT to distribute to its shareholders for each year an amount
equal to 100% of its taxable income (other than capital gains, which will be
addressed on a case-by-case basis). The Operating Partnership anticipates that
distributions for 1999 (assuming the Mergers occur in 1998) will be paid from
cash available for distribution. To the extent that cash available for
distribution 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 Host REIT's taxable income for 1999, Host currently estimates
that this policy will result in an initial annual distribution by the
Operating Partnership of approximately $1.00 to $1.10 per OP Unit ($0.25 to
$0.275 per quarter).
For the fifty-two weeks ended June 19, 1998 (the "Last Twelve Months"),
Host's pro forma cash from operations per OP Unit and pro forma cash available
for distribution per OP Unit were $1.73 and $.81, respectively. The following
table describes the calculation of pro forma cash from operations and cash
available for distribution for the Last Twelve Months:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS
EXCEPT PER OP
UNIT
AMOUNTS)
-------------
<S> <C>
Pro forma income before extraordinary items for the fiscal year
ended January 2, 1998........................................... $ 33,000
Less: Pro forma income before extraordinary items for the First
Two Quarters 1997............................................. (41,000)
Plus: Pro forma income before extraordinary items for the First
Two Quarters 1998.......................................... 104,000
--------
Pro forma income before extraordinary items for the Last Twelve
Months.......................................................... 96,000
Plus: Pro forma loss on sale of real estate for the Last Twelve
Months (1).................................................... 15,000
Plus: Pro forma real estate related depreciation and amortiza-
tion for the Last Twelve
Months (2)................................................. 337,000
Plus: Pro forma portion of FFO of unconsolidated equity invest-
ments for the Last Twelve Months, net of pro forma equity
in earnings of affiliates for the Last Twelve
Months (3)................................................. 37,000
Less: Pro forma one-time gain for the Last Twelve Months (4)... (10,000)
Less: Pro forma portion of FFO relating to minority owners for
the Last Twelve Months, net of pro forma portion of minor-
ity interest relating to OP Units for the Last Twelve
Months (5)................................................. (8,000)
--------
Pro forma cash from operations................................... 467,000
</TABLE>
123
<PAGE>
<TABLE>
<S> <C>
Adjustments:
Pro forma FF&E reserves for the Last Twelve Months (6)............ (179,000)
Pro forma portion of FF&E reserves of unconsolidated equity in-
vestments for the Last Twelve Months (7)......................... (4,000)
Pro forma portion of FF&E reserves of minority interests for the
Last Twelve Months (8)........................................... 5,000
Pro forma principal repayments for the Last Twelve Months (9)..... (69,000)
---------
Pro forma cash available for distribution for the Last Twelve
Months............................................................. $ 220,000
=========
Pro forma cash available for distribution per OP Unit for the Last
Twelve Months (10)................................................. $ .81
=========
</TABLE>
- --------
(1) Represents pro forma loss on sale of real estate for the last two quarters
1997 of $15 million.
(2) Represents pro forma real estate related depreciation and amortization for
the fiscal year ended January 2, 1998 of $339 million minus pro forma real
estate related depreciation and amortization for the First Two Quarters
1997 of $153 million plus pro forma real estate related depreciation and
amortization for the First Two Quarters 1998 of $151 million.
(3) Represents pro forma portion of FFO of unconsolidated equity investments,
net of pro forma equity in earnings of affiliates, for the fiscal year
ended January 2, 1998 of $39 million minus pro forma portion of FFO of
unconsolidated equity investments, net of pro forma equity in earnings of
affiliates, for the First Two Quarters 1997 of $15 million plus pro forma
portion of FFO of unconsolidated equity investments, net of pro forma
equity in earnings of affiliates, for the First Two Quarters 1998 of $16
million.
(4) Represents pro forma one-time gain for the last two quarters 1997 of $10
million.
(5) Represents pro forma portion of FFO relating to minority owners, net of
pro forma portion of minority interest relating to OP Units, for the
fiscal year ended January 2, 1998 of $10 million minus pro forma portion
of FFO relating to minority owners, net of pro forma portion of minority
interest relating to OP Units, for the First Two Quarters 1997 of $5
million plus pro forma portion of FFO relating to minority owners, net of
pro forma portion of minority interest relating to OP Units, for the First
Two Quarters 1998 of $3 million.
(6) Represents pro forma FF&E reserves for the fiscal year ended January 2,
1998 of $174 million minus pro forma FF&E reserves for the First Two
Quarters 1997 of $83 million plus pro forma FF&E reserves for the First
Two Quarters 1998 of $88 million.
(7) Represents pro forma FF&E reserves of unconsolidated equity investments
for the fiscal year ended January 2, 1998 of $5 million minus pro forma
FF&E reserves of unconsolidated equity investments for the First Two
Quarters 1997 of $3 million plus pro forma FF&E reserves of unconsolidated
equity investments for the First Two Quarters 1998 of $2 million.
(8) Represents pro forma FF&E reserves of minority interests for the fiscal
year ended January 2, 1998 of $4 million minus pro forma FF&E reserves of
minority interests for the First Two Quarters 1997 of $2 million plus pro
forma FF&E reserves of minority interests for the First Two Quarters 1998
$3 million.
(9) Represents pro forma principal repayments for the fiscal year ended
January 2, 1998 of $94 million minus pro forma principal repayments for
the First Two Quarters 1997 of $64 million plus pro forma principal
repayments for the First Two Quarters 1998 of $39 million.
(10) Based on a total of 270.1 million OP Units outstanding on a pro forma
basis after the Mergers.
All information contained in this Consent Solicitation assumes that the
Operating Partnership's distributions for 1999 will be made at a rate equal to
its pro forma cash available for distribution for the Last Twelve Months ended
June 19, 1998 (i.e. $.81 per OP Unit). If Host's preliminary estimate of Host
REIT's 1999 taxable income proves accurate but the Operating Partnership's
cash available for distribution for 1999 were only $.81 per OP Unit as it was
on a pro forma basis for the Last Twelve Months ended June 19, 1998, then the
Operating Partnership would be required to borrow to make distributions to
enable Host REIT to distribute 100% of its estimated taxable income in
accordance with its distribution policy. While the Operating Partnership does
not believe this will be necessary, it believes it would be able to borrow the
necessary amounts and that any such borrowing would not have a material
adverse effect on its financial condition or results of operations.
Investors are cautioned that Host expects that its preliminary estimate of
1999 taxable income (and distributions for 1999) may materially change as a
result of issuances of additional common or preferred stock by Host either
prior to or following the Mergers (which could reduce the distribution per OP
Unit in accordance with its distribution policy), changes in operations,
changes in the preliminary estimate of taxable income for
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<PAGE>
1999 and various other factors (some of which may be beyond the control of
Host REIT and the Operating Partnership). Distributions will be made in the
discretion of Host REIT's Board of Trustees and 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.
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.
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--Federal Income Taxation of Host REIT
Following the Mergers--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
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<PAGE>
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 60% or less. In addition, the New Senior
Notes indenture and the New Credit Facility impose limitations on the
incurrence of indebtedness. The Indenture for the Notes also 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.
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
Although there are no provisions of the Maryland REIT Law that address
conflicts of interest, Host REIT's Board of Trustees has adopted a policy to
address conflicts of interest. In addition, Maryland and Delaware law
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<PAGE>
impose certain duties on the Board of Trustees and Host REIT, as general
partner of the Operating Partnership (to the extent such duties have not been
eliminated pursuant to the Declaration of Trust or the Partnership Agreement).
There can be no assurance, however, that these policies 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.
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.
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.
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. 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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<PAGE>
SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of
Host which has been derived from Host's audited Consolidated Financial
Statements for the five most recent fiscal years ended January 2, 1998 and the
unaudited condensed 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 Host 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 Host have changed substantially.
The information contained in the following table is not comparable to the
operations of Host or 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 Company 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.............. $ 747 $ 522 $1,147 $ 732 $ 484 $ 380 $ 659
Operating profit...... 374 215 449 233 114 152 92
Interest expense...... 162 122 302 237 178 165 164
Income (loss) from
continuing
operations........... 96 32 47 (13) (62) (13) 56
Net income (loss)(5).. 96 37 50 (13) (143) (25) 50
OTHER OPERATING DATA:
Cash from operations.. 206 193 464 201 142 146 415
Cash provided by (used
in) investing
activities........... 11 (200) (1,046) (504) (208) (178) (262)
Cash provided by (used
in) financing
activities........... (213) (188) 389 806 200 26 (389)
Comparative FFO(6)
(unaudited).......... 206 145 295 164 136 N/A N/A
Depreciation and
amortization......... 125 102 240 168 122 113 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........... $ 717 $ 509 $ 865 $ 704 $ 201 $ 67 $ 73
Total assets.......... 6,765 5,324 6,526 5,152 3,557 3,366 3,362
Debt.................. 3,784 2,715 3,783 2,647 2,178 1,871 2,113
</TABLE>
- --------
(1) In the First Two Quarters 1997 and fiscal year 1997, Host recognized a $5
million and $3 million, respectively, extraordinary gain, net of taxes, on
the extinguishment of certain debt. In 1994, Host recognized a $6 million
extraordinary loss, net of taxes, on the required redemption of senior
notes. In 1993, Host 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, Host
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 Host's
consolidated statements of operations and are, therefore, not included in
sales, operating profit before corporate expenses
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<PAGE>
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, Host changed its accounting method for assets held for sale. During
1993, Host 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) Host 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) Host 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
Host, including enabling its shareholders and analysts to more easily
compare Host'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 Host's
cash needs, including its ability to make distributions. Host'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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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
LACK OF COMPARABILITY FOLLOWING THE REIT CONVERSION
Because substantially all of 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 of Host 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 hotel properties and senior
living communities, net gains (losses) on property transactions and equity in
the earnings (losses) of affiliates. House profit reflects the net revenues
flowing to the Host as property owner and represents gross 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.
Host's hotel operating costs and expenses are, to a great extent, fixed.
Therefore, Host 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 Host's properties reaching levels which allowed the
manager to share in the growth of profits in the form of higher management
fees. Host expects that this trend will continue in 1998 as the upscale and
luxury full-service segments continue to strengthen. At these higher operating
levels, Host'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 Host'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. Host 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 Host's hotel
properties, net gains (losses) on property transactions and equity in earnings
(losses) of affiliates. Revenues increased $225 million, or 43%, to $747
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"). Host'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, the acquisition of 30
senior living communities in 1997 and one senior living community in 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 Host'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 Host's full-service hotel
properties, average room rates increased over eight percent, while average
occupancy decreased slightly.
Revenues generated from Host's 31 senior living communities totaled $39
million for the First Two Quarters 1998. For the First Two Quarters 1998,
average occupancy was almost 92% and the average per diem rate was almost $88,
which resulted in revenue per available unit ("REVPAU") of $80.65. Senior
living communities' sales totaled $110 million for the First Two Quarters
1998.
Revenues were also impacted by the gains on the sales of two hotel
properties. The New York East Side Marriott was sold for $191 million
resulting in a pre-tax gain of approximately $40 million. The Napa Valley
Marriott was sold for $21 million resulting in a pre-tax gain of approximately
$10 million.
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 $66 million to $373 million in the First Two Quarters 1998
from $307 million for the First Two Quarters 1997, primarily representing
increased hotel and senior living communities' 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 Host's hotel operating costs and expenses being fixed. Host's senior living
communities' operating costs and expenses were $20 million for the First Two
Quarters 1998.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, Host's operating profit increased $159 million,
or 74%, to $374 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. Host's senior living
communities generated $19 million of operating profit for the First Two
Quarters 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 $3 million to $21 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 Host's efforts to 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.
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Interest Expense. Interest expense increased 33% to $162 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, approximately $300 million assumed in connection with the
acquisition of senior living communities, 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 Host in December 1996.
Interest Income. Interest income increased $3 million to $25 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 $96 million, compared to $32 million for the First
Two Quarters 1997.
Extraordinary Gain. In March 1997, Host purchased 100% of the outstanding
bonds secured by a first mortgage on the San Francisco Marriott Hotel. Host
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, Host 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. Host's net income for the First Two Quarters 1998 was $96
million compared to $37 million for the First Two Quarters 1997. For the First
Two Quarters 1998 and 1997, basic earnings per common share were $.47 and
$.18, respectively and diluted earnings per common share were $.45 and $.18,
respectively.
1997 COMPARED TO 1996 (HISTORICAL)
Revenues. Revenues increased $415 million, or 57%, to $1.1 billion for 1997.
Host'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 addition of 30 senior living communities in 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 Host's full-service properties,
average room rates increased almost 11%, while average occupancy increased
over one percentage point.
Revenues generated from Host's 1997 third quarter acquisition of 29 senior
living communities totaled $37 million. During 1997, average occupancy of the
communities was 92% and the average per diem rate was $84, which resulted in
1997 REVPAR of $77. Overall occupancies for 1997 were lower than the
historical and anticipated future occupancies due to the significant number of
expansion units added during the year, the overall disruption to the
communities as a result of the construction and the time required to fill the
expansion units. Senior living communities' sales totaled $111 million for
1997.
Operating Costs and Expenses. Operating costs and expenses increased $199
million to $698 million for 1997, primarily representing increased hotel and
senior living communities' operating costs, including
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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. Host's senior living communities operating costs
and expenses were $20 million (54% of revenues) for 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, Host's operating profit increased $216 million,
or 93%, to $449 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,
Host's hotels recorded improvements in comparable operating results. In
particular, Host'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, Host
expects results to be strong in these markets and other gateway cities in
which the Company owns hotels. In 1997, Host'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
Host'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. Host's senior living communities
generated $17 million (46% of revenues) of operating profit.
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.
Corporate Expenses. Corporate expenses increased $4 million to $47 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 Host's efforts
to carefully control its corporate expenses in spite of the substantial growth
in revenues.
Interest Expense. Interest expense increased $65 million to $302 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, approximately $315 million in debt incurred in conjunction with the
acquisition of senior living communities, 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 Host 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, Host purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. Host 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, Host 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, Host
refinanced the mortgage debt secured by the Marriott's Orlando World Center.
In connection with the refinancing, Host 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.
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Net Income (Loss). Host's net income in 1997 was $50 million, compared to a
net loss of $13 million in 1996. Basic earnings per common share was $.25 for
1997, compared to a basic loss per common share of $.07 in 1996. Diluted
earnings per common share was $.24 for 1997 compared to a diluted loss per
common share of $.07 in 1996.
1996 COMPARED TO 1995 (HISTORICAL)
Revenues. Revenues increased $248 million, or 51%, to $732 million in 1996.
Host'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 Host's Courtyard
properties and 18 of Host'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.
Hotel revenues increased $243 million, or 51%, to $717 million in 1996, as
all three of Host'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 Host'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 Host'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 Host'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, Host'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,
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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. Host'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 Host'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 Host, 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. Host'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. The basic and diluted loss per common share was
$.07 for 1996 and $.90 for 1995.
PRO FORMA RESULTS OF OPERATIONS
Because substantially all of the Company's Hotels will be leased following
the REIT Conversion, the Company does not believe that Host's 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.
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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.................. $ 639 $ 577 $ 639 $ 577
Total revenues................... 648 586 648 586
Operating costs and expenses..... 299 302 298 301
Operating profit before minority
interest, corporate expenses and
interest expense................ 349 284 350 285
Minority interest................ (11) (7) (11) (7)
Corporate expenses............... (20) (18) (20) (18)
Interest expense................. (204) (207) (212) (215)
Dividends on Convertible
Preferred Securities............ (17) (17) (17) (17)
Interest income.................. 13 8 13 8
---------- ---------- --------- ---------
Income before income taxes....... 110 43 103 36
Provision for income taxes....... (6) (2) (5) (2)
---------- ---------- --------- ---------
Income before extraordinary items
................................ $ 104 $ 41 $ 98 $ 34
========== ========== ========= =========
</TABLE>
EITF 98-9, "Accounting for Contingent Rents in Interim Financial Periods,"
requires a Lessor to defer recognition of contingent rental income in interim
periods until the specified target that triggers the contingent rental income
is achieved. The Company is reviewing the impact of EITF 98-9 and the impact
of EITF 98-9 could be significant to interim period reporting, but will have
no impact on full year reporting. The pro forma financial information and
related discussion does not reflect any impact for EITF 98-9.
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 $62 million, or 11%, to
$648 million for the First Two Quarters 1998 from $586 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 $136
million, or 8.1%, 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 8.3% to
$113.67 for the First Two Quarters 1998. Average room rates increased 9%,
while average occupancy decreased slightly to 77.8%.
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 decreased $3 million to $299 million
in the First Two Quarters 1998. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 46% of rental revenues in the First
Two Quarters 1998 from 51% 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 $65
million, or 23%, to $349 million for the First Two Quarters 1998. Hotel
operating profit increased $62 million, or 22%, to $345 million, or 54% of
rental revenues, for the First Two Quarters 1998 from $283 million, or 49% of
rental revenues, for the First Two Quarters 1997. The Company's hotels
recorded significant improvements in comparable operating results.
Specifically, hotels in New
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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 $204 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 in December 1996.
Interest Income. Interest income increased $5 million to $13 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 $104 million, 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 $62 million, or 11%, to $648 million for the
First Two Quarters 1998 from $586 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 $136
million, or 8.1%, 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 8.3% to
$113.67 for the First Two Quarters 1998. Average room rates increased 9%,
while average occupancy decreased slightly to 77.8%.
Operating Costs and Expenses. Operating costs and expenses decreased $3
million to $298 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 51% 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 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 $65
million, or 23%, to $350 million for the First Two Quarters 1998. Hotel
operating profit increased $62 million, or 22%, to $346 million, or 54% of
rental revenues, for the First Two Quarters 1998 from $284 million, or 49% 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.
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Interest Expense. Interest expense decreased $3 million to $215 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 in December 1996.
Interest Income. Interest income increased $5 million to $13 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 $98 million, compared to $34 million for the First
Two Quarters 1997.
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............................... $1,182 $1,096 $1,182 $1,096
Total revenues................................ 1,197 1,106 1,197 1,106
Operating costs and expenses.................. 651 640 649 638
Operating profit before minority interest,
corporate expenses and interest expense...... 546 466 548 468
Minority interest............................. (9) (9) (9) (9)
Corporate expenses............................ (44) (39) (44) (39)
Interest expense.............................. (441) (456) (458) (473)
Dividends on Convertible Preferred
Securities................................... (37) (37) (37) (37)
Interest income............................... 20 16 20 16
------ ------ ------ ------
Income (loss) before income taxes............. 35 (59) 20 (74)
Benefit (provision) for income taxes.......... (2) 3 (1) 4
------ ------ ------ ------
Income (loss) before extraordinary items ..... $ 33 $ (56) $ 19 $ (70)
====== ====== ====== ======
</TABLE>
100% PARTICIPATION WITH NO NOTES ISSUED--1997 COMPARED TO 1996 (PRO FORMA)
Revenues. Revenues increased $91 million, or 8%, to $1,197 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 $264 million, or 7.3%, to nearly $3.9 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 9.8% to $103.30 in
1997. Average room rates increased 9%, while average occupancy increased
slightly to 77.7%.
Operating Costs and Expenses. Operating costs and expenses increased $11
million to $651 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of revenues for 1997, from 57%
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
$80 million, or 17%, to $546 million in 1997. Hotel operating
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profit increased $74 million, or 16%, to $542 million, or 46% of rental
revenues, for 1997 compared to $468 million, or 43% 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 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 $441 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.
Interest Income. Interest income increased $4 million to $20 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
Crestline.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $33 million, compared to a $56 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 $91 million, or 8%, to $1,197 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 $264 million, or 7.3%, to nearly $3.9 billion in 1997,
reflecting increases in REVPAR. Improved results for the Company's full-
service hotels were driven by strong increases in REVPAR of 9.8% to $103.30 in
1997. Average room rates increased 9%, while average occupancy increased
slightly to 77.7%.
Operating Costs and Expenses. Operating costs and expenses increased $11
million to $649 million for 1997. As a percentage of rental revenues, hotel
operating costs and expenses decreased to 54% of revenues for 1997, from 57%
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 $80
million, or 17%, to $548 million in 1997. Hotel operating profit increased $75
million, or 16%, to $545 million, or 46% of rental revenues, for 1997 compared
to $470 million, or 43% 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
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<PAGE>
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.
Interest Expense. Interest expense decreased $15 million to $458 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.
Interest Income. Interest income increased $4 million to $20 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
Crestline.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $19 million, compared to a $70 million loss before extraordinary
items for 1996 as a result of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Host 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. Host utilizes these sources of capital to acquire new
properties, fund capital additions and improvements, and make principal
payments on debt.
Capital Transactions. Host 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 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. Host anticipates that any net
proceeds from the sale of offered securities will be used for refinancing of
Host's indebtedness, for acquisitions and general corporate purposes.
On August 5, 1998, HMH Properties, an indirect wholly owned subsidiary of
Host, which owns 61 of Host'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 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 Host,
with and into HMH Properties. Capital Resources, the owner of eight of Host's
hotel properties, was the obligor under the $500 million revolving credit
facility (the "Old Credit Facility"). The Operating Partnership will assume
the New Senior Notes in connection with the REIT Conversion and the guarantee
of Host will terminate on the Effective Date.
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In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into the $1.25 billion New Credit Facility with a group of commercial
banks. The New Credit Facility has an initial 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 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 will be assumed by the
Operating Partnership in connection with the REIT Conversion and the guarantee
of Host will terminate on the Effective Date.
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 Host's Old Credit Facility. The net
proceeds from the offering and borrowings under the New Credit Facility were
used by Host 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 Host, entered into the Old Credit Facility with a
group of commercial banks under which it could borrow up to $500 million for
certain permitted uses. As a result of this transaction, Host terminated its
line of credit with Marriott International.
In July 1997, HMH Properties and HMC Acquisition Properties, Inc.
("Acquisitions"), indirect, wholly owned subsidiaries of Host, 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 HMH Properties (the "HMH Properties Merger"). The amendments to the
indentures also increased the ability of HMH 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 HMH Properties' earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items subsequent to the 1997 Consent Solicitations over 220% of HMH
Properties' interest expense. HMH Properties paid dividends to Host 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 HMH Properties
Merger, HMH Properties issued an aggregate of $600 million of 8 7/8% senior
notes at par with a maturity of July 2007. HMH 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, 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
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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 conversion
rate is subject to adjustments in certain events, including (i) payment of
dividends (and other distributions) on Host common stock by Host in shares of
Host common stock; (ii) distributions to all holders of Host common stock of
rights or warrants entitling such holders (for a period not to exceed 45 days)
to subscribe for or purchase Host common stock at an exercise price less than
the market price of Host common stock; (iii) subdivisions and combinations of
Host common stock; (iv) payment of dividends (and other distributions) on Host
common stock consisting of indebtedness of Host, capital stock or other
securities, assets or cash (other than certain cash dividends at an annualized
rate of up to 12.5% of the market price of Host common stock); (v) payments
for Host common stock by Host or any of its subsidiaries in respect of a
tender or exchange offer (other than an odd-lot offer) at a price per share in
excess of 110% of the market price of Host common stock; (vi) consummation by
Host of certain mergers, a consolidation, a sale of all or substantially all
of its assets, a recapitalization or certain reclassifications of Host common
stock. The distribution of the capital stock of Crestline to all holders of
Host REIT common stock would, and certain other elements of the REIT
Conversion (such as other distributions of Host's accumulated earnings and
profits) may, result in an adjustment to the conversion price of the
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
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 Company 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
Company 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 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 Host, issued an aggregate
of $1 billion of 9.5% senior secured notes in two concurrent offerings. HMH
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
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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, Host replaced its line of credit with a line of credit from
Marriott International pursuant to which Host 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. Host 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,
Host 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, Host sold the 255-room Sheraton Elk
Grove Suites for proceeds of approximately $16 million. Host 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 Host's Courtyard properties and 18
of the Host's Residence Inn properties were sold (subject to a leaseback) to
Hospitality Properties Trust for approximately $314 million and Host 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. During the first and third quarters of
1995, 37 of Host's Courtyard properties were sold to and leased back from
Hospitality Properties Trust for approximately $330 million. Host 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, Host also sold its four remaining
Fairfield Inns for net cash proceeds of approximately $6 million, which
approximated their carrying value.
In cases where Host has made a decision to dispose of particular properties,
Host assesses impairment of each individual property to be sold on the basis of
expected sales price less estimated costs of disposal. Otherwise, Host 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, Host 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. Host seeks to grow
primarily through opportunistic acquisitions of full-service hotels. Host
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,
Host 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). Host 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, Host 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, Host 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 the first quarter of 1998, Host 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. Host 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
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million and acquired the 281-room Ritz-Carlton, Phoenix for $75 million. Host
is continually engaged in discussions with respect to other potential
acquisition properties. In addition, Host acquired the 397-room Ritz-Carlton,
Tysons Corner, Virginia and the 487-room Torrance Marriott near Los Angeles,
California. In the third quarter of 1998, Host acquired the 308-room Ritz-
Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton, San
Francisco for approximately $161 million and the 404-room Memphis Marriott
(which was converted to the Marriott brand upon acquisition) for approximately
$16 million.
On April 17, 1998, Host 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 Operating Partnership 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 acquired by the Company. The hotels will be
leased to Lessees and will be managed on behalf of the Lessees under their
existing management contracts.
Under the terms of its hotel management agreements, Host 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.
Host 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, Host 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. Host 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, Host 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.
Host may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties creates
a lower risk to Host as the success of the market is generally known and
development time is significantly shorter than new construction. Host 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.
In 1997, Host acquired the outstanding common stock of the Forum Group from
Marriott Senior Living Services, Inc., ("MSLS") a subsidiary of Marriott
International. Host purchased the Forum Group portfolio of 29 senior living
communities for approximately $460 million, including approximately $270
million in debt. The properties will continue to be operated by MSLS. In
addition, Host plans to add approximately 1,060 units to these communities for
approximately $107 million through a expansion plan which will be completed in
1999. In 1997, approximately $56 million (549 units) of the expansion plan had
been completed (including $33 million of debt financing provided by Marriott
International). Host also acquired 49% of the remaining 50% interest in the
venture which owned the 418-unit Leisure Park senior living community from
Marriott International for approximately $23 million, including approximately
$15 million of debt.
During the first quarter of 1998, Host acquired the Gables at Winchester in
suburban Boston, a 124-unit senior living community, for $21 million and
entered into conditional purchase agreements to acquire 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, Host may acquire these two 160-unit
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properties located in Denver and Colorado Springs, Colorado, for $35 million,
if they achieve certain operating performance criteria. All three of these
communities will be operated by MSLS under long-term operating agreements.
Under the terms of its senior living communities' management agreements, Host
is generally required to spend an amount of gross revenues to cover certain
routine repairs and maintenance and replacements and renewals to the
communities' property and improvements. The amount Host is required to spend
will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through
2007, and 3.5% thereafter. Host anticipates spending approximately $6 million
in 1998.
As part of the REIT Conversion, Host REIT and the Operating Partnership will
distribute shares of Crestline, to Host REIT's shareholders and the Blackstone
Entities.
Debt Payments. At January 2, 1998, Host and its subsidiaries had $1,585
million of senior notes, approximately $2.0 billion of non-recourse mortgage
debt secured by real estate assets and approximately $219 million of unsecured
and other debt.
Scheduled maturities over the next five years were $942 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. Host'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, Host 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, Host 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, Host was party to two additional
interest rate swap agreements with an aggregate notional amount of $400
million. These agreements expired in May 1997. Host 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. Host 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. Host is exposed to
credit loss in the event of non-performance by the contracting party to the
interest rate swap agreement; however, Host does not anticipate non-performance
by the contracting party.
Cash Flows. Host's cash flow from continuing operations in 1997, 1996 and
1995 totaled $464 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.
Host's cash used in investing activities from continuing operations in 1997,
1996 and 1995 totaled $1,046 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.
Host's cash from financing activities from continuing operations was $389
million for 1997, $806 million for 1996 and $204 million for 1995. Cash used in
financing activities was $213 million and $188 million, respectively, for the
First Two Quarters 1998 and First Two Quarters 1997. Host's cash from financing
activities primarily consists of the proceeds from debt and equity offerings,
the issuance of the Convertible Preferred
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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. Host 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 Host, including enabling its
shareholders and analysts to more easily compare Host'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 Host's cash
needs, including its ability to make distributions. Host'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
$61 million, or 42%, to $206 million in the First Two Quarters 1998.
Comparative FFO increased $131 million, or 80%, to $295 million in 1997. The
following is a reconciliation of Host'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...... $ 96 $ 32 $ 47 $ (13)
Real estate related depreciation and
amortization................................. 125 101 240 168
Other real estate activities.................. (52) 2 6 7
Partnership adjustments....................... (8) -- (13) 1
REIT Conversion expenses...................... 6 -- -- --
Deferred taxes................................ 39 10 15 1
------ ------ ----- -----
Comparative FFO............................. $ 206 $ 145 $ 295 $ 164
====== ====== ===== =====
</TABLE>
The Company considers Comparative FFO to be an indicative measure of Host's
operating performance due to the significance of Host's long-lived assets and
because such data is considered useful by the investment community to better
understand Host's results, and can be used to measure Host'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. Host 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, Host 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
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guarantees totaled $2 million and $13 million in 1997 and 1996, respectively.
Fundings by Host under these guarantees amounted to $10 million in 1997 and $8
million for 1995.
Leases. Host 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 Host and contain provisions for the payment of contingent
rentals based on a percentage of sales in excess of stipulated amounts. Host
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. Host'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 Host'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, Host 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, Host 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. Host'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 Host'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, Host has invested in implementing
new accounting systems which are Year 2000 compliant. Accordingly, Host
believes that future costs associated with Year 2000 issues will be minimal
and not material to Host's consolidated financial statements.
However, Host 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.
Accounting Standards. Host 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 Host'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, Host 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, Host recognized a non-cash, pre-tax
charge against earnings during the fourth quarter 1995 of $47 million, which
was reflected in discontinued operations.
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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 Host's financial statements.
During 1997, Host 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, Host 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.
Host'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, Host had no other comprehensive income.
As of June 19, 1998 and January 2, 1998, Host's accumulated other
comprehensive income was approximately $11 million and $10 million,
respectively.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
Host has considered the impact of EITF 97-2 on its financial statements and
has determined that EITF 97-2 requires the Company to include property-level
sales and operating expenses of its hotels and senior living communities in
its statements of operations. Host will adopt EITF 97-2 in the fourth quarter
of 1998, with retroactive effect in prior periods to conform to the new
presentation. Application of EITF 97-2 to the consolidated financial
statements for the twenty-four weeks ended June 19, 1998 would have increased
both revenues and operating expenses by approximately $993 million and would
have had no impact on operating profit, net income or earnings per share.
EITF 98-9, "Accounting for Contingent Rent in Interim Financial Periods",
was issued on May 21, 1998. EITF 98-9 requires a lessor to defer recognition
of contingent rental income in interim periods until the specified target that
triggers the contingent rental income is achieved.
EITF 98-9 has no impact on Host prior to the REIT Conversion and the Company
is reviewing the impact of EITF 98-9 on its leases.
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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 persons who
will be Trustees and executive officers of Host REIT after the REIT
Conversion:
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 Trustee of Host REIT will commence at
or prior to the REIT Conversion and will expire 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 Trustee of Host REIT will
commence at or prior to the REIT Conversion and will expire 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 Trustee of Host REIT will commence
at or prior to the REIT Conversion and will expire at the 2001 annual meeting
of shareholders.
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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 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 Trustee of Host REIT will commence at or
prior to the REIT Conversion and will expire 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 Trustee of Host REIT will commence at or prior to the REIT
Conversion and will expire 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 Trustee of Host REIT will commence at or prior to the REIT
Conversion and will expire 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.
Mr. Schreiber's term as a Trustee of Host REIT will commence at or prior to
the REIT Conversion and will expire at the annual meeting of
shareholders.
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 will be President
and Chief Executive Officer of Host REIT commencing at or prior to the REIT
Conversion and his term as a Trustee of Host REIT will commence at or prior to
the REIT Conversion and will expire 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.
Since September 1998, Mr. Parsons has been President and an initial Trustee of
Host REIT but he will resign from such positions upon or prior to the REIT
Conversion. Mr. Parsons will be Executive Vice President and Chief Financial
Officer of Host REIT commencing at or prior to the REIT Conversion.
Christopher J. Nassetta. Mr. Nassetta joined Host in October 1995 as
Executive Vice President and was elected Chief Operating Officer of Host in
1997. Mr. Nassetta will be Executive Vice President and Chief
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Operating Officer of Host REIT commencing at or prior to the REIT Conversion.
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. Since
September 1998, Mr. Townsend has been Vice President and an initial Trustee of
Host REIT but he will resign from such positions upon or prior to the REIT
Conversion. Mr. Townsend will be Senior Vice President, General Counsel and
Secretary of Host REIT commencing at or prior to the REIT Conversion.
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-- Corporate Accounting
in 1995. In 1996, he was elected Senior Vice President and Corporate
Controller. Since September 1998, Mr. Olinger has been Vice President of Host
REIT but he will resign from such position at or prior to the REIT Conversion.
Mr. Olinger will be Senior Vice President and Corporate Controller of Host
REIT commencing at or prior to the REIT Conversion. 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.
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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 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 $ 0 $ 22,668(8)
Chairman of the 1996 262,951 105,180 114,969(7) 0 0 21,439(8)
Board 1995 250,554 100,000 107,463(7) 0 0 12,634
Terence C. Golden(9).... 1997 619,045 557,141 58,783(10) 354,693 0 66,105
President and Chief 1996 600,017 480,013 0 10,476,603 0 560,827(11)
Executive Officer 1995 190,656 152,152 0 0 0 0
Robert E. Parsons, Jr... 1997 338,889 254,167 0 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,658,277 0 26,273
President and Chief 1995 213,767 123,649 0 0 0 10,951
Financial Officer
Christopher J.
Nassetta(9)............ 1997 338,889 254,167 0 0 0 36,231
Executive Vice 1996 328,447 263,490 0 3,647,513 0 119,168(11)
President and Chief 1995 78,000 50,700 0 0 0 0
Operating Officer
Christopher G.
Townsend............... 1997 202,962 111,629 0 1,015,800 0 18,405
Senior Vice President, 1996 186,232 102,428 0 0 0 15,891
General Counsel 1995 156,375 93,825 0 0 0 7,658
</TABLE>
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- --------
(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 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
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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 the
General Partners."
EMPLOYMENT AGREEMENTS
The Operating Partnership expects to have employment agreements with certain
of its executive officers but there is no assurance that this will be the
case. The terms of such agreements currently are under negotiation and are not
expected to be finalized until the Effective Date.
1998 EMPLOYEE BENEFITS ALLOCATION AGREEMENT
As part of the REIT Conversion, Host, the Operating Partnership and
Crestline expect to enter into an Employee Benefits Allocation Agreement and
Other Employment Matters Agreement ("1998 Employee Benefits Allocation
Agreement"). The 1998 Employee Benefits Allocation Agreement is expected to
govern the allocation of responsibilities with respect to various benefits and
labor matters. Under the 1998 Employee Benefits Allocation Agreement,
Crestline is expected to assume from Host certain liabilities relating to
covered benefits and labor matters with respect to individuals who are
employed by Host or its affiliates before the Effective Date who will be
employed by Crestline or its affiliates is expected to govern the treatment of
awards under on or after the Effective Date ("Transferred Employees") and the
Operating Partnership is expected to assume from Host all other liabilities
relating to employee benefits and labor matters. The 1998 Employee Benefits
Allocation Agreement is expected to govern the treatment of awards under the
Host Marriott Corporation 1997 Comprehensive Stock Incentive Plan, formerly
called the Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
(the "Comprehensive Stock Incentive Plan"),as part of the REIT Conversion. The
1998 Employee Benefits Allocation Agreement is expected to require Crestline
to establish the Crestline Capital Corporation 1998 Comprehensive Stock
Incentive Plan to grant awards to Transferred Employees. Additionally, the
1998 Employee Benefits Allocation Agreement is expected to provide that the
Operating Partnership will adopt the Comprehensive Stock Incentive Plan for
awards held by an individual other than a Transferred Employee.
COMPREHENSIVE STOCK INCENTIVE PLAN
Host sponsors the Comprehensive Stock Incentive Plan for purposes of
attracting and retaining highly qualified employees. Host has reserved
44,442,911 shares of Host common stock for issuance pursuant to the
Comprehensive Stock Incentive Plan. As part of the REIT Conversion, the
Comprehensive Stock Incentive Plan is expected to be adopted by the Operating
Partnership. Shares of Host common stock issued or reserved under the
Comprehensive Stock Incentive Plan are expected to be exchanged for Host REIT
Common Shares and Crestline common stock, according to the terms of the 1998
Employee Benefit Allocation Agreement.
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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.
The Operating Partnership intends to continue to award options under the
Comprehensive Stock Incentive Plan after the REIT Conversion. Options granted
to officers and key employees of the Operating Partnership will 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, the Operating Partnership 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. The
Operating Partnership intends to award 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, the
Operating Partnership 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, the
Operating Partnership intends to award SARs on Host REIT Common Shares.
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, the Operating Partnership 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. The Company expects to continue the Stock Purchase
Plan after the REIT Conversion.
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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 are
expected to be converted to Host REIT Common Shares and Crestline common
stock. After the REIT Conversion, the Operating Partnership expects to allow
the 401(k) Plan's participants to elect to invest all or part of their plan
benefits in Host REIT Common Shares.
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, the Operating Partnership expects to allow participants 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.
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
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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.
INDEMNIFICATION AGREEMENTS
Host REIT intends to enter into indemnification agreements with each of its
trustees and officers. The indemnification agreement will require, among other
things, that Host REIT indemnify its trustees and officers to the fullest
extent permitted by law and advance to its trustees and officers all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted.
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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 the following limitations intended to
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protect the REIT status of Host REIT. The Marriott International Purchase
Right will be exercisable only to the extent that neither (i) Marriott
International or any entity in which it has a direct or indirect interest and
which would be deemed, under the applicable attribution rules, to own the
shares of Host REIT owned by Marriott International or which would be deemed
to own, taking into account the applicable attribution rules, more than 9.8%
of Crestline, any subsidiary of Crestline or any other tenant of Host REIT nor
(ii) any owners of direct or indirect interests in Marriott International
would, as a result of such exercise, own, taking into account the applicable
attribution rules, more than 9.8% of both Host REIT and Crestline, any
subsidiary of Crestline or any other tenant of Host REIT. In addition to the
foregoing limitation, the Marriott International Purchase Right will be
exercisable only if such acquisition and ownership of Host REIT Shares would
not cause the Operating Partnership to be considered to own, directly or by
attribution, 10% or more of Crestline, any subsidiary of Crestline or any
other tenant of Host REIT.
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
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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 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
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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.
(c) 1993 Employee Benefits Allocation Agreement. Host and Marriott
International have entered into an Employee Benefits Allocation and Other
Employment Matters Agreement ("1993 Employee Benefits Allocation
Agreement") that provides for the allocation of certain responsibilities
with respect to employment compensation, benefit and labor matters. The
1993 Employee Benefits Allocation Agreement was amended as of March 27,
1998 to: (i) reflect various conversions and redenominations that were
necessary as a result of the spin-off and acquisitions described in
Marriott International's February 12, 1998 Proxy, and to add New Marriott
MI, Inc. (renamed Marriott International, Inc.) as a party to the 1993
Employee Benefits Allocation Agreement. In general, the 1993 Employee
Benefits Allocation Agreement provides that Host retained all employee
liabilities for employees who on or after the Marriott International
Distribution were employees of Host, and that old Marriott International,
Inc., which was renamed SMS, in 1998, retained all liabilities for
employees who on after the Marriott Distribution were employees of Marriott
International. Pursuant to the 1993 Employee Benefits Allocation Agreement,
and in connection with the Marriott Distribution, Host also adjusted
outstanding awards under the Host employee benefit plans. The 1993 Employee
Benefits Allocation Agreement will be amended to add Crestline as a party
to the agreement and to reflect the 1998 Employee Benefits Allocation
Agreement.
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,
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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) 1995 Employee Benefits Allocation Agreement. Host and HM Services
have entered into an Employee Benefits Allocation and Other Employment
Matters Agreement (the "1995 Employee Benefits Allocation Agreement") that
provides for the allocation of certain responsibilities with respect to
employee compensation, benefits and labor matters. In general, the 1995
Employee Benefits Allocation Agreement provides that Host retain all
employee liabilities for employees who on or after the HMSC Distribution
were 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 1995 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 July 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....... 15,500 *
Robert M. Baylis........ 13,500 *
Terence C. Golden(6).... 781,684 *
J.W. Marriott,
Jr.(6)(7)(8)........... 13,275,014 6.49
Richard E.
Marriott(6)(8)(9)...... 13,203,209 6.45
Ann Dore McLaughlin..... 9,500 *
John G. Schreiber....... 0 0
Harry L. Vincent, Jr.... 25,100 *
Christopher J
Nassetta(6)............ 356,201 *
Robert E. Parsons,
Jr.(6)................. 404,244 *
Christopher G.
Townsend(6)............ 109,417 *
Blackstone
Entities(11)........... 0 0
Dresdner RCM Global
Investors LLC(12)...... 13,595,975 6.65
FMR Corp.(13)........... 22,532,574 11.02
Southeastern Asset
Management, Inc.(14)... 36,758,000 17.98
ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A
GROUP (11
PERSONS)(6)(10)........ 24,209,204 11.84
</TABLE>
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(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 July 31, 1998: for J.W. Marriott, Jr., 810,447 shares;
for Richard E. Marriott, 55,700 shares; for Mr. Parsons, 15,225 shares;
for Mr. Townsend, 6,975 shares; and for all directors and executive
officers as a group, 913,147 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) 704,555 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 25,179,933
shares, or 12.31% of the total shares outstanding of Host common stock as
of July 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 1,757,788 shares, or
0.86% of the total shares outstanding of Host common stock as of July 31,
1998. In addition, Host's Retirement and Savings Plan owned 65,257
shares, or 0.03% of the total shares outstanding of Host common stock as
of July 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 7.64% of the total shares
outstanding of Host common stock as of July 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
21,730,700 shares, shared dispositive power over 14,968,300 shares and no
dispositive power over 59,000 shares. Of these shares, SAM has reported
sole voting power over 18,338,100 shares, shared voting power over
14,968,300 shares and no power to vote 3,451,600 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 Common Shares or Notes will tender (or be deemed to have tendered)
the OP Units they receive to the Operating Partnership in exchange for Common
Shares or Notes. See "The Mergers and the REIT Conversion--The Mergers--
Issuance of OP Units," "--Right to Exchange OP Units for Common Shares" and
"--Right to 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--Certain
Provisions of Maryland Law and Host REIT's Declaration of Trust and Bylaws."
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
Deduction."
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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
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 determined in good faith by the General
Partner to be 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 10% 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 Crestline 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 form of the Amended and Restated
Declaration of Trust (the "Declaration of Trust") and Bylaws of Host REIT to
be effective upon completion of the merger of Host with and into 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 initially will provide that Host REIT
may issue up to 750 million Common Shares and 50 million preferred shares. As
of September 9, 1998, 100 Common Shares were issued and outstanding. As
permitted by the Maryland REIT Law, the Declaration of Trust will contain 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 or series of shares of beneficial interest that Host
REIT has authority to issue. The Board of Trustees, without any action by the
shareholders of Host REIT, also will have the authority to classify or
reclassify unissued shares of any class or series and to cause such shares to
be issued.
Under the Maryland REIT Law, a shareholder of Host REIT will not be
personally liable for the obligations of Host REIT solely as a result of his
status as a shareholder of Host REIT. Host REIT's Declaration of Trust
provides that no shareholder shall be liable for any debt or obligation of
Host REIT by reason of being a shareholder nor shall any shareholder be
subject to any personal liability in tort, contract or otherwise to any person
in connection with the property or affairs of Host REIT by reason of being a
shareholder. 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. Subject to the provisions of Host REIT's
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Declaration of Trust regarding restrictions on transfer or as otherwise
provided in the Declaration of Trust, Common Shares have equal distribution,
liquidation and other rights.
Pursuant to the Maryland REIT Law, a Maryland REIT, subject to certain
exceptions, cannot 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 be cast 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 will permit such action by the Board of Trustees.
The Declaration of Trust will authorize the Board of Trustees to reclassify
any unissued Common Shares into other classes or series of beneficial interest
and to establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED SHARES
The Declaration of Trust will authorize the Board of Trustees to issue 50
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. As permitted by the Maryland
REIT Law, the Declaration of Trust also contains a provision permitting the
Board of Trustees, without any action of 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 or series
of beneficial interest that Host REIT has authority to issue, including
preferred shares. 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. Although the
Board of Trustees has no intention at the present time of doing so (other than
in connection with the proposed Shareholders Rights Plan), it could authorize
Host REIT to issue a class or series of shares 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.
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.
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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).
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 Host REIT's Board of Trustees intends to
grant an exception (pursuant to the applicable provisions of the Declaration
of Trust) 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 (i) 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 Crestline or any of the Lessees and (ii) such
ownership of Host REIT shares would not cause the Operating Partnership to be
considered to own, directly or by attribution, 10% or more of Crestline 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 Crestline 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 has the authority to increase the
Ownership Limit from time to time, but does 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 (i) 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 (ii) any person
from transferring shares
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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 (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.
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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.
These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of Common Shares might receive a premium for their Common Shares
over the then prevailing market price or which such holders might believe to
be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Shares will be .
CERTAIN PROVISIONS OF MARYLAND LAW AND HOST REIT'S DECLARATION OF TRUST AND
BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of Host REIT does not purport to be complete
and is subject to and qualified in its entirety by reference to Maryland law
and the forms of the Declaration of Trust and Bylaws of Host REIT to be
effective upon completion of the merger of Host with and into Host REIT.
The Declaration of Trust and Bylaws of Host REIT will contain certain
provisions that could make more difficult an acquisition or change in control
of Host REIT by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage person seeking to
acquire control of Host REIT to negotiate first with the Board of Trustees.
Host REIT believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. See also "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
NUMBER OF TRUSTEES; CLASSIFICATION AND REMOVAL OF BOARD OF TRUSTEES; OTHER
PROVISIONS
The Declaration of Trust will provide that the Board of Trustees initially
will consist of eight members and may thereafter be increased or decreased in
accordance with the Bylaws of Host REIT, provided that the total number of
trustees may not be fewer than three nor more than 13. Pursuant to Host REIT's
Bylaws, the number of trustees shall be fixed by the Board of Trustees within
the limits set forth in the Declaration of Trust. Further, the Declaration of
Trust will provide that the Board of Trustees will be divided into three
classes of trustees, with each class to consist as nearly as possible of an
equal number of trustees. The term of office of the first class of trustees
will expire at the 1999 annual meeting of shareholders; the term of the second
class of trustees will expire at the 2000 annual meeting of shareholders; and
the term of the third class of trustees will expire at the 2001 annual meeting
of shareholders. At each annual meeting of shareholders, the class of trustees
to be elected at such meeting will be elected for a three-year term, and the
trustees in the other two classes will continue in office. Because
shareholders will have no right to cumulative voting for the election of
trustees, at each annual meeting of shareholders the holders of a majority of
the Common Shares will be able to elect all of the successors to the class of
trustees whose term expires at that meeting.
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Host REIT's Declaration of Trust also will provide that, except for any
trustees who may be elected by holders of a class or series of shares of
beneficial interest other than the Common Shares, trustees may be removed only
for cause and only by the affirmative vote of shareholders holding at least
two-thirds of the shares then outstanding and entitled to be cast for the
election of trustees. Vacancies on the Board of Trustees may be filled by the
concurring vote of a majority of the remaining trustees and, in the case of a
vacancy resulting from the removal of a trustee by the shareholders, by the
shareholders. Under Maryland law, trustees may fill any vacancy only until the
next annual meeting of shareholders. A vote of shareholders holding at least
two-thirds of all the votes entitled to be cast thereon is required to amend,
alter, change, repeal or adopt any provisions inconsistent with the foregoing
classified board and trustee removal provisions. These provisions may make it
more difficult and time-consuming to change majority control of the Board of
Trustees of Host REIT and, thus, may reduce the vulnerability of Host REIT to
an unsolicited proposal for the takeover of Host REIT or the removal of
incumbent management.
Because the Board of Trustees will have the power, without a vote of
shareholders, (i) to establish the preferences and rights of additional series
of beneficial interest and (ii) to increase or decrease the number of
authorized Common Shares and preferred shares, the Board of Trustees may
afford the holders of any series of senior shares of beneficial interest
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Shares. The issuance of any such senior shares of beneficial
interest could have the effect of delaying, deferring or preventing a change
in control of Host REIT. See "Description of Shares of Beneficial Interest."
See "Management--Limitation on Liability and Indemnification" for a
description of the limitations on liability of trustees and officers of Host
REIT and the provisions for indemnification of trustees and officers provided
for under applicable Maryland law and the Declaration of Trust.
CHANGES IN CONTROL PURSUANT TO MARYLAND LAW
Maryland Business Combination Law. Under the MGCL, as applicable to 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.
Maryland Control Share Acquisition Law. 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
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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.
AMENDMENTS TO THE DECLARATION OF TRUST AND BYLAWS
The Declaration of Trust, including its provisions on classification of the
Board of Trustees, restrictions on transferability of Common Shares and
removal of trustees, generally may be amended only by a resolution adopted by
the Board of Trustees and approved at an annual or special meeting of the
shareholders by the affirmative vote of the holders of not less than two-
thirds of all the votes entitled to be cast on the matter. Under the Maryland
REIT Law, a declaration of trust may permit the trustees by a two-thirds vote
to amend the declaration to qualify as a REIT under the Code or the Maryland
REIT Law without the affirmative vote or written consent of shareholders. The
Declaration of Trust will permit such action by the Board of Trustees. As
permitted under the Maryland REIT Law, the Declaration of Trust also will
authorize the Board of Trustees, without a vote of shareholders, to increase
or decrease the authorized number of common or preferred shares and to
classify or reclassify any unissued common or preferred shares into another
class or series of shares.
The Bylaws of Host REIT provide that trustees have the exclusive right to
amend the Bylaws.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws of Host REIT provide that (i) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by shareholders may be made only
(A) pursuant to Host REIT's notice of meeting, (B) by the Board of Trustees or
(C) by a shareholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws and (ii) with
respect to special meetings of the shareholders, only the business specified
in Host REIT's notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the Board of Trustees
may be made only (A) pursuant to Host REIT's notice of the meeting, (B) by the
Board of Trustees or (C) provided that the Board of Trustees has determined
that trustees shall be elected at such meeting, by a shareholder who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws. The advance notice provisions contained in
the Bylaws generally require nominations and new business proposals by
shareholders to be delivered to the Secretary of Host REIT not later than the
close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting of shareholders.
MEETINGS OF SHAREHOLDERS; CALL OF SPECIAL MEETINGS; SHAREHOLDER ACTION IN
LIEU OF MEETING BY UNANIMOUS CONSENT
Host REIT's Bylaws provide that annual meetings of shareholders shall be
held on a date and at the time set by the Board of Trustees during the month
of May each year (commencing in May 1999). Special meetings
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of the shareholders may be called only by the Board of Trustees of Host REIT.
Pursuant to the Declaration of Trust and Bylaws of Host REIT, any action
required or permitted to be taken by the shareholders must be effected at a
duly called annual or special meeting of shareholders and may not be effected
by any consent in writing by shareholders, unless such consent is unanimous.
MERGER, CONSOLIDATION AND TRANSFER OF ALL OF SUBSTANTIALLY ALL OF THE ASSETS
OF HOST REIT
Pursuant to the Declaration of Trust, subject to the terms of any class or
series of shares at the time outstanding, Host REIT may merge with or into
another entity, but any such merger must be approved (i) by the Board of
Trustees in the manner provided in the Maryland REIT Law and (ii) by
shareholders to the extent required in the Maryland REIT Law. In general,
under the Maryland REIT Statute, mergers of a Maryland real estate investment
trust, such as Host REIT, with or into another entity must first be approved
by a majority of the entire Board of Trustees and thereafter approved by
shareholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter (unless the declaration of trust provides for a
lesser shareholder vote but not less than a majority of the number of votes
entitled to be cast on the matter). Host REIT's Declaration of Trust does not
provide for a lesser vote. Notwithstanding the foregoing, certain mergers
under the Maryland REIT Law may be accomplished without a vote of
shareholders. For example, no shareholder vote is required for a merger of a
subsidiary of a Maryland real estate investment trust with or into its parent,
provided the parent owns at least 90% of the subsidiary. In addition, a merger
need not be approved by shareholders if the merger does not reclassify or
change its outstanding shares or otherwise amend its declaration of trust, and
the number of shares to be issued or delivered in the merger is not more than
20% of the number of its shares of the same class or series outstanding
immediately before the merger becomes effective.
Subject to the terms of any class or series of shares at the time
outstanding, under the Declaration of Trust Host REIT also may (a) to the
extent permitted by law, consolidate Host REIT with one or more other entities
into a new entity or (b) sell, lease, exchange, or otherwise transfer all or
substantially all of the assets of Host REIT, but any such action must be
approved by the Board of Trustees and, after notice to all shareholders
entitled to vote on the matter, by the affirmative vote of two-thirds of all
the votes entitled to be cast on the matter (or such higher vote as may be
required by law). The following transactions will not constitute "a sale,
lease, exchange, or other transfer of all or substantially all of the assets
of Host REIT" for purposes of such provision and the requirement of
shareholder approval thereof: a sale, lease, exchange, or other transfer of
all or substantially all of the assets of Host REIT in the ordinary course of
business actually conducted by it; a mortgage, pledge or creation of any other
security interest in any or all of the assets of Host REIT, whether or not in
the ordinary course of its business; an exchange of shares of stock through
voluntary action under any agreement with shareholders; or a sale, lease,
exchange, or other transfer of all or substantially all of the assets of Host
REIT to one or more persons if all the equity interests of the person or
persons are owned, directly or indirectly, by Host REIT. The voluntary
dissolution of Host REIT also would require the affirmative vote of two-thirds
of all the votes entitled to be cast on the matter under the Declaration of
Trust.
DETERMINATION OF ADVISABILITY OF MERGERS, CONSOLIDATIONS, TRANSFERS OF ALL
OR SUBSTANTIALLY ALL OF THE ASSETS OF HOST REIT OR OTHER BUSINESS
COMBINATIONS
The Declaration of Trust will provide that, in determining whether a merger,
consolidation, transfer of all or substantially all of the assets of Host REIT
or other business combination involving Host REIT is advisable, a trustee
shall consider the interests of the shareholders of Host REIT, and, in his
sole discretion, may consider (i) the interests of Host REIT's employees,
suppliers, creditors and customers, (ii) the economy of the nation, (iii)
community and societal interests and (iv) the long-term as well as short-term
interests of Host REIT and its shareholders, including the possibility that
such interests may be best served by the continued independence of Host REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination and control share provisions of the MGCL, the
provisions of the Declaration of Trust on classification of the Board of
Trustees, fixing the size of the Board of Trustees within a specified range,
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and removal of trustees, the provisions authorizing the Board of Trustees,
without a shareholder vote, to increase or decrease the authorized number of
common or preferred shares and to classify or reclassify any unissued class or
series of shares into another class or series of shares, the requirement that
shareholders acting in lieu of a meeting may do so only by unanimous written
consent and the provisions relating to mergers, consolidations and transfers
of all or substantially all of the assets of Host REIT, the provisions for
amending the Declaration of Trust and Bylaws, the advance notice provisions of
the Bylaws, the inability of shareholders to call special meetings, as well as
the transfer restrictions that will be contained in the Declaration of Trust
which are intended to help Host REIT to satisfy certain requirements under the
Code to qualify as a REIT for federal income tax purposes could 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 interests.
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 in effect after the Mergers (until June 2017), subject to certain
limitations intended to help 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.
SHAREHOLDER RIGHTS PLAN
Host currently has in effect a stockholder rights plan, and it has preferred
stock purchase rights attached to its common stock pursuant to such rights
plan. Prior to the completion of the merger of Host with and into Host REIT,
the Board of Trustees intends to adopt a Shareholder Rights Plan ("Rights
Agreement") to replace the existing Host plan and declare a dividend of one
preferred share purchase right (a "Right") for each outstanding Common Share.
All Common Shares issued by Host REIT between the date of adoption of the
Rights Agreement and the Distribution Date (as defined below), or the date, if
any, on which the Rights are redeemed would have Rights attached to them. Its
expected that the Rights will expire ten years after adoption of the Rights
Agreement, unless earlier redeemed or exchanged. Each Right, when exercisable,
would entitle the holder to purchase a fraction of a share of a newly created
series of junior participating preferred shares. Until a Right is exercised,
the holder thereof, as such, would have no rights as a shareholder of Host
REIT including, without limitation, the right to vote or to receive dividends.
The Rights Agreement is expected to provide that the Rights initially attach
to all certificates representing Common Shares then outstanding. The Rights
would separate from the Common Shares and a distribution of Rights
certificates would occur (a "Distribution Date") upon the earlier to occur of
(i) ten days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding Common Shares (the "Share Acquisition Date") or (ii) ten business
days (or such later date as the Board of Trustees may determine) following the
commencement of a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person of 20% or more of the
outstanding Common Shares. Until the Distribution Date, the Rights would be
evidenced by the Common Share certificates, and would be transferred with, and
only with, the Common Share certificates.
It is expected that, if a Person becomes the beneficial owner of 20% or more
of the then outstanding Common Shares (except pursuant to an offer for all
outstanding Common Shares which the Outside Trustees determine to be fair to
and otherwise in the best interests of Host REIT and its shareholders), each
holder of a Right would, after the end of a redemption period, have the right
(subject to the Ownership Limit and the other ownership restrictions contained
in the Declaration of Trust) to exercise the Right by purchasing Common Shares
(or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to two times such amount.
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If at any time following the Share Acquisition Date, (i) Host REIT is
acquired in a merger or other business combination transaction in which it is
not the surviving corporation (other than a merger which follows an offer
described in the preceding paragraph), or (ii) 50% or more of Host REIT's
assets or earning power is sold or transferred, each holder of a Right would
have the right to receive, upon exercise, common shares of the acquiring
company having a value equal to two times the purchase price of the Right,
subject to the Ownership Limit and the other ownership restrictions contained
in the Declaration of Trust.
It is expected that, in general, the Board of Trustees of Host REIT may
redeem the Rights at a price of $.005 per Right at any time until ten days
after an Acquiring Person has been identified as such. If the decision to
redeem the Rights occurs after a person becomes an Acquiring Person, the
decision will require the concurrence of a majority of the Continuing
Trustees, defined as any member of the Board of Trustees who was a member of
the Board of Trustees prior to the date of the Rights Agreement, and any
person who is subsequently elected to the Board if such person is recommended
or approved by a majority of the Continuing Trustees. The term "Outside
Trustees" means "Continuing Trustees" who are not officers of Host REIT.
The Rights would have certain anti-takeover effects. The Rights would cause
substantial dilution to a person or group that attempts to acquire Host REIT.
The Rights, however, would not interfere with any merger or other business
combination approved by the Board of Trustees since the Board may, at its
option, at any time prior to any person becoming an Acquiring Person, redeem
all rights or amend the Rights Agreement to exempt the person from the Rights
Agreement.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires that Host REIT hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade, short-term securities and receivables.
The Maryland REIT Law also prohibits using or applying land for farming,
agricultural, horticultural or similar purposes.
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DESCRIPTION OF THE NOTES
The Notes will be issued under the Indenture between the Operating
Partnership and Marine Midland Bank, 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. 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 "--Limitation 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.
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, 80% of the Exchange Value for such
Partnership.
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The Notes will bear interest at a fixed rate of interest equal to 6.56% 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 in the Indenture. Interest on the Notes
will be computed on the basis of a 360 day year of twelve 30- day months.
The principal of each Note payable on the Maturity Date will be paid against
presentation and surrender of such Note at an office or agency maintained by
the Operating Partnership in New York City (the "Paying Agent") in United
States dollars. Initially, the Indenture Trustee will act as Paying Agent.
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").
In the event that, following the closing of the Mergers, any Partnership (i)
sells or otherwise disposes of any Hotel owned by the Partnership immediately
prior to the Merger 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 owned by the Partnership immediately prior to the Merger 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 (in either case, "Net Cash Proceeds"), the Operating
Partnership will be required within 90 days of the receipt of the total Net
Cash Proceeds to prepay at the Redemption Price an aggregate amount of
principal of the particular series of the Notes which were issued to the
Holders who were partners of such Partnership prior to the REIT Conversion
equal to 80% of such Net Cash Proceeds.
If the Paying Agent (other than the Operating Partnership, any of its
Subsidiaries or an affiliate thereof) holds on the redemption date of any
Notes money sufficient to pay such Notes, then on and after that date such
Notes will cease to be outstanding and interest on them will cease to accrue.
Notice of any optional or mandatory 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, the Indenture
Trustee shall select, in such manner as it shall deem fair and appropriate,
the Notes to be redeemed in whole or in part.
LIMITATION ON INCURRENCE OF INDEBTEDNESS
The Operating Partnership will not, and will not permit any of its
Subsidiaries to, incur any indebtedness (including acquired indebtedness)
other than intercompany indebtedness (representing indebtedness to which the
only parties are the Operating Partnership, Host REIT and/or any of their
subsidiaries, but only so long as such indebtedness is held solely by any of
such parties) that is subordinate in right of payment to the Notes, if
immediately after giving effect to the incurrence of such indebtedness, the
aggregate principal amount of all outstanding indebtedness of the Operating
Partnership and its Subsidiaries on a consolidated basis, determined in
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accordance with GAAP, is (i) greater than 60% of the Total Market
Capitalization of the Operating Partnership or (ii) greater than 75% of the
Operating Partnership's Total Assets.
As used in the Indenture and the description thereof herein:
"Subsidiary" means (i) a corporation, partnership, limited liability
company, trust, REIT 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, (ii) a partnership, limited liability company, trust, REIT or
other entity not treated as a corporation for federal income tax purposes,
a majority of the equity interests of which are owned, directly or
indirectly, by the Operating Partnership or a Subsidiary of the Operating
Partnership, or (iii) one or more corporations which, either individually
or in the aggregate, would be Significant Subsidiaries (as defined below,
except that the investment, asset and equity thresholds for purposes of
this definition shall be 5%), the majority of the value of the equity
interests of which are owned, directly or indirectly, by the Operating
Partnership or by one or more Subsidiaries.
"Total Assets" means the sum of (i) Undepreciated Real Estate Assets and
(ii) all other assets (excluding intangibles) of the Operating Partnership
and its Subsidiaries determined on a consolidated basis (it being
understood that the accounts of Subsidiaries shall be consolidated with
those of the Operating Partnership only to the extent of the Operating
Partnership's proportionate interest therein).
"Total Market Capitalization" means, as of any date, the sum of (i) the
product of (x) the closing price of a Common Share of Host REIT 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 preference of all outstanding preferred units of
limited partnership interest in Operating Partnership, plus (iii) the
aggregate principal amount of all outstanding indebtedness 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 indebtedness on such date and the application of the proceeds thereof).
"Undepreciated Real Estate Assets" means, as of any date, the cost (being
the original cost to the Operating Partnership or any of its Subsidiaries
plus capital improvements) of real estate assets of the Operating
Partnership and its Subsidiaries on such date, before depreciation and
amortization of such real estate assets, determined on a consolidated basis
(it being understood that the accounts of Subsidiaries shall be
consolidated with those of the Operating Partnership only to the extent of
the Operating Partnership's proportionate interest therein).
MERGER, CONSOLIDATION OR SALE
The Operating Partnership will not merge with or into, sell, lease, convey,
or transfer, or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially as an entirety in one transaction
or a series of related transactions) to or consolidate with any individual,
corporation, limited liability company, partnership, joint venture,
association, joint stock company, trust, REIT, unincorporated organization or
government or any agency or political subdivision thereof (any such entity, a
"Person") or permit any Person to merge with or into the Operating
Partnership, unless: (i) either the Operating Partnership shall be the
continuing Person or the Person (if other than the Operating Partnership)
formed by such consolidation or into which the Operating Partnership is merged
or that acquired such property and assets of the Operating Partnership shall
be an entity organized and validly existing under the laws of the United
States of America or any state or jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Indenture
Trustee, all of the obligations of the Operating Partnership, on the Notes and
under the Indenture; (ii) immediately after giving effect, on a pro forma
basis, to such transaction, no Event of Default shall have occurred and be
continuing; and (iii) the Operating Partnership will have delivered to the
Indenture Trustee an officers' certificate and an opinion of counsel, in each
case stating that such consolidation, merger or transfer and such supplemental
indenture complies such conditions.
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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
receipt of the total Net Cash Proceeds from the applicable sale or other
disposition or refinancing 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; and (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.
The term "Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Operating Partnership (as defined by Regulation S-X
promulgated under the Securities Act).
If an Event of Default under the Indenture occurs and is continuing, then in
every such case other than a bankruptcy-related Event of Default as described
in (v) above, in which case the principal amount of the Notes shall ipso facto
become immediately due and payable, the Indenture Trustee or the Holders of
not less than 25% in principal amount of the outstanding Notes 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 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) and
interest on the Notes have been cured or waived. The Indenture provides that
the Holders of not less than a majority of the principal amount of the
outstanding Notes of a series 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 on any Note or (y) in respect of a covenant or
provision contained in the Indenture that cannot be modified or amended
without the consent of the Holder of each outstanding Note affected thereby.
The Indenture Trustee will be required to give notice to the Holders of
Notes within 90 days of a default under the Indenture unless such default has
been cured or waived; provided, however, that the Indenture Trustee may
withhold notice to the Holders of any default (except a default in the payment
of the principal of or interest on any Note or in the payment of any mandatory
prepayment installment in respect of any Note) if specified Responsible
Officers (as defined in the Indenture) of the Indenture Trustee consider such
withholding to be in the interest of such Holders.
The Indenture provides that no Holders of Notes may institute any
proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Indenture Trustee, for
60 days, to act after it has received a written request to institute
proceedings in respect of an Event of Default from the Holders of not less
than 25% in principal amount of the outstanding Notes, as well as an offer of
indemnity reasonably satisfactory to it. This provision will not prevent,
however, any Holder of Notes from instituting suit for the enforcement of
payment of the principal of and 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 under the Indenture, unless such Holders
shall have offered to the Indenture Trustee thereunder reasonable security or
indemnity. The Holders of not less than a majority in principal amount of the
outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee,
or of exercising any trust or power conferred upon the Indenture
Trustee. However, the Indenture Trustee may refuse to follow any direction
which is in conflict with any law or
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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 120 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
by the Operating Partnership and the Indenture Trustee without the consent of
any Holder of Notes for any of the following purposes: (i) to cure any
ambiguity, defect or inconsistency in the Indenture; (ii) to evidence the
succession of another Person to the Operating Partnership as obligor under the
Indenture; (iii) to permit or facilitate the issuance of the Notes in
uncertificated form; (iv) to make any change that does not adversely affect
the rights of any Holder of Notes; (v) to provide for the issuance of and
establish the form and terms and conditions of the Notes of any series as
permitted by the Indenture; (vi) to add to the covenants of the Operating
Partnership or to add Events of Default for the benefit of Holders or to
surrender any right or power conferred upon the Operating Partnership in the
Indenture; (vii) to evidence and 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 provide for
guarantors or collateral for the Notes of any series; or (xi) to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Modifications and amendments of the Indenture, other than those described
above, will be permitted to be made only with the consent of the Holders of
not less than a majority in principal amount of all outstanding Notes which
are affected by such modification or amendment; provided, however, that no
such modification or amendment may, without the consent of the Holders of each
such Note affected thereby, (i) change the stated maturity of the principal of
or 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 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) waive a
default in the payment of principal of or interest on the Notes (other than a
recission of acceleration of the Notes of any series and a waiver of the
payment default that resulted from such acceleration, as provided in the
Indenture); or (vi) reduce the percentages of outstanding Notes of any series
necessary to modify or amend the Indenture or to waive compliance with certain
provisions thereof or certain defaults and consequences.
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.
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 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, and delivering to the Indenture Trustee an officers' certificate and a
legal opinion stating that the conditions precedent to such discharge have
been complied with.
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 125
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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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, (v) any pealable judgment ruling
event that makes it un- that the general partner
lawful for the business is bankrupt or insolvent
of the Partnership to be (except that, in either
carried on or for the such case, in certain
Partners to carry it on circumstances the lim-
in a limited partnership ited partners (other
or (vi) upon the agree- than Host REIT) may vote
ment of the Partners. to continue the Operat-
Partners are entitled to ing Partnership and sub-
receive cash distribu- stitute a new general
tions out of the Part- partner in place of Host
nership's net operating REIT), or (iv) on or af-
income, if any, and to ter December 31, 2058,
receive cash distribu- on election by Host
tions, if any, upon re- REIT, in its sole and
financing of a Partner- absolute discretion. The
ship's debt or liquida- Operating Partnership
tion of the Partner- has no specific plans
ship's real estate in- for disposition of the
vestments. See "Back- assets acquired through
ground and Reasons for the REIT Conversion or
the Mergers and the REIT that may be subsequently
Conversion--Background acquired. To the extent
of the Partnerships." 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 to 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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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, except for
for such Partnership Unit Redemption Right. Common Shares held by
Units. The trading vol- Upon redemption, such affiliates. The Common
ume of such Partnership limited partner will Shares will be listed on
Units in the resale mar- receive, at the election the NYSE. A public mar-
ket is thin and the of Host REIT, either ket currently exists for
prices at which Partner- Common Shares of Host Host's common stock. The
ship Units trade are REIT or the cash breadth and strength of
generally not equal to equivalent thereof in this market will depend
their net asset value. exchange for such OP upon, among other
No Limited Partner can Units. A limited partner things, the number of
require a Partnership to may in certain Common Shares outstand-
dispose of the Partner- circumstances transfer ing, Host REIT's finan-
ship's assets or redeem his OP Units. See cial results and pros-
the Limited Partner's "Description of OP pects and the general
interest in the Partner- Units--Restrictions on interest in Host REIT's
ship. Transfers of Interests dividend yield compared
by Limited Partners." to that of other debt
and equity securities.
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, except for Common Shares held by affiliates. 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
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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 125 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 125 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.
193
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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ADDITIONAL EQUITY/POTENTIAL DILUTION
Each Partnership was de- The Operating Partner- Host REIT may issue ad-
signed as a finite-life ship is authorized to ditional equity securi-
investment vehicle. None issue OP Units and other ties, including shares
of the Partnerships are partnership interests of beneficial interest
authorized to raise ad- (including partnership which may be classified
ditional funds for (or interests of different as one or more classes
reinvest net sale or re- series or classes that or series of common or
financing proceeds in) may be senior to OP preferred shares and
new investments, absent Units) as determined by contain certain prefer-
amendments to their Host REIT, in its sole ences, in the discretion
partnership agreements discretion, including in of the Board of Trust-
or approval of a major- connection with acquisi- ees. Any proceeds from
ity of the outstanding tions of properties. The the issuance of equity
limited partnership in- Operating Partnership securities by Host REIT
terests. Since such may issue OP Units and must be contributed to
Partnerships were not other partnership inter- the Operating Partner-
structured to issue ad- ests to Host REIT, as ship in exchange for OP
ditional equity securi- long as such interests Units or corresponding
ties, there is little are issued in connection equity interests in the
chance of dilution of with a comparable issu- Operating Partnership.
the partners' share of ance of Common Shares or The issuance of addi-
cash available for dis- other equity interests tional equity securities
tribution. of Host REIT and pro- by Host REIT may result
ceeds raised in connec- in the dilution of the
tion with the issuance interests of the share-
of such shares are con- holders, as well as in-
tributed to the Operat- terests of holders of OP
ing Partnership. In ad- Units in the Operating
dition, the Operating Partnership. See "Dis-
Partnership may issue tribution and Other
additional OP Units upon Policies--Investment
exercise of the options Policies."
granted pursuant to op-
tion plans or restricted
shares issued under re-
stricted share plans or
other employee benefit
plans adopted by Host
REIT.
194
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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FINANCING 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--Financing 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 60% or less.
The Board of Trustees
could alter or eliminate
this policy. See "Dis-
tribution and Other Pol-
icies--Financing 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.
195
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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. Host REIT intends
dition to such Partner- ating Partnership funds to adopt a policy which
ship's current assets. or reinvesting the Oper- requires that all mate-
None of the Partnerships ating Partnership's cash rial contracts and
are authorized to raise flow and net sale or re- transactions between
additional funds for (or financing proceeds ex- Host REIT, the Operating
reinvest net sale or re- cept (i) restrictions Partnership or any of
financing proceeds in) precluding investments its subsidiaries, on the
new investments, absent by the Operating Part- one hand, and a trustee
amendments to their nership that would ad- or executive officer of
partnership agreements versely affect Host Host REIT or any entity
or approval of a major- REIT's status as a REIT, in which such trustee or
ity of the outstanding (ii) general restric- executive officer is a
limited partnership in- tions on transactions trustee or has a mate-
terests. with Affiliates and rial financial interest,
(iii) the noncompetition on the other hand, must
agreements. See "Busi- be approved by the af-
ness and Properties-- firmative vote of a ma-
Noncompetition Agree- jority of the disinter-
ments." ested trustees. Lastly,
Host REIT must conduct
its investment activi-
ties through the Operat-
ing Partnership for so
long as the Operating
Partnership exists. 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. For so long as the Operating Partnership exists, Host
REIT must conduct all investment activities through the Operating Partnership.
196
<PAGE>
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. A majority of
ployees of its affili- the Operating Partner- the initial trustees
ates, to perform any ship except (i) Host will be independent. 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 right to remove ity of the outstanding
their General Partner by OP Units (including OP
a majority vote (except Units held by Host
for Atlanta Marquis, REIT); and (iii) until
which requires a 66 2/3% December 31, 2058, Host
vote of its Class A lim- REIT may not cause or
ited partner interests), permit the Operating
subject to certain con- Partnership to dissolve
ditions. Each of the (except in connection
partnership agreements with a sale of all or
permits removal of the substantially all of the
general partner only for Operating Partnership's
breach of certain provi- assets, with the ap-
sions of the partnership proval described above)
agreement, fraud or un- more than 10% of the
remedied acts of bad limited partners object
faith or gross negli- to such dissolution.
gence or breach of fidu- Host REIT may not be re-
ciary duty. Furthermore, moved as general partner
the MDAH and MHP2 part- by the limited partners
nership agreements allow with or without cause
removal of the General unless Host REIT ceases
Partner only if certain to be a "public compa-
favorable legal opinions ny," and then Host REIT
concerning liability of could be removed as gen-
the Limited Partners and eral partner with or
tax status of the Part- without cause by limited
nership are obtained. In partners holding per-
all cases of removal of centage interests in the
the General Partner, Operating Partnership
however, the Partnership ("Percentage Interests")
may continue only if the that are more than 50%
Limited Partners find a of the aggregate Per-
successor general part- centage Interests of the
ner. outstanding limited
partnership interests
entitled to vote there-
on, including any such
interests held by the
general partner. See
"Risk Factors--Risks and
Effects of the Mergers--
No Control Over Major
Decisions," "Description
of OP Units--Purposes,
Business and Management"
and "--Dissolution,
Winding Up and Termina-
tion."
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.
197
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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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 or its
fairly and with complete general partner, is un- shareholders for mone-
candor toward the Lim- der no obligation to tary damages arising
ited Partners. The duty consider the separate from their activities.
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.
198
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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MANAGEMENT LIABILITY AND INDEMNIFICATION
Under the Delaware Act Under the Delaware Act, The Maryland REIT Law
and the Rhode Island Host REIT, as general permits a Maryland real
Act, each General Part- partner of the Operating estate investment trust
ner is liable for the Partnership, is liable to include in its Decla-
payment of partnership for the payment of the ration of Trust a provi-
obligations and debts, obligations and debts of sion limiting the lia-
unless limitations upon the Operating Partner- bility of its trustees
such liability are ex- ship unless limitations and officers to the
pressly stated in the upon such liability are trust and its sharehold-
document or instrument stated in the document ers for money damages
evidencing the obliga- or instrument evidencing except for liability re-
tion (e.g., a loan the obligation. Under sulting from (i) actual
structured as a nonre- the Partnership Agree- receipt of an improper
course obligation). Each ment, the Operating benefit or profit in
partnership agreement of Partnership agrees to money, property or serv-
the Partnerships gener- indemnify Host REIT or ices or (ii) acts com-
ally provides that the any trustee or officer mitted in bad faith or
General Partner will not of Host REIT from and active and deliberate
be held liable for any against all losses, dishonesty established
costs arising out of its claims, damages, liabil- by a final judgment as
action or inaction ex- ities, joint or several, being material to the
cept that the General expenses (including le- cause of action.The Dec-
Partner will be liable gal fees), fines, set- laration of Trust and
for any costs which tlements and other Maryland law provides
arise from the General amounts incurred in con- broad indemnification to
Partner's own fraud, nection with any actions trustees and officers,
negligence, misconduct relating to the opera- whether serving Host
or other breach of fidu- tions of the Operating REIT, or at its request,
ciary duty. In cases in Partnership as set forth any other entity, to the
which the General Part- in the Partnership fullest extent permitted
ner is indemnified, any Agreement in which Host under Maryland law. Host
indemnity is payable REIT or any such trustee REIT will indemnify its
only from the assets of or officer is involved, present and former
the Partnership. unless (i) the act or trustees and officers,
omission of Host REIT among others, against
was material to the mat- judgments, penalties,
ter giving rise to the fines, settlements and
proceeding and either reasonable expenses ac-
was committed in bad tually incurred by them
faith or was the result in connection with any
of active and deliberate proceeding to which they
dishonesty; (ii) Host may be made a party by
REIT or the other person reason of their service
to be indemnified actu- in those or other capac-
ally received an im- ities unless it is es-
proper personal benefit tablished that (i) the
in money, property or act or omission of the
services or (iii) in the trustee or officer was
case of any criminal material to the matter
proceeding, Host REIT or giving rise to the pro-
the other person to be ceeding and (a) was com-
indemnified had reason- mitted in bad faith or
able cause to believe (b) was the result of
the act or omission was active and deliberate
unlawful. The reasonable dishonesty, (ii) the
expenses incurred by trustee or officer actu-
Host REIT may be reim- ally received an im-
bursed by the Operating proper personal benefit
Partnership in advance in money, property or
of the final disposition services or (iii) in the
of the proceeding upon case of any criminal
receipt by the Operating proceeding, the trustee
Partnership of an affir- or officer had reason-
mation by Host REIT or able cause to believe
the other person to be that the act or omission
indemnified of its good was unlawful. However,
faith belief that the under Maryland law, Host
standard of conduct nec- REIT may not indemnify
essary for indemnifica- for an adverse judgment
tion has been met and an in a suit by or in the
undertaking by Host REIT right of Host REIT. The
to repay the amount if Bylaws of Host REIT re-
it is determined that quire it, as a condition
such standard was not to advancing expenses,
met. to obtain (i) a written
affirmation by the
trustee or officer of
his good faith belief
that he has met the
standard of conduct nec-
essary for indemnifica-
tion by Host REIT as au-
thorized by the Bylaws
and (ii) a written
statement by or on his
behalf to repay the
amount paid or reim-
bursed by Host REIT if
it shall ultimately be
determined that the
standard of conduct was
not met. Host REIT also
intends to enter into
indemnification agree-
ments indemnifying each
of its trustees and of-
ficers to the fullest
extent permitted by
Maryland law and advance
to its trustees and of-
ficers all related ex-
penses subject to reim-
bursement if it is sub-
sequently determined
that indemnification is
not permitted.
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.
199
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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 obligations of Host
liability of Limited the Operating Partner- REIT. Host REIT's Decla-
Partners for the Part- ship's debts and obliga- ration of Trust will
nership's debts and ob- tions is generally lim- provide that no share-
ligations is generally ited to the amount of holder of Host REIT will
limited to the amount of their investment in the be liable for any debt
their investment in the Operating Partnership, or obligation of Host
Partnership, together together with their in- REIT solely as a result
with an interest in un- terest in undistributed of his status as a
distributed income, if income, if any. shareholder of Host
any. REIT. Host REIT's Bylaws
further will provide
that Host REIT shall in-
demnify each present or
former shareholder
against any claim or li-
ability to which the
shareholder may become
subject by reason of his
being or having been a
shareholder and that
Host REIT shall reim-
burse each shareholder
for all reasonable ex-
penses 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 ne-
gated, claims for taxes
and certain statutory
liability, the share-
holders may, in some ju-
risdictions, be person-
ally liable to the ex-
tent that such claims
are not satisfied by
Host REIT. Inasmuch as
Host REIT carries public
liability insurance
which it considers ade-
quate, any risk of per-
sonal 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.
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 under applicable Maryland law for the debts
and obligations of Host REIT solely as a result of their status as
shareholders of Host REIT. In certain other jurisdictions, shareholders may be
personally liable with respect to tort claims, contractual claims where
shareholder liability is not negated, claims for taxes and certain statutory
liability to the extent such claims are not satisfied by Host REIT.
200
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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ANTITAKEOVER PROVISIONS
For each of the Partner- Except in limited cir- Applicable Maryland law
ships, a change in man- cumstances (see "Voting and the Declaration of
agement may be effected Rights" below) Host Trust and Bylaws of Host
only by removal of the REIT, in its capacity as REIT will contain a num-
General Partner. See general partner of the ber of provisions that
"Management Control" Operating Partnership, may have the effect of
above for a discussion has exclusive management delaying or discouraging
of the ability to remove power over the business a change in control of
a General Partner. A and affairs of the Oper- Host REIT that might be
transfer of limited ating Partnership. Host in the best interests of
partnership interests in REIT may not be removed shareholders. These pro-
a Partnership is gener- as general partner of visions will include,
ally restricted if (i) the Operating Partner- among others; (i) a
it is on a day other ship by the limited Board of Trustees with
than the first day in an partners with or without three-year staggered
accounting period, (ii) cause (unless Host REIT terms whose size is
it would, when combined is no longer a "public fixed within a range;
with the total of other company," in which case (ii) authorized capital
partnership interests the general partner may stock that may be in-
transferred within past be removed with or with- creased or decreased and
12 consecutive months, out cause by limited classified and issued as
in the opinion of coun- partners holding per- a variety of equity se-
sel, result in the Part- centage interests in the curities, in the discre-
nership being deemed to Operating Partnership tion of the Board of
have been terminated ("Percentage Interests") Trustees, including se-
within the meaning of that are more than 50% curities having superior
Section 708 of the Code of the aggregate Per- voting rights to the
(except for MHP2), (iii) centage Interests of the Common Shares; (iii) re-
it would, in the opinion outstanding limited strictions on business
of counsel for the as- partnership interests combinations with per-
signee or assignor, re- entitled to vote there- sons who acquire more
quire the filing of a on, including any such than a certain percent-
registration statement interests held by the age of Common Shares:
under the Securities general partner). Under (iv) a requirement that
Act, or would otherwise the Partnership Agree- shareholders approve
be in violation of any ment, Host REIT may, in voting rights for "Con-
federal or state securi- its sole and absolute trol Shares" acquired in
ties or blue sky laws, discretion, prevent a "control share" acquisi-
(iv) it would result in limited partner from tions (v) a provision
the assignor or assignee transferring his inter- that only the Board of
holding a fraction of a est or any rights as a Trustees may amend the
partnership unit, (v) it limited partner except Bylaws; (vi) advance no-
would, in the opinion of in certain limited cir- tice provisions for
counsel, result in the cumstances. Host REIT shareholders to submit
Partnership being may exercise this right new business or nominate
treated as an associa- of approval to deter, candidates for trustee;
tion taxable as a corpo- delay or hamper attempts (vii) the inability of
ration, (vi) it would, by Persons to acquire a shareholders to call
in the opinion of coun- majority interest in the special meetings; (viii)
sel, result in the Part- Operating Partnership. a requirement that
nership failing to ob- In addition, Host REIT trustees be removed only
tain or continue in ef- has the power to impose for cause and only by a
fect any license permit- limits on transfers if, vote of shareholders
ting the service or sale and to the extent, nec- holding at least two-
of alcoholic beverages essary to cause the Op- thirds of all the shares
at one or more hotels or erating Partnership not entitled to be cast for
(vii) it is an assign- to be a "publicly traded the election of trust-
ment to a tax-exempt en- partnership" that would ees; (ix) a requirement
tity or non-U.S. person be taxed as a corpora- of an affirmative vote
within the meaning of tion, including the pro- of two-thirds of all
Section 7701(a)(30) of hibition contained in votes entitled to be
the Code. In addition to the Partnership Agree- cast to approve amend-
such restrictions, the ment restricting the ments to the Declaration
General Partners of At- ownership, actually or of Trust that require a
lanta Marquis, Chicago constructively, of more shareholder vote; and
Suites, Hanover, Desert than 4.9% by value of (x) certain ownership
Springs and MHP may, in any class of interests limitations which are
their sole discretion, in the Operating Part- designed to protect Host
restrict any transfer of nership. See "Descrip- REIT's status as a REIT
limited partnership in- tion of OP Units." under the Code. In addi-
terests. In each of the tion, Host REIT intends
Partnerships, an as- to adopt a Shareholder
signee of a limited Rights Plan whereby
partner interest may not shareholders will be en-
become a substitute lim- titled to preferred
ited partner, entitling share purchase rights in
him to vote on matters certain situations. See
that may be submitted to "Description of Shares
the Limited Partners for of Beneficial Interest--
approval, unless the Certain Provisions of
General Partner consents Maryland Laws and Host
to such substitution. REIT's Declaration of
Trust ad Bylaws."
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.
201
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
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. At each an-
the partnership agree- Partnership, certain nual meeting of share-
ments of each Partner- consolidations and merg- holders, the successors
ship. Such voting rights ers and amendments of to the class of trustees
include: acquisition of the Partnership Agree- whose term expires at
interests in other prop- ment. Otherwise, all de- such meeting shall be
erties, incurrence of cisions relating to the elected to hold office
certain debt, merger or operation and management for a term expiring at
consolidation with an- of the Operating Part- the annual meeting of
other entity, sale of nership will be made by shareholders in the
all or substantially all Host REIT, in its capac- third year following the
of the assets of a Part- ity as general partner year of their election.
nership, certain amend- of the Operating Part- Maryland law requires
ments to the partnership nership. During the that certain major
agreement, termination first year following the transactions, including
of certain agreements to Mergers, the limited most amendments to Host
which the Partnership is partners have voting REIT's Declaration of
party, expansion of one rights as to the sale of Trust, may not be con-
or more hotels in cer- all or substantially all summated without the ap-
tain cases, dissolution of the assets of the Op- proval of shareholders.
of the Partnership or erating Partnership, a The trustees may amend
removal of the General merger involving the Op- the Declaration of Trust
Partner. erating Partnership, without a shareholder
certain issuances of OP vote, however, to pre-
Units and for certain serve Host REIT's status
limited partners, cer- as a REIT under the Code
tain sales of hotels or the Maryland REIT
that are held by the Op- law. Each Common Share
erating Partnership. will have one vote and
Host REIT's Declaration
of Trust permits the
Board of Trustees to
classify and issue
shares of capital stock
in one or more series
having voting power
which may differ from
that of the Common
Shares. Pursuant to the
Declaration of Trust,
the trustees also may
increase or decrease the
authorized number of
common or preferred
shares without a share-
holder vote. See "De-
scription of Shares of
Beneficial Interest."
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--Risks and Effects of
the Mergers--No Control over Major Decisions."
202
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
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Sale Other Than to an Affiliate
The Atlanta Marquis, Under the Partnership Subject to the terms of
Desert Springs and Hano- Agreement, Host REIT any class or series of
ver partnership agree- generally has the exclu- shares at the time out-
ments allow the sale of sive authority to deter- standing, under the Dec-
all or substantially all mine whether, when and laration of Trust Host
of the assets of the on what terms the assets REIT may sell, lease,
partnership to a buyer of the Operating Part- exchange, or otherwise
without the consent of nership (including the transfer all or substan-
the Limited Partners. Hotels) will be sold. tially all of the assets
The Chicago Suites part- See "Description of OP of Host REIT, but any
nership agreement allows Units-- Sales of As- such action must be ap-
the sale of its Hotel or sets." However, Host proved by the Board of
a material portion of REIT, as general partner Trustees and, after no-
its assets with the con- of the Operating Part- tice to all shareholders
sent of a majority of nership, generally may entitled to vote on the
the outstanding limited not sell, exchange, matter, by the affirma-
partner interests and transfer or otherwise tive vote of two-thirds
the receipt of an ap- dispose of all or sub- of all the votes enti-
praisal from an MAI stantially all of the tled to be cast on the
qualified appraiser. The Operating Partnership's matter (or such higher
MDAH partnership agree- assets in a single vote as may be required
ment allows the sale of transaction or a series by law). The following
the Fairview Park Hotel, of related transactions transactions will not
or more than two other (including by way of constitute "a sale,
MDAH Hotels, only with merger, consolidation or lease, exchange, or
the consent of a major- other combination with other transfer of all or
ity of the outstanding any other Persons), substantially all of the
limited partner inter- without the consent of assets of Host REIT" for
ests including any lim- more than 50% of the purposes of such provi-
ited partner interests outstanding limited sion and the requirement
held by the General partnership interests, of shareholder approval
Partner. The MHP part- including any limited thereof: a sale, lease,
nership agreement allows partnership interests exchange, or other
the General Partner to held by Host REIT. In transfer of all or sub-
sell or dispose of any addition, during the stantially all of the
assets of MHP, including first year following the assets of Host REIT in
its interest in the Har- Mergers, the holders of the ordinary course of
bor Beach Partnership, OP Units of the Operat- business actually con-
to any person. The MHP2 ing Partnership have ducted by it; a mort-
partnership agreement certain voting rights if gage, pledge or creation
allows the sale of any a vote of shareholders of any other security
Hotel or the Partner- of Host REIT is re- interest in any or all
ship's interest in the quired. In connection of the assets of Host
Santa Clara Partnership with a sale of all or REIT, whether or not in
with the consent of a substantially all of the the ordinary course of
majority of the out- assets of the Operating its business; an ex-
standing limited partner Partnership during this change of shares of
interests, including any first year following the stock through voluntary
limited partner inter- Mergers, the approval of action under any agree-
ests held by the General a majority of all out- ment with shareholders;
Partner. standing OP Units would or a sale, lease, ex-
be required, including change, or other trans-
The PHLP partnership the OP Units held by fer of all or substan-
agreement allows the Host REIT, voting as tially all of the assets
sale of an asset which single class with Host of Host REIT to one or
has a cost basis at the REIT voting its OP Units more persons if all the
time of sale in excess in the same proportion equity interests of the
of 5% of the aggregate as its shareholders person or persons are
cost basis of all assets vote, would be required. owned, directly or indi-
of PHLP only with the In addition, during the rectly, by Host REIT.
consent of a majority of first year following the
the outstanding limited Mergers, any taxable
partner interests, in- sale or sales of Hotels
cluding any limited representing more than
partner interests held 10% of the aggregate Ap-
by the General Partner. praised Value of the Ho-
tels of any Partnership
would require, in addi-
tion to any other ap-
proval requirements, the
approval of a majority
of all outstanding OP
Units held by persons
who formerly were Lim-
ited Partners of such
Partnership, voting as a
separate class.
203
<PAGE>
Under Host REIT's Declaration of Trust, 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, lease,
exchange or otherwise transfer of all or substantially all of the assets of
Host REIT. No approval of the shareholders is required for a sale, lease,
exchange, or other transfer of all or substantially all of the assets of Host
REIT in the ordinary course of business actually conducted by it; a mortgage,
pledge or creation of any other security interest in any or all of the assets
of Host REIT, whether or not in the ordinary course of its business; an
exchange of shares of stock through voluntary action under any agreement with
shareholders; or a sale, lease, exchange, or other transfer of all or
substantially all of the assets of Host REIT to one or more persons if all the
equity interests of the person or persons are owned, directly or indirectly,
by Host REIT.
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.
204
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- --------------------------------------------------------------------------------
Sale to the General Partner or
Its Affiliates
The General Partners of The Operating Partner- Neither the Declaration
MDAH and MHP2 may cause ship shall not, directly of Trust nor the Bylaws
those Partnerships to or indirectly, sell, or Host REIT has any
sell any of their assets transfer or convey any specified additional re-
to its General Partner property to any affili- quirements for sales of
or an affiliate of the ate of Host REIT that is assets to affiliates of
General Partner (i) with not also a subsidiary of Host REIT.
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 (ii) by complying
with certain notice and
independent appraisal
requirements as follows:
(a) 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, (b) 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), (c)
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, (d) 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, (e) the pur-
chase price must be pay-
able in cash, (f) no
real estate commission
may be paid by the Part-
nership in connection
with such sale and
(g) the General Partner
must include copies of
such appraisals with the
notice to its Limited
Partners.
205
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- --------------------------------------------------------------------------------
The General Partners of
Atlanta Marquis, Desert
Springs, Hanover and
MHP may cause those
Partnerships to sell
any hotels to the Gen-
eral Partner or any af-
filiate (i) with the
consent of Limited
Partners holding of a
majority of the out-
standing limited part-
ner interests in the
Partnership (with the
General Partners or
their affiliates of
Desert Springs, Hanover
and MHP being required
to vote any limited
partner interests it
holds in the same man-
ner as the majority of
"outside" limited part-
ner interests actually
voted (so long as a ma-
jority of the outside
limited partners are
present for purposes of
a vote by submitting
ballots or otherwise)),
and (ii) by complying
with certain notice and
independent appraisal
requirements as fol-
lows: (a) the General
Partner must provide
notice of the proposed
sale to its Limited
Partners, who thereaf-
ter have 30 days to
elect a nationally rec-
ognized appraiser hav-
ing the approval of the
holders of a majority
of the limited partner
interests, (b) such ap-
praiser has 30 days
from the date of elec-
tion to prepare and
submit to the General
Partner an appraisal of
the fair market value
of the Hotel in ques-
tion, (c) the purchaser
must submit to the Gen-
eral Partner an ap-
praisal of the fair
market value of the Ho-
tel, such appraisal to
be submitted within the
time limit provided by
clause (b) above in the
case of the appraisal
to be submitted by the
appraiser elected by
the Limited Partners
and (d) the General
Partner must thereafter
seek the required con-
sent and include there-
with copies of the two
appraisals. If the Lim-
ited Partners do not
select an appraiser as
provided in (a) above
or such appraiser does
not supply an appraisal
within the time frame
in (b) above, then the
General Partner must
submit three appraisals
with its request for
consent, one such ap-
praisal prepared by an
appraiser selected by
the purchaser and the
other two appraisals
prepared by appraisers
selected by the first
appraiser (all of such
appraisal costs to be
borne by the purchas-
er).
The Chicago Suites and
PHLP partnership agree-
ments contain no spe-
cial provisions con-
cerning a sale of part-
nership assets 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. Neither the Declaration of Trust nor the
Bylaws of Host REIT, contain any provisions restricting the sale of assets to
an affiliate of Host REIT.
206
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Merger
The partnership agree- Under the Partnership Pursuant to the Declara-
ment of MDAH allows a Agreement, Host REIT tion of Trust, subject
merger of the Partner- generally may not cause to the terms of any
ship with the consent of a merger or consolida- class or series of
a majority of the out- tion of the Operating shares at the time out-
standing limited partner Partnership without the standing, Host REIT may
interests, but the Gen- consent of a majority of merge with or into an-
eral Partner may not the outstanding partner- other entity, but any
vote any of its limited ship interests (includ- such merger must be ap-
partner interests. The ing the partnership in- proved (i) by the Board
partnership agreement of terests held by Host of Trustees in the man-
MHP2 allows a merger of REIT) and the general ner provided in the
the Partnership with the partner. In addition, Maryland REIT Law and
consent of a majority of during the one-year pe- (ii) by shareholders to
the outstanding limited riod following the Merg- the extent required in
partner interests, in- ers, the holders of OP the Maryland REIT Law.
cluding the limited Units of the Operating In general, under the
partner interests held Partnership have certain Maryland REIT Law, merg-
by the General Partner, voting rights if a vote ers of a Maryland real
unless the General Part- of shareholders of Host estate investment trust,
ner has an interest in REIT is required in con- such as Host REIT, with
the transaction, in nection with a merger. or into another entity
which case it must vote In such case, approval must first be approved
all of its or its affil- of a majority of all by a majority of the en-
iates limited partner outstanding OP Units, tire Board of Trustees
interests in the same including the OP Units and thereafter approved
manner as the majority held by Host REIT, vot- by shareholders by the
of "outside" limited ing as a single class affirmative vote of two-
partner interests actu- with Host REIT voting thirds of all the votes
ally voted (so long as a its OP Units in the same entitled to be cast on
majority of the outside proportion as its share- the matter (unless the
limited partners are holders vote, would be declaration of trust
present for purposes of required. provides for a lesser
a vote by submitting shareholder vote but not
ballots or otherwise). less than a majority of
Each of the Atlanta Mar- the number of votes en-
quis, Chicago Suites, titled to be cast on the
Desert Springs, Hanover, matter). Host REIT's
MHP and PHLP partnership Declaration of Trust
agreements contain no does not provide for a
merger provision. Under lesser vote. Notwith-
the Delaware Act and the standing the foregoing,
Rhode Island Act, a certain mergers under
merger may be effected the Maryland REIT Law
upon approval by its may be accomplished
General Partner and the without a vote of share-
holders of a majority of holders. For example, no
the limited partnership shareholder vote is re-
interests of each class quired for a merger of a
of limited partner. In subsidiary of a Maryland
Atlanta Marquis, the real estate investment
General Partner may vote trust with or into its
the limited partner in- parent, provided the
terests it holds. In parent owns at least 90%
Chicago Suites the Gen- of the subsidiary. In
eral Partner holds no addition, a merger need
limited partner inter- not be approved by
ests and a merger may be shareholders if the
effectuated by the af- merger does not reclas-
firmative vote of a ma- sify or change its out-
jority of the outstand- standing shares or oth-
ing limited partner in- erwise amend its decla-
terests. In Desert ration of trust, and the
Springs, Hanover and number of shares to be
MHP, the General Partner issued or delivered in
may vote its limited the merger is not more
partner interests. than 20% of the number
of its shares of the
same class or series
outstanding immediately
before the merger be-
comes effective. Subject
to the terms of any
class or series of
207
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
shares at the time out-
standing, under the Dec-
laration of Trust Host
REIT also may to the ex-
tent permitted by law,
consolidate Host REIT
with one or more other
entities into a new en-
tity, but any such ac-
tion must be approved by
the Board of Trustees
and, after notice to all
shareholders entitled to
vote on the matter, by
the affirmative vote of
two-thirds of all the
votes entitled to be
cast on the matter (or
such higher vote as may
be required by law).
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.
208
<PAGE>
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PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
Dissolution
Upon breach of certain The Operating Partner- Under the Declaration of
provisions of its part- ship will continue until Trust, subject to the
nership agreement, December 31, 2098, un- provisions of any class
breach of fiduciary du- less sooner dissolved or series of shares at
ty, fraud or unremedied and terminated. The Op- the time outstanding,
acts of bad faith or erating Partnership will the Board of Trustees
gross negligence, each be dissolved prior to must obtain approval of
of Chicago Suites, Des- the expiration of its holders of at least two-
ert Springs, Hanover, term, and its affairs thirds of all of the
MDAH, MHP, MHP2 and PHLP wound up, (i) until De- votes entitled to be
may be dissolved with cember 31, 2058 with the cast on the matter in
the consent of a major- consent of the limited order to dissolve Host
ity of the outstanding partners who hold 90% of REIT.
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.
209
<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 generally must be
Partner to amend the as general partner of approved by the Board of
partnership agreement the Operating Partner- Trustees and by the vote
with the consent of a ship, or any limited of at least two-thirds
majority of the out- partner holding 25% or of the votes entitled to
standing limited partner more of the limited be cast at a meeting of
interests. The Desert partnership interests. shareholders. Under the
Springs, Hanover, MHP Subject to certain ex- Maryland REIT Law, a
and MHP2 partnership ceptions, such proposed declaration of trust may
agreements allow the amendment must be ap- permit the trustees by a
General Partner to amend proved by the vote of two-thirds vote to amend
the partnership agree- Host REIT, as general the declaration of trust
ment with the consent of partner, and limited to qualify as a REIT un-
a majority of outstand- partners holding Per- der the Code or the
ing limited partner in- centage Interests that Maryland REIT Law with-
terests, including any are more than 50% of the out the affirmative vote
such interests held by aggregate Percentage In- or written consent of
the General Partner, un- terests of the outstand- shareholders. The Decla-
less the General Partner ing limited partnership ration of Trust will
has an interest in the interests entitled to permit such action by
vote, in which case, the vote thereon including the Board of Trustees.
General Partner must any such limited part- As permitted under the
vote any limited partner nership interests held Maryland REIT Law, the
interests it holds in by Host REIT (which ini- Declaration of Trust
the same manner as the tially will hold approx- also will authorize the
majority of "outside" imately 77% of the OP Board of Trustees, with-
limited partner inter- Units, following the out the vote of share-
ests actually voted (so REIT Conversion, assum- holders, to increase or
long as a majority of ing the full Participa- decrease the authorized
the outside limited tion Scenario). In addi- number of common or pre-
partners are present for tion, with certain ex- ferred shares and to
purposes of a vote by ceptions, Host REIT, as classify or reclassify
submitting ballots or general partner, has any unissued common or
otherwise). The MDAH broad discretion to preferred shares into
partnership agreement amend the Partnership another class or series
allows the General Part- Agreement without the of shares.
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
210
<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 generally will require
the consent of both the Board of Trustees and two-thirds of the votes entitled
to be cast at a meeting of shareholders.
211
<PAGE>
PARTNERSHIPS OPERATING PARTNERSHIP HOST REIT
- -------------------------------------------------------------------------------
COMPENSATION, FEES AND DISTRIBUTIONS
Under the partnership The trustees of Host
agreements of the The Operating REIT will receive
Partnerships, the Partnership will pay (or compensation for their
General Partners do not reimburse Host REIT for) services as described
receive any fees or all expenses that Host herein under
other compensation from REIT incurs (subject to "Management."
their Partnerships in several very limited
exchange for their exceptions), including
services as general expenses incurred
partner. The General relating to the REIT
Partner of each Conversion, the ongoing
Partnership is entitled, operation of Host REIT
however, to and any other offering
reimbursement for the of additional OP Units
cost of providing any or Common Shares,
administrative or other including all expenses,
services rendered to its damages and other
Partnership. The General payments resulting from
Partners are also or arising in connection
entitled to with litigation related
distributions with to any of the foregoing,
respect to their and expenses for
respective percentage federal, state and local
interests in the income taxes incurred by
Partnerships, as well as Host REIT.
certain additional back-
end participations in
cash flow and excess
sale and refinancing
proceeds after the
Limited Partners have
received certain
investment returns. See
"Background and Reasons
for the Mergers and the
REIT Conversion--
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.
212
<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, the expected Exchange Value for each of
the Partnerships, and the percentage of the Operating Partnership that the
Blackstone Entities will own immediately following the REIT Conversion, 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%.
213
<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"); (iv) the acquisition and ownership
of Common Shares received by Limited Partners who elect to exchange their OP
Units received in the Mergers for Common Shares in connection with the Mergers
(the "Common Share Election"); and (v) 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
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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 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 (INCLUDING THE DECISION WHETHER TO EXERCISE THE
NOTE ELECTION OR THE COMMON SHARE ELECTION) AND THE SUBSEQUENT OWNERSHIP AND
DISPOSITION OF OP UNITS, COMMON SHARES AND/OR NOTES. 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 (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 receive a Note
upon the exercise of his right to make the Note Election or Common Shares
upon the exercise of his right to make the Common Share Election; (ii) 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; (iii) 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; (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 or the Common Share Election; and
(v) whose "at risk" amount does not fall below zero as a result of the
Mergers.
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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 or the Common Share
Election in connection with the Mergers but retains his OP Units should not
be required to recognize gain by reason of the exercise of either 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. Based upon representations made by Host, Host REIT, and the Operating
Partnership relating to the facts and circumstances surrounding each such
liability, all direct or indirect liabilities of the Partnerships fall into
one of the four categories of "qualified liabilities" described in Treasury
Regulations Section 1.707-5(a)(6).
9. 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, prior to 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 Host Employee Trust, Crestline 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 prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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
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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.
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 Crestline. 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 Crestline, none of the rent from the Lessees
would be qualifying income for purposes
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of determining whether the Operating Partnership should be taxed as a
corporation. In order to avoid this result, the Crestline 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 Crestline, and the Crestline 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 these prohibitions are enforced at
all times in accordance with their terms (as to which there can be no
assurance), 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.
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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 or exchanged for Common Shares, at the
election of the Limited Partner, in connection with the Mergers) and the
discussion herein assumes that the Mergers will be so treated. There can be no
assurance, however, that the IRS will not seek to recharacterize each Merger
as either (i) the liquidation of a 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 or exchanged for Common
Shares, at the election of each Limited Partner, in connection with the
Mergers) or (ii) the transfer by a Partnership of its assets to the Operating
Partnership in exchange for OP Units and/or Notes (and, possibly, Common
Shares) and the subsequent distribution of such OP Units and/or Notes (and,
possibly, Common Shares) 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 make the Common Share
Election or the Note Election, (ii) 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 (iii) 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
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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.
Even if a Limited Partner who retains his OP Units 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 Mergers--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. 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.
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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.
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 by reason of
his status as a Limited Partner. 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
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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 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 or the Common Share Election and thus retains
the OP Units received in the Mergers 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 the 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, 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
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encumbering the Hotels owned by the Partnerships (other than with the proceeds
of indebtedness that would be considered nonrecourse liabilities allocable to
those Hotels). 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 long-term 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 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 Tax 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, possibly, Common
Shares) and the subsequent distribution of such OP Units
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and/or Notes (and, possibly, Common Shares) 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 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 (and,
possibly, with respect to Limited Partners who exercise the Common Share
Election, if the Operating Partnership is treated as acquiring the exchanged
Common Shares from Host REIT and distributing them to the electing Limited
Partners) (see "--Disguised Sale Regulations--Impact of Limited Partners Who
Exercise the Common Share Election or the Note Election" and "Tax Treatment of
Limited Partners Who Exercise Their Right to Make the Common Share Election or
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
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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 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.
Hogan & Hartson believes, based on representations made by Host, Host REIT
and the Operating Partnership relating to the facts and circumstances
surrounding each such liability, that all direct or indirect liabilities of
the Partnerships fall into one of the four categories of "qualified
liabilities" described above. Based on the aforementioned representations and
certain numerical estimates provided by the Operating Partnership and the
General Partners, however, 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 Common Share Election or 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 or the Common Share Election
in connection with the Mergers but retains his OP Units must nevertheless
recognize
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gain under the Disguised Sale Regulations if another Limited Partner in the
Partnership does exercise his right to make the Note Election or the Common
Share Election and receives Notes or Common Shares 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 or the Common Share Election should not be required to recognize gain
by reason of another Limited Partner's exercise of either of such rights. As
noted previously, an opinion of counsel does not bind the courts, and no
assurance can be provided that such opinion will not be challenged by the IRS
or will be sustained by a court if so challenged.
5. Effect of Disguised Sale Characterization. If a transfer of property to a
partnership and one or more transfers of money or other consideration
(including the assumption 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
become the owner of the property. If the transfer of money or other
consideration from the partnership to the partner occurs after the transfer of
property to the partnership, the partner and the partnership are treated as
if, on the date of the transfer of the property, the partnership transferred
to the partner an obligation to transfer to the partner money or other
consideration. Moreover, if a transfer of property to a partnership is treated
as part of a sale without regard to the partnership's assumption of or taking
subject to a "qualified liability," as defined above, then the partnership's
assumption of or taking subject to that liability is treated as a transfer of
additional consideration to the transferring partner. The amount of such
"qualified liability" treated as additional consideration is generally the
lesser of (x) the amount of the "qualified liability" and (y) an amount
determined by multiplying the "qualified liability" by the partner's "net
equity percentage." The "net equity percentage" is generally the amount of
consideration received by such partner (other than relief from "qualified
liabilities") divided by the partner's net equity in the property sold, as
calculated under the Disguised Sale Regulations.
Investment Company Regulations. If a transfer of property to a partnership
(such as the transfer of the 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.
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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 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. 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
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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).
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
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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 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
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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 or exchanged for Common Shares at
the election of the Limited Partner in connection with the Mergers), or (ii)
the transfer by a Partnership of its assets to the Operating Partnership in
exchange for OP Units and/or Notes (and/or, possibly, Common Shares) and the
subsequent distribution of such OP Units and/or Notes (and/or, possibly,
Common Shares) to its partners.
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 or the Common Share 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/or
Common Shares, to
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the extent the Limited Partners in that Partnership make the Common Share
Election) and the subsequent distribution of such OP Units (and possibly Notes
and/or Common Shares) 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,
while a Limited Partner who exercised his right to make the Common Share
Election would then exchange his OP Units for Common Shares. For a discussion
of the treatment of such Limited Partners, see "Tax Treatment of Limited
Partners Who Exercise Their Right to Make the Common Share Election or 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, Notes, and, possibly,
Common Shares, to the extent the Limited Partners in such Partnership make the
Common Share Election or the Note Election. If each Merger were to be treated
as the exchange of the assets of a Partnership for a mixture of OP Units,
Notes and/or Common Shares (to the extent that the Limited Partners of a
Partnership made the Note Election and the Common Share Election), a
Partnership would recognize gain equal to the difference between (x) the sum
of the initial issue price (i.e., the face amount) of the Notes and the fair
market value of the Common Shares 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 Common
Shares and 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 Common Share Election or 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 either the Common Shares or the Notes that are
ultimately issued to the Limited Partners who exercise their right to make the
Common Share Election or the Note Election. As noted previously, however, an
opinion of counsel does not bind 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.
Under Section 731 of the Code, the deemed subsequent distribution of OP
Units 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 the exercise of the Common Share Election or
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.
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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 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."
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TAX TREATMENT OF LIMITED PARTNERS WHO EXERCISE THEIR RIGHT TO MAKE THE COMMON
SHARE ELECTION OR THE NOTE ELECTION
A Limited Partner who exercises his right to make the Common Share Election
or the Note Election and receives Common Shares or a Note in exchange for OP
Units in connection with the Mergers will be treated as having received OP
Units in the Mergers and having made a fully taxable disposition of such OP
Units (which would be in 1998, if the Effective Date of the Mergers is in
1998). The amount realized in connection with such disposition made pursuant
to the exercise of the Common Share Election will equal the sum of the fair
market value of the Common Shares received plus the portion of the Operating
Partnership's liabilities allocable to the Limited Partner for federal income
tax purposes immediately prior to the disposition of such OP Units. The amount
realized in connection with such disposition made pursuant to the exercise of
the Note Election will equal the sum of the "issue price" of the Note (i.e.,
the face amount of the Note) plus the portion of the Operating Partnership's
liabilities allocable to the Limited Partner for federal income tax purposes
immediately prior to the disposition of such OP Units. To the extent the
applicable amount realized exceeds the Limited Partner's adjusted basis in his
OP Units, the Limited Partner will recognize gain. If a Limited Partner has a
"negative capital account" with respect to his Partnership Interest, (i.e.,
the Limited Partner's share of Partnership liabilities exceeds his adjusted
tax basis in his Partnership Interest immediately prior to the Mergers), the
income recognized would exceed the value of the Common Shares or the face
amount of the Note by the amount of his "negative capital account." 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 until principal on the Note is paid. 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, if 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 or the Common Share 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 or the Common Share 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 COMMON SHARE ELECTION OR THE NOTE ELECTION COULD HAVE A
MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGERS (INCLUDING THE DECISION
WHETHER TO EXERCISE THE COMMON SHARE ELECTION OR THE NOTE ELECTION) AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT
IS ESSENTIAL THAT EACH LIMITED PARTNER CONSIDERING MAKING THE COMMON SHARE
ELECTION OR 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.
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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 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
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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 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
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<PAGE>
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
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.
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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........................................... 15,655
Desert Springs........................................... 57,753(1)
Hanover.................................................. 63,680(2)
MDAH..................................................... 74,925(3)
MHP...................................................... 221,532
MHP2..................................................... 189,981(4)
PHLP..................................................... 55,892
</TABLE>
- --------
(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. $51,280
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 ($80,077 for a
Limited Partner who
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<PAGE>
paid cash and did elect to reduce basis). $75,874 for a Limited Partner who
purchased his Partnership Unit for an installment note and did not reduce
basis ($81,026 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.
$189,071 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 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 (other than with the proceeds
of indebtedness that would be considered nonrecourse liabilities allocable to
those Hotels). 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 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
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<PAGE>
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........................................... $ 17,478
Desert Springs........................................... $ (16,873)(1)
Hanover.................................................. $ 59,522(2)
MDAH..................................................... $ 34,291(3)
MHP...................................................... $ (80,458)
MHP2..................................................... $ 47,353(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. $71,922
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 ($29,139 for a
Limited Partner who paid cash and did elect to reduce basis). $33,342 for
a Limited Partner who purchased his Partnership Unit for an installment
note and did not reduce basis ($28,190 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. $48,263
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 he 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 Activity 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 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
239
<PAGE>
(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 (or pursuant to the Common
Share Election), 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 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 or
pursuant to the Common Share Election) 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
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<PAGE>
of the interests in partnership capital and profits. As a result of the
Mergers, four of the Partnerships, Atlanta Marquis, Desert Springs, MHP and
PHLP, will terminate for federal income tax purposes under Section
708(b)(1)(B) of the Code. The Operating Partnership will take certain steps
intended to prevent such a termination of the remaining four partnerships,
Chicago Suites, Hanover, MDAH and MHP2, but there can be no assurance that the
IRS will not determine that such partnerships did not experience a termination
as a result of the Mergers. 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 that terminate for federal income tax
purposes will be depreciated over 39 years, rather than over the remaining
current life of those 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 that terminate
for federal income tax purposes (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 terminating 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 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.
241
<PAGE>
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 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
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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
"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
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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 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.
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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 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 intends 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.
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
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prior to the Effective Date 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 Host Employee Trust and Crestline 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 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"),
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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).
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 (including, but not limited to, tax liabilities attributable to Built-in
Gain Assets), 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 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
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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
or Host REIT intend to make one or more taxable distributions to their
shareholders of that portion of the Crestline common stock that will not be
transferred to the Blackstone Entities and possibly cash or other
consideration. The aggregate amount of such distribution is currently expected
to be in the range of approximately $525 million to $625 million and is
intended to eliminate a substantial portion, but not necessarily 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 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.
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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 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
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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 a Crestline
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 generally from seven
to ten years, depending upon the particular Hotel) commencing on or before the
Effective Date. 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).
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
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owners of 10% or more of Host REIT, actually or constructively, own 10% or
more of such Lessee through an ownership interest in Crestline. In order to
help preclude the Lessees from being regarded as Related Party Tenants, (i)
the Articles of Incorporation of Crestline 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 Crestline; (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) 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 bear the economic burden of the loss in income from
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operation of the Hotels subject to the right, in certain circumstances, to
terminate the Lease if lessor does not restore the Hotel to its prior
condition, (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
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
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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.
The 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 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%
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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.
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
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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 or
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 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-
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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 of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
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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 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
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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 if such shares have been held for more than one year
(and any such long-term capital gain shall be subject to the maximum 20%
capital gain rate). 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 (and any such capital gain shall be subject
to the maximum capital gain rate of 35%). 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
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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.
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 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
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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. 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.
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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 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
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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.
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
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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").
Hogan & Hartson has delivered to Host REIT and the Operating Partnership an
opinion 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 both Host REIT and 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 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."
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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, in some cases, 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 on its taxable income, computed with regard to
any deduction for dividends. 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 both such participation and the amendments to the
partnership agreements 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 and the amendments to the partnership
agreements 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 and for or against the
amendments to the partnership agreements or abstain with respect thereto and
indicate whether they will retain their OP Units or elect to exchange them for
Common Shares or Notes. The Solicitation Period will commence upon delivery of
the Solicitation Materials to the Limited Partners (on or about September ,
1998) and will continue until the later of (a) November , 1998 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 November , 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 EFFECTIVELY BE COUNTED AS VOTING
AGAINST THE MERGER AND AGAINST THE AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.
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 AND
AGAINST THE AMENDMENTS TO THE PARTNERSHIP AGREEMENTS. FAILURE OF A LIMITED
PARTNER TO RETURN A SIGNED CONSENT FORM, WHETHER IT COUNTS AS A VOTE AGAINST
THE MERGER OR THE AMENDMENTS TO THE PARTNERSHIP AGREEMENTS 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 the
amendments to the partnership agreement. 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 AND THE AMENDMENTS TO THE PARTNERSHIP
AGREEMENT) WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER.
FORM W-9 AND FIRPTA CERTIFICATION OR WITHHOLDING CERTIFICATE REQUIRED
As a condition to the receipt of OP Units in the Mergers (and Common Shares
or a Note in exchange therefor, if a Limited Partner exercises the Common
Share Election or Note Election), each Limited Partner who does not want to be
subject to withholding under FIRPTA and certain other applicable withholding
rules, will be required to provide to Host REIT and the Operating Partnership
an executed Form W-9 and 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
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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 connection with 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."
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
Required Vote for the Mergers.
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 A majority of Class A limited
partner interests must be present
either in person or by proxy to
establish a quorum and consent of
limited partners holding more
than 50% of the outstanding Class
A limited partner interests and
the approval of the General
Partner. The General Partner
holds 0.28% of the outstanding
Class A limited partner
interests. Host will vote its
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. Host holds no
limited partner interests.
Desert Springs A majority of the limited partner
interests other than the limited
partner interests held by the
General Partner, if any, must be
present in person or by proxy for
the vote to be recognized and
consent of limited partners
holding more than 50% of the
limited partner interests
actually voting and the approval
of the General Partner are
required for approval of a
Merger. Host holds no limited
partner interests.
Hanover A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners holding more
than 50% of the limited partner
interests, other than the limited
partner interests held by the
General Partner, actually voting
and the approval of the General
Partner. Host holds 47.62% of the
outstanding limited partner
interests. Host must vote all of
its limited partner
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<PAGE>
PARTNERSHIP REQUIRED VOTE
----------- -------------
interests in the same manner as
the majority of "outside" limited
partner interests vote so long as
consents of a majority of
"outside" 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 other
than the limited partner
interests held by the General
Partner holding more than 50% of
the outstanding limited partner
interests and the approval of the
General Partner. Host holds 0.48%
of the limited partner interests.
Host is not permitted to vote its
limited partner interests.
MHP A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners other than the
limited partner interests held by
the General Partner holding more
than 50% of the limited partner
interests actually voting and the
approval of the General Partner
are required for approval of a
Merger. Host holds 48.33% of the
outstanding limited partner
interests. Host must vote all of
its limited partner interests in
the same manner as the majority
of "outside" 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 A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners holding more
than 50% of the limited partner
interests actually voting and the
approval of the General Partner
are required for approval of a
Merger. Host holds 52.75% of the
outstanding limited partner
interests. Host must vote all of
its limited partner interests in
the same manner as the majority
of "outside" 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. Host holds 0.06%
of the limited partner interests.
Host will vote such limited
partner interests FOR the Merger.
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<PAGE>
Required Vote for the Amendments to the Partnership Agreements.
PARTNERSHIP REQUIRED VOTE
----------- -------------
Atlanta Marquis A majority of Class A limited
partner interests must be present
either in person or by proxy to
establish a quorum and consent of
limited partners holding more
than 50% of the outstanding Class
A limited partner interests and
the approval of the General
Partner. Host holds 0.28% of the
outstanding Class A limited
partner interests. Host will vote
such Class A limited partner
interests FOR the amendment.
Chicago Suites Consent of limited partners
holding more than 50% of the
outstanding limited partner
interests and the approval of the
General Partner. Host holds no
limited partner interests.
Desert Springs A majority of the limited partner
interests other than the limited
partner interests held by the
General Partner, if any, must be
present in person or by proxy for
the vote to be recognized and
consent of limited partners
holding more than 50% of the
limited partner interests
actually voting and the approval
of the General Partner. Host
holds no limited partner
interests.
Hanover A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners holding more
than 50% of the limited partner
interests, other than the limited
partner interests held by the
General Parnter, actually voting
and the approval of the General
Partner. Host holds 47.62% of the
outstanding limited partner
interests. Host must vote all of
its limited partner interests in
the same manner as the majority
of "outside" limited partner
interests vote so long as
consents of a majority of
"outside" 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 other
than the limited partner
interests held by the General
Partner holding more than 50% of
the outstanding limited partner
interests and the approval of the
General Partner. Host holds 0.60%
of the limited partner interests.
Host is not permitted to vote its
limited partner interests.
MHP A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners other than the
limited partner interests held by
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the General Partner holding more
than 50% of the limited partner
interests actually voting and the
approval of the General Partner.
Host holds 48.33% of the
outstanding limited partner
interests. Host must vote all of
its limited partner interests in
the same manner as the majority
of "outside" 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 A majority of the limited partner
interests must be present in
person or by proxy for the vote
to be recognized and consent of
limited partners holding more
than 50% of the limited partner
interests actually voting and the
approval of the General Partner.
Host holds 52.75% of the
outstanding limited partner
interests. Host must vote all of
its limited partner interests in
the same manner as the majority
of "outside" 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. Host holds 0.06%
of the limited partner interests.
Host will vote such limited
partner interests FOR the
amendment.
Record Date and Outstanding Partnership Units. The Record Date is September
18, 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 PARTNERSHIP PARTNERSHIP UNITS
LIMITED UNITS HELD REQUIRED FOR APPROVAL
PARTNERSHIP PARTNERS OF RECORD OF THE MERGER
----------- --------- ----------- ---------------------
<S> <C> <C> <C>
Atlanta Marquis..................... 717 530 266
Chicago Suites...................... 261 335 168
Desert Springs...................... 1,100 900 N/A(/1/)
Hanover............................. 57 84 N/A(/1/)
MDAH................................ 455 414 206(/2/)
MHP................................. 683 1,000 N/A(/1/)
MHP2................................ 419 745 N/A(/1/)
PHLP................................ 1,152 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.
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<PAGE>
(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 and the
amendments to the partnership agreements. 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 Corporation and 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, 1998, the balance sheet of Host
Marriott, L.P. as of June 19, 1998, the balance sheet of Host Marriott Trust
as of September 8, 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.
270
<PAGE>
AVAILABLE INFORMATION
The Partnerships 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 and Host REIT have 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 filed under the Exchange Act and the Operating Partnership's
and Host REIT'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.
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 Merger, such Partnership will continue to file
reports and other information with the Commission as required by law, if
applicable.
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<PAGE>
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.
"1993 Employee Benefits Allocation Agreement" means the Employee Benefits
Allocation and Other Employment Matters Agreement between Host and Marriott
International, as amended.
"1995 Employee Benefits Allocation Agreement" means the Employer Benefits
Allocation and Other Employment Matters Agreement between Host and HM
Services, as amended.
"1997 Act" means the Taxpayer Relief Act of 1997.
"1998 Employee Benefits Allocation Agreement" means the Employee Benefits
Allocation Agreement and Other Employment Matters Agreement between Host and
Crestline, to be executed in connection with the REIT Conversion.
"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" means 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.
"Annual Adjustment" means the sum of % or any percentage increase in CPI,
plus % of any percentage increase in a regional labor cost index agreed to by
Lessor and Lessee, such increases measured over the prior 12 months.
"Anti-Abuse Rule" means the 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 Crestline common
stock.
"Blackstone Entities" means The Blackstone Group, a Delaware limited
partnership and a series of funds controlled by Blackstone Real Estate
Partners, a Delaware limited partnership.
"Blackstone Hotels" means 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 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
facilitate 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.
"Bylaws" means the Bylaws of Host REIT as adopted by the Board of Trustees
of Host REIT.
"Chain Services" means services generally furnished on a central or regional
basis to the Hotels. Such services include the following: (i) the development
and operation of computer systems and reservation services, (ii) regional
management and administrative services, regional marketing and sales services,
regional training services, manpower development and relocation costs of
regional personnel and (iii) such additional central or regional services as
may from time to time be more efficiently performed on a regional or group
level.
"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.
"Common Share Election" means the election by Limited Partners to tender
their OP Units received in the Mergers to Host REIT in exchange for Common
Shares.
"Company" means Host (to the extent of its business and assets to be
contributed to the Operating Partnership) with respect to periods prior to the
REIT Conversion, and Host REIT and the Operating Partnership, collectively
with respect to the period after the REIT Conversion.
"Consent Solicitation" means the Prospectus/Consent Solicitation Statement
of the Operating Partnership dated September , 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 market value.
"Consent Form" means the form on which the Limited Partners may vote "FOR,"
"AGAINST" or "ABSTAIN" with respect to the Mergers and "FOR," "AGAINST" or
"ABSTAIN" with respect to the related amendments to the partnership
agreements.
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"Control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
"Control shares" means 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.
"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.
"Crestline" means Crestline Capital Corporation (formerly 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 Crestline to Host's existing shareholders and the
Blackstone Entities.
"Declaration of Trust" means the Declaration of Trust of Host REIT, dated as
expected to be in effect upon the REIT Conversion.
"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" means Section 707 of the Code and the Treasury
Regulations thereunder.
"E&P" means Host's accumulated earnings and profits, as computed for federal
income tax purposes.
"Effective Date" means the date on which the Effective Time occurs.
"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 (or such later date or time as may be specified
therein in accordance with applicable law).
"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 12% of the aggregate average tax basis of
the real and personal property subject to the applicable Lease.
"Excess Losses" means losses that would have the effect of creating a
deficit balance in a Limited Partner's capital account.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"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 methodologies used to determine the value of an OP Unit and the
allocation of the equity 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.
"FF&E" means furniture, fixtures and equipment.
"FF&E Adjustment" means the amount by which the annual Minimum Rent would be
reduced in the event 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
would exceed 12% 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 Non-
Controlled Subsidiary agrees to acquire and lease the Excess FF&E to the
Lessee) or (ii) 110% of the Market Leasing Factor times the cost of the Excess
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.
"FF&E Replacements" means 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 senior living
communities.
"Full Participation Scenario" means the REIT Conversion occurs, all the
Partnerships participate and no Common Shares or Notes are issued.
"Funds From Operations" or "FFO" as defined by NAREIT means 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.
"GAAP" means generally accepted accounting principles.
"General Partner" means the general partner of a Partnership, each of which
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" means proceeds from aggregate sales from a Hotel, including
room sales, food and beverage sales and telephone and other sales.
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"Hanover" means Hanover Marriott Limited Partnership, a Delaware limited
partnership.
"Holders" means persons in whose names the Notes are registered in the
security register for the Notes.
"Host" means Host Marriott Corporation, a Delaware corporation, 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 Employee Trust" means the Host Marriott Employee 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 Host Employee Trust and
possibly certain other investors will be the owners of the voting stock of the
Non-Controlled Subsidiaries.
"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, or, as the context may require, Host Marriott Trust
together with its subsidiaries or any of such subsidiaries.
"Hotel Partnership" means any Partnership or Private Partnership.
"Hotels" means the approximately 125 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."
"Indenture" means the indenture to be entered into between the Operating
Partnership and the Indenture Trustee pursuant to which the Notes will be
issued.
"Indenture Trustee" means Marine Midland Bank, 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" means the lease agreements under which the Lessees will lease the
Hotels from the Operating Partnership.
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"Lessees" means 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" means 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 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.
"Management Agreements" means the current management agreements pursuant to
which the Managers manage the Hotels. Following REIT Conversion, the
Management Agreements will be assigned to and assumed by the Lessees for the
term of the applicable Lease.
"Managers" means 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 event 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 would exceed 12% 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
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 specified 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 Corporations and Associations
Article of the Maryland Code Annotated.
"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
will be the surviving entity and will become a subsidiary of the Operating
Partnership.
"Merger Expenses" means all costs and expenses incurred in connection with
the proposed Mergers.
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"Merger Partnership" means a newly formed direct or indirect subsidiary of
the Operating Partnership, which will merge with 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 specified in each lease, less the
FF&E Adjustment.
"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 the $1.25 billion credit facility.
"NOI" means net operating income or the income before interests, taxes,
depreciation and amortization.
"Non-Controlled Subsidiaries" means 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.
"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" means 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 6.56% Callable Note due December 15, 2005 of the
Operating Partnership which a Limited Partner may elect to receive in
connection with 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) 80% of the
Exchange Value of such Limited Partner's Partnership Interest.
"Note Election" means the election by Limited Partners 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.
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"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 Adjusted 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 (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.
"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" means the interests of the Limited Partners in their
respective Partnerships.
"Partnership Provisions" means 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" means 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.
"Q & A" means the Questions and Answers provided to the Limited Partners as
part of the Solicitation Materials.
"Recognition Period" means the ten-year period beginning on the date on
which a Built-In Gain Asset is acquired by Host REIT.
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"Record Date" means September 12, 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.
"REIT Conversion" means (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 Crestline common stock, and possibly
cash and other consideration to Host REIT's shareholders and the Blackstone
Entities, (viii) the leasing of the Hotels to subsidiaries of Crestline 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 Host may determine in its discretion to be necessary or desirable to
complete or facilitate 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.
"Rights Agreement" means the Rights Agreement to be adopted by Host REIT
substantially in the form included as an exhibit to this Consent Solicitation.
"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" means "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.
"Shareholder Rights Plan" means the Shareholder Rights Plan to be adopted by
Host.
"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.
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"Solicitation Materials" means the Consent Solicitation, the Consent Form,
the OP Unit Election Form and the Q&A.
"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" means partnerships or limited liability companies
in which either the Operating Partnership or the Hotel Partnerships have an
interest.
"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" means the regulations promulgated by the IRS under
the Code.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States or any political subdivision
thereof, (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States persons who have authority to control
all substantial decisions of the trust.
"UBTI" means unrelated business taxable income.
"Unit 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.
281
<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 CORPORATION
Report of Independent Public Accountants................................ F-5
Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997... F-6
Consolidated Statements of Operations for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995......................... F-7
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-8
Consolidated Statement of Cash Flows for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995......................... F-9
Notes to Consolidated Financial Statements.............................. F-10
Condensed Consolidated Balance Sheet as of June 19, 1998 (unaudited).... F-34
Condensed Consolidated Statements of Operations for the Twenty-Four
Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)................ F-35
Condensed Consolidated Statements of Cash Flows for the Twenty-Four
Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)................ F-36
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-37
HOST MARRIOTT HOTELS
Report of Independent Public Accountants................................ F-45
Combined Consolidated Balance Sheets as of January 2, 1998 and January
3, 1997................................................................ F-46
Combined Consolidated Statements of Operations for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-47
Combined Consolidated Statements of Cash Flows for the Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995........... F-48
Notes to Combined Consolidated Financial Statements..................... F-49
Condensed Combined Consolidated Balance Sheet as of June 19, 1998
(unaudited)............................................................ F-73
Condensed Combined Consolidated Statements of Operations for the Twenty-
four Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)........... F-74
Condensed Combined Consolidated Statements of Cash Flows for the Twenty-
four Weeks Ended June 19, 1998 and June 20, 1997 (unaudited)........... F-75
Notes to Condensed Combined Consolidated Financial Statements
(unaudited)............................................................ F-76
HMC SENIOR COMMUNITIES, INC., WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION (TENANT FINANCIAL STATEMENTS)
Report of Independent Public Accountant................................. F-83
Consolidated Balance Sheet as of January 2, 1998........................ F-84
Consolidated Statement of Operations for the Period from June 21, 1997
(inception) through January 2, 1998.................................... F-85
Consolidated Statement of Shareholders' Equity for the Period from June
21, 1997 (inception) through January 2, 1998........................... F-86
Consolidated Statement of Cash Flows for the Period from June 21, 1997
(inception) through January 2, 1998.................................... F-87
Notes to Consolidated Financial Statements.............................. F-88
Condensed Consolidated Balance Sheet as of June 19, 1998 (unaudited).... F-98
Condensed Consolidated Statement of Operations for the Twenty-four Weeks
Ended June 19, 1998 (unaudited)........................................ F-99
Condensed Consolidated Statement of Cash Flows for the Twenty-four Weeks
Ended June 19, 1998 (unaudited)........................................ F-100
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-101
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HOST MARRIOTT L.P.
Report of Independent Public Accountants............................... F-103
Balance Sheet as of June 19, 1998...................................... F-104
Notes to Balance Sheet................................................. F-105
HOST MARRIOTT TRUST
Report of Independent Public Accountants............................... F-107
Balance Sheet as of September 8, 1998.................................. F-108
Notes to Balance Sheet................................................. F-109
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
OPERATING PARTNERSHIP
Introduction to Unaudited Pro Forma Financial Statements of the
Company............................................................... F-110
100% Participation with No Notes Issued
Pro Forma Balance Sheet as of June 19, 1998............................ F-112
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................. F-116
Pro Forma Statements of Cash Flows for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................. F-120
100% Participation with Notes Issued
Pro Forma Balance Sheet as of June 19, 1998............................ F-123
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................. F-127
Pro Forma Statements of Cash Flows for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................. F-131
CRESTLINE
Introduction to Unaudited Pro Forma Financial Statements of Crestline.. F-134
Pro Forma Balance Sheet as of June 19, 1998............................ F-135
Pro Forma Statements of Operations for the First Two Quarters 1998 and
the Fiscal Year Ended January 2, 1998................................. F-136
HISTORICAL FINANCIAL INFORMATION FOR THE MERGER PARTNERSHIPS
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
Selected Financial Data................................................ F-139
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... F-141
Report of Independent Public Accountants............................... F-147
Consolidated Balance Sheets as of December 31, 1997 and 1996........... F-148
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995................................................... F-149
Consolidated Statements of Changes in Partners' Deficit for the Years
Ended December 31, 1997, 1996 and 1995................................ F-150
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995................................................... F-151
Notes to Consolidated Financial Statements............................. F-152
Condensed Consolidated Statement of Operations for the First Two
Quarters 1998 and 1997 (unaudited).................................... F-162
Condensed Consolidated Balance Sheet as of June 19, 1998 and December
31, 1997 (unaudited).................................................. F-163
Condensed Consolidated Statements of Cash Flows for the First Two
Quarters 1998 and 1997 (unaudited).................................... F-164
Notes to Condensed Consolidated Financial Statements (unaudited)....... F-165
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
Selected Financial Data................................................ F-168
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... F-169
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................ F-178
Balance Sheets as of December 31, 1997 and 1996......................... F-179
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-180
Statements of Changes in Partners' Capital (Deficit) for the Years Ended
December 31, 1997, 1996 and 1995....................................... F-181
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-182
Notes to Financial Statements........................................... F-183
Condensed Consolidated Balance Sheets as of June 19, 1998 and December
31, 1997 (unaudited)................................................... F-191
Condensed Consolidated Statements of Operations for the First Two
Quarters 1998 and 1997 (unaudited)..................................... F-192
Condensed Consolidated Statements of Cash Flows for the First Two
Quarters 1998 and 1997 (unaudited)..................................... F-193
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-194
HANOVER MARRIOTT LIMITED PARTNERSHIP
Selected Financial Data................................................. F-196
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-197
Report of Independent Public Accountants................................ F-202
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-203
Balance Sheets as of December 31, 1997 and 1996......................... F-204
Statements of Changes in Partners' Capital (Deficit) for the Years Ended
December 31, 1997, 1996 and 1995....................................... F-205
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-206
Notes to Financial Statements........................................... F-207
Condensed Balance Sheets as of June 19, 1998 and December 31, 1997
(unaudited)............................................................ F-215
Condensed Statements of Operations for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-216
Condensed Statements of Cash Flows for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-217
Notes to Condensed Financial Statements (unaudited)..................... F-218
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
Selected Financial Data................................................. F-220
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-221
Report of Independent Public Accountants................................ F-227
Consolidated Balance Sheets as of December 31, 1997 and 1996............ F-228
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-229
Consolidated Statements of Changes in Partners' Capital (Deficit) for
the Years Ended December 31, 1997, 1996 and 1995....................... F-230
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-231
Notes to Consolidated Financial Statements.............................. F-232
Condensed Consolidated Balance Sheets as of June 19, 1998 and December
31, 1997 (unaudited)................................................... F-241
Condensed Consolidated Statements of Operations for the First Two
Quarters 1998 and 1997 (unaudited)..................................... F-242
Condensed Consolidated Statements of Cash Flows for the First Two
Quarters 1998 and 1997 (unaudited)..................................... F-243
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-244
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
Selected Financial Data................................................. F-247
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-248
Report of Independent Public Accountants................................ F-255
Balance Sheets as of December 31, 1997 and 1996......................... F-256
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-257
Statements of Changes in Partners' Capital for the Years Ended December
31, 1997, 1996 and 1995................................................ F-258
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statements of Cash Flows for the Years Ended December 31, 1997, 199f-
1846 and 1995.......................................................... F-259
Notes to Financial Statements........................................... F-260
Condensed Balance Sheets as of June 19, 1998 and December 31, 1997
(unaudited)............................................................ F-270
Condensed Statements of Operations for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-271
Condensed Statements of Cash Flows for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-272
Notes to Condensed Financial Statements (unaudited)..................... F-273
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
Selected Financial Data................................................. F-276
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-277
Report of Independent Public Accountants................................ F-281
Balance Sheets as of December 31, 1997 and 1996......................... F-282
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-283
Statements of Changes in Partners' Deficit for the Years Ended December
31, 1997, 1996 and 1995................................................ F-284
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-285
Notes to Financial Statements........................................... F-286
Condensed Balance Sheets as of June 19, 1998 and December 31, 1997
(unaudited)............................................................ F-292
Condensed Statements of Operations for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-293
Condensed Statements of Cash Flows for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-294
Notes to Condensed Financial Statements (unaudited)..................... F-295
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
Selected Financial Data................................................. F-297
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-298
Report of Independent Public Accountants................................ F-301
Balance Sheets as of December 31, 1997 and 1996......................... F-302
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-303
Statements of Changes in Partners' Deficit for the Years Ended December
31, 1997, 1996 and 1995................................................ F-304
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-305
Notes to Financial Statements........................................... F-306
Condensed Balance Sheets as of June 19, 1998 and December 31, 1997
(unaudited)............................................................ F-313
Condensed Statements of Operations for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-314
Condensed Statements of Cash Flows for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-315
Notes to Condensed Financial Statements (unaudited)..................... F-316
POTOMAC HOTEL LIMITED PARTNERSHIP
Selected Financial Data................................................. F-318
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-319
Report of Independent Public Accountants................................ F-328
Balance Sheets as of December 31, 1997 and 1996......................... F-329
Statements of Operations for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-330
Statements of Changes in Partners' Deficit for the Years Ended December
31, 1997, 1996 and 1995................................................ F-331
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-332
Notes to Financial Statements........................................... F-333
Condensed Balance Sheets as of June 19, 1998 and December 31, 1997
(unaudited)............................................................ F-345
Condensed Statements of Operations for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-346
Condensed Statements of Cash Flows for the First Two Quarters 1998 and
1997 (unaudited)....................................................... F-347
Notes to Condensed Financial Statements (unaudited)..................... F-348
</TABLE>
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of January 2, 1998 and January 3,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 2, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries 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 consolidated financial statements, in
1995 the Company changed its method of accounting for the impairment of long-
lived assets.
Arthur Andersen LLP
Washington, D.C.
February 27, 1998
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Property and Equipment, net.................................... $5,217 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)..... 54 297
Due from Managers.............................................. 93 89
Investments in Affiliates...................................... 13 11
Other Assets................................................... 284 246
Short-term Marketable Securities............................... 354 --
Cash and Cash Equivalents...................................... 511 704
------ ------
$6,526 $5,152
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior Notes Issued by the Company or its Subsidiaries........ $1,585 $1,021
Mortgage Debt................................................. 1,979 1,529
Other......................................................... 219 97
------ ------
3,783 2,647
Accounts Payable and Accrued Expenses.......................... 97 74
Deferred Income Taxes.......................................... 508 464
Other Liabilities.............................................. 388 290
------ ------
Total Liabilities........................................... 4,776 3,475
------ ------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company Substantially
All of Whose Assets are the Convertible Subordinated
Debentures Due 2026 ("Convertible Preferred Securities")...... 550 550
------ ------
Shareholders' Equity
Common Stock, 600 million shares authorized; 203.8 million
shares in 1997 and 202.0 million shares in 1996 issued and
outstanding.................................................. 204 202
Additional Paid-in Capital.................................... 947 926
Retained Earnings (Deficit)................................... 49 (1)
------ ------
Total Shareholders' Equity.................................. 1,200 1,127
------ ------
$6,526 $5,152
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
REVENUES
Hotels.................................................. $1,093 $ 717 $ 474
Senior living communities............................... 37 -- --
Net gains (losses) on property transactions............. (11) 1 (3)
Equity in earnings of affiliates........................ 5 3 --
Other................................................... 23 11 13
------ ----- -----
Total revenues........................................ 1,147 732 484
------ ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees
of $162 million, $101 million and $67 million,
respectively).......................................... 649 461 281
Senior living communities (including Marriott
International management fees of $6 million in 1997)... 20 -- --
Other (including a $60 million write-down of undeveloped
land in 1995).......................................... 29 38 89
------ ----- -----
Total operating costs and expenses.................... 698 499 370
------ ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................... 449 233 114
Minority interest........................................ (32) (6) (2)
Corporate expenses....................................... (47) (43) (36)
Interest expense......................................... (302) (237) (178)
Dividends on Convertible Preferred Securities of
subsidiary trust........................................ (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)
====== ===== =====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
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 COMMON SHARE................... $ .25 $(.07) $(.90)
====== ===== =====
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
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 COMMON SHARE................. $ .24 $(.07) $(.90)
====== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED
OUTSTANDING STOCK STOCK CAPITAL EARNINGS
----------- ----------- ------ ---------- --------
(IN MILLIONS) (IN MILLIONS)
<C> <S> <C> <C> <C> <C>
Balance, December 30,
153.6 1994.................... $ 13 $154 $479 $ 64
-- Net loss................. -- -- -- (143)
Distribution of stock of
Host Marriott Services
-- Corporation............. -- -- (4) 95
Common stock issued for
the comprehensive stock
and employee stock
1.3 purchase plans.......... -- 1 16 --
Conversion of preferred
4.8 stock to common stock... (13) 5 8 --
- --------------------------------------------------------------------------------
Balance, December 29,
159.7 1995.................... -- 160 499 16
-- Net loss................. -- -- -- (13)
Adjustment to Host
Marriott Services
-- Dividend................ -- -- -- (4)
Common stock issued for
the comprehensive stock
and employee stock
3.9 purchase plans.......... -- 3 17 --
Common stock issued for
6.8 warrants exercised...... -- 7 42 --
Common stock issued in
31.6 stock offering.......... -- 32 368 --
- --------------------------------------------------------------------------------
Balance, January 3,
202.0 1997.................... -- 202 926 (1)
-- Net income............... -- -- -- 50
Common stock issued for
the comprehensive stock
and employee stock
1.8 purchase plans.......... -- 2 21 --
- --------------------------------------------------------------------------------
Balance, January 2,
203.8 1998.................... $ -- $204 $947 $ 49
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 240 168 122
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....................... (5) (3) --
Other.................................................. 60 49 33
Changes in operating accounts:
Other assets.......................................... 60 9 (2)
Other liabilities..................................... 67 32 (9)
------- ----- -----
Cash from continuing operations........................ 464 205 110
Cash from (used in) discontinued operations............ -- (4) 32
------- ----- -----
Cash from operations................................... 464 201 142
------- ----- -----
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............................................ (596) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements..... (131) (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............................................ (1,046) (504) (156)
Cash used in investing activities from discontinued
operations............................................ -- -- (52)
------- ----- -----
Cash used in investing activities...................... (1,046) (504) (208)
------- ----- -----
FINANCING ACTIVITIES
Issuances of debt....................................... 857 46 1,251
Issuances of Convertible Preferred Securities, net...... -- 533 --
Issuances of common stock............................... 6 454 13
Scheduled principal repayments.......................... (93) (82) (100)
Debt prepayments........................................ (403) (173) (960)
Other................................................... 22 28 --
------- ----- -----
Cash from financing activities from continuing
operations............................................ 389 806 204
Cash used in financing activities from discontinued
operations............................................ -- -- (4)
------- ----- -----
Cash from financing activities......................... 389 806 200
------- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (193) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............ 704 201 67
------- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................. $ 511 $ 704 $ 201
======= ===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and senior living communities ............. $ 733 $ 696 $ 141
======= ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of January 2, 1998, Host Marriott Corporation (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. The Company also owned a portfolio
consisting of 30 premier senior living communities as of January 2, 1998, all
of which are managed by Marriott Senior Living Services, Inc. ("MSLS"), a
subsidiary of Marriott International.
On December 29, 1995, the Company 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 consolidated financial statements were restated to
reflect the Operating Group as discontinued operations.
The structure of the Company 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.
Principles of Consolidation
The 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 and senior living communities because the Company has delegated
substantially all of the operating decisions related to the generation of
house profit from its hotel properties and senior living communities 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' and
senior living communities' 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 consolidated
financial statements. See Note 18.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
F-10
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires the Company to include
property-level sales and operating expenses of its hotels and senior living
communities in its statements of operations (see Note 18). The Company will
adopt EITF 97-2 in the fourth quarter of 1998 with retroactive effect in prior
periods to conform to the new presentation. Application of EITF 97-2 to the
consolidated financial statements for the fiscal years ended January 2, 1998,
January 3, 1997 and December 29, 1995 would have increased both revenues and
operating expenses by approximately $1.7 billion, $1.2 billion and $.9
billion, respectively and would have had no impact on operating profit, net
income or earnings per share.
Earnings (Loss) Per Common Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other dilutive
securities. Diluted earnings per common share 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.
A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per common share follows:
<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 compre-
hensive stock plan, less shares assumed purchased at average
market price................................................ 4.8 -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market price....... .3 -- --
----- ----- -----
Shares utilized for the calculation of diluted earnings per
share..................................................... 208.2 188.7 158.3
===== ===== =====
</TABLE>
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: 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 or
senior living communities, 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
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $115 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. 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.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized.
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.
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
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 consolidated financial statements.
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, the Company 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 the Company, 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 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. The Company recorded
approximately $9 million of expenses related to the consummation of the
Special Dividend in 1995. Revenues for the Company'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 the
Company and HM Services after the Special Dividend and to provide for an
orderly transition, the Company 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 the Company 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 the Company upon exercise of stock options held by
certain former employees of the Company (see Note 10).
F-13
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 521 $ 349
Buildings and leasehold improvements......................... 4,796 3,507
Furniture and equipment...................................... 710 548
Construction in progress..................................... 35 82
------ ------
6,062 4,486
Less accumulated depreciation and amortization............... (845) (681)
------ ------
$5,217 $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 costs, which
has been included in net gains (losses) on property transactions in the
accompanying 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>
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 four affiliated partnerships for
approximately $550 million, including the assumption of approximately $410
million of debt. These affiliated partnerships included the partnerships that
own the 353-room Hanover Marriott; the 884-room Marriott's Desert Springs
Resort and Spa; 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; and the partnership that owns the
418-unit Leisure Park retirement community. 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 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 was eliminated
in the consolidation of CHLP 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>
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $1,991 $2,636
Other assets................................................. 284 334
------ ------
Total assets............................................... $2,275 $2,970
====== ======
Debt, principally mortgages.................................. $2,185 $2,855
Other liabilities............................................ 412 672
Partners' deficit............................................ (322) (557)
------ ------
Total liabilities and partners' deficit.................... $2,275 $2,970
====== ======
</TABLE>
Combined summarized operating results for the Company's affiliates follow:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................ $ 610 $ 737 $ 770
Operating expenses:
Cash charges (including interest)...................... (381) (465) (506)
Depreciation and other non-cash charges................ (192) (230) (240)
----- ----- -----
Income before extraordinary items....................... 37 42 24
Extraordinary items--forgiveness of debt................ 40 12 181
----- ----- -----
Net income............................................ $ 77 $ 54 $ 205
===== ===== =====
</TABLE>
In December 1997, the Company, on behalf of six of its subsidiaries, filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission, which describes the potential consolidation of six limited
partnerships, including 219 limited-service hotel properties, into a single
operating partnership and the formation of a new general partner which would
intend to qualify as a real estate investment trust ("REIT"). Completion of
this transaction is subject to several major contingencies, including a vote by
the partners in each partnership, and no assurance can be given that the
transaction will be consummated.
F-16
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
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 $3.0 billion of real
estate assets, with an average rate of 8.6% at January 2,
1998, maturing through 2022................................. 1,957 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 March 1998.................... 22 --
------ ------
Total Mortgage Debt........................................ 1,979 1,529
------ ------
Other notes, with an average rate of 8% at January 2, 1998,
maturing through 2027....................................... 200 86
Capital lease obligations.................................... 19 11
------ ------
Total Other................................................ 219 97
------ ------
$3,783 $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
Company's 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 the Company, 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 "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 required to permit Properties to make
distributions to affiliates.
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concurrent with the Consent Solicitations and the 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, which may include senior living communities, 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, the Company, 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 the Company'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 the Company. 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, the Company 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.
The Company also purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The Company 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, the Company incurred approximately $418 million of mortgage debt in
conjunction with the acquisition of 11 hotels. In connection with the
acquisition of the outstanding common stock of Forum Group, Inc. (the "Forum
Group") in June 1997 (see Note 12), the Company also assumed debt of
approximately $270 million. The $270 million of debt is comprised of secured
debt of approximately $198 million and unsecured debt of approximately $72
million ($59 million of which was provided by Marriott International). In
1997, the Company completed $56 million of the $107 million expansion plan for
the Forum Group properties. 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 Company also assumed approximately $15 million of debt in
conjunction with the acquisition of the Leisure Park retirement community.
F-18
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, the Company
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, the Company 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.
In December 1997, the Company 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.
The Company's debt balance at January 2, 1998, includes $232 million of debt
that is recourse to the parent company. Aggregate debt maturities at January
2, 1998, excluding capital lease obligations, are (in millions):
<TABLE>
<S> <C>
1998................................................................ $ 371
1999................................................................ 58
2000................................................................ 135
2001................................................................ 220
2002................................................................ 158
Thereafter.......................................................... 2,822
------
$3,764
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts
capitalized, was $286 million in 1997, $220 million in 1996 and $177 million
in 1995. Deferred financing costs, which are included in other assets,
amounted to $97 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.
F-19
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST HOLDING COMPANY SUBSTANTIALLY ALL OF WHOSE ASSETS ARE
THE CONVERTIBLE SUBORDINATED DEBENTURES DUE 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, 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 the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures were issued,
the Debentures, the Company'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 the
Company. 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 the Company's
guarantee described above; the Company'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 Company 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 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 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. The Company 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, the Company 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 the Company 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.
7. SHAREHOLDERS' EQUITY
Six hundred million shares of common stock, 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
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995, substantially all outstanding shares of such preferred stock were
converted into approximately five million shares of common stock with the
remainder defeased.
On March 27, 1996, the Company 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, the Company issued warrants to
purchase up to 7.7 million shares of the Company'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 Company common stock were issued. During 1997,
approximately 60,000 warrants were exercised at $10.00 per share and an
equivalent number of shares of Company common stock were issued. As of January
2, 1998, there were approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company'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 the Company 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 the Company'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 the Company for $.01 each. If the Company 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 the Company or the acquiror having a value of
twice the exercise price of the right.
8. INCOME 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......................................... $ 158 $ 139
Deferred tax liabilities.................................... (666) (603)
------ ------
Net deferred income tax liability......................... $ (508) $ (464)
====== ======
</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 and January 3, 1997 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates................................... $ (310) $ (303)
Property and equipment...................................... (200) (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......................... $ (508) $ (464)
====== ======
</TABLE>
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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)
=== === ====
</TABLE>
At January 2, 1998, the Company had approximately $41 million of alternative
minimum tax credit carryforwards available which do not expire.
Through 1997, the Company settled with the Internal Revenue Service ("IRS")
substantially all issues for tax years 1979 through 1993. The Company expects
to resolve any remaining issues with no material impact on the consolidated
financial statements. The Company 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:
<TABLE>
<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........................................ .1 9.0 --
Other, net............................................. .1 1.0 0.7
---- ----- -----
Effective income tax rate............................ 43.4% 62.5 % (17.3)%
==== ===== =====
</TABLE>
As part of the Marriott International Distribution and the Special Dividend,
the Company, 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 the Company, 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.
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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....................................................... $ 3 $ 115
1999....................................................... 3 112
2000....................................................... 3 109
2001....................................................... 3 106
2002....................................................... 3 103
Thereafter................................................. 16 1,361
--- ------
Total minimum lease payments............................... 31 $1,906
======
Less amount representing interest.......................... 12
---
Present value of minimum lease payments.................. $19
===
</TABLE>
As discussed in Note 12, the Company sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to a REIT. Additionally, in 1996, the Company sold and leased back 18 of its
Residence Inns to the same REIT. 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.
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>
F-23
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE STOCK PLANS
At January 2, 1998, the Company has two stock-based compensation plans which
are described below. Under the comprehensive stock plan (the "Comprehensive
Plan"), the Company may award to participating employees (i) options to
purchase the Company's common stock, (ii) deferred shares of the Company's
common stock and (iii) restricted shares of the Company's common stock. In
addition, the Company 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, the Company 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.
The Company 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.
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 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 the Company were redenominated in both
Company 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 Company's
common stock
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, the Company 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,
the Company valued this right at approximately $20 million, which is included
in other assets. A summary of the status of the Company's stock option plan
for 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
<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 WEIGHTED SHARES WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES JANUARY 2, 1998 CONTRACTUAL 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>
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. The Company 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. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
forfeitures, and where appropriate, the level of attainment of performance
criteria and fluctuations in the fair market value of the Company'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. The Company 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
The Company 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 the
Company is determined annually by the Board of Directors. The Company 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 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.
Also in 1997, the Company acquired the outstanding common stock of the Forum
Group from MSLS (29 senior living communities) for approximately $460 million,
including approximately $270 million in debt, as described in Note 5. In
addition, the Company plans to add approximately 1,060 units to these
communities for approximately $107 million through an expansion plan which
will be completed in 1999. In 1997, approximately $56 million of the expansion
plan had been completed (including approximately $33 million of debt financing
provided by Marriott International). The Company also acquired 49% of the
remaining 50% interest in the partnership which owned the 418-unit Leisure
Park retirement community for approximately $23 million, including the
assumption of approximately $15 million of debt.
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 a REIT 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
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 consolidated pro forma results of
operations, assuming the above transactions and the refinancings and new debt
activity discussed in Note 5 occurred on December 30, 1995, are as follows (in
millions, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues.................................................... $1,274 $1,121
Income (loss) before extraordinary items.................... 42 (24)
Net income (loss)........................................... 45 (24)
Basic earnings (loss) per common share:
Income (loss) before extraordinary items................... .21 (.13)
Basic earnings (loss) per common share..................... .22 (.13)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items................... .20 (.13)
Diluted earnings (loss) per common share................... .22 (.13)
</TABLE>
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............... 3,764 3,815 2,636 2,654
Other financial instruments
Convertible Preferred Securities.......... 550 638 550 595
Interest rate swap agreements............. -- -- -- 1
Affiliate debt service commitments........ -- -- -- --
</TABLE>
Short-term marketable securities and 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.
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The Company
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.
The Company 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) all of the Company's senior living communities are
managed by MSLS under agreements with initial terms of 25 to 30 years and
which are subject to renewal at the option of Marriott International for an
additional five to ten years (see Note 16); (iv) Marriott International
provided the Company with $92 million of financing at an average rate of 9% in
1997 (and may provide additional financing as the expansion plan is completed)
in conjunction with the acquisition of senior living communities from Marriott
International (see Notes 5 and 12); (v) the Company acquired 49% of Marriott
International's 50% interest in the Leisure Park retirement community in 1997
for $23 million, including approximately $15 million of assumed debt; (vi)
Marriott International guarantees the Company's performance in connection with
certain loans and other obligations ($107 million at January 2, 1998); (vii)
the Company borrowed and repaid $109 million of first mortgage financing for
construction of the Philadelphia Marriott (see Note 5); (viii) 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); (ix) 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; (x) in 1995, the Company also acquired a
full-service property from a partnership in which Marriott International owned
a 50% interest; and (xi) Marriott International provides certain limited
administrative services.
In 1997, 1996 and 1995, the Company paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$13 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International, $3
F-28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million, $4 million and $12 million, respectively, for limited administrative
services. The Company also paid Marriott International $4 million, $2 million
and $1 million, respectively, of franchise fees in 1997, 1996 and 1995. In
connection with the acquisition of the Forum Group, the Company paid Marriott
International $6 million in senior living community management fees during
1997.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company 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.
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.
F-29
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
agreement 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.
The agreement 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 consolidated balance
sheets.
16. SENIOR LIVING COMMUNITY OPERATING AGREEMENTS
The Company's senior living communities (the "Communities") are subject to
operating agreements (the "SLC Agreements") which provide for MSLS 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 MSLS of up to
an additional five to ten years. The SLC Agreements provide for payment of
base management fees generally equal to five to eight percent of gross
revenues and incentive management fees generally equal to zero to 20% of
Operating Profit (as defined in the SLC Agreements) over a priority return to
the Company. In the event of early termination of the SLC Agreements, MSLS
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, but not all, management agreements if specified performance
thresholds are not satisfied. No SLC Agreement with respect to a single
community is cross-collateralized or cross-defaulted to any other SLC
Agreement and any single SLC Agreement may be terminated following a default
by the Company or MSLS, although such termination will not trigger the
cancellation of any other SLC Agreement.
Pursuant to the terms of the SLC Agreements, MSLS 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 SLC Agreements establish payment of Central Administrative Services
fees generally equal to 0% of Gross Revenues for the first year and 2%
thereafter.
MSLS is required under the SLC Agreements to deduct an amount from gross
revenues 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 revenues) generally will be 2.65% through fiscal year
2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The SLC
Agreements provide that the Company shall provide MSLS 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.
At January 2, 1998, approximately $6 million has been advanced to MSLS for
working capital for the senior living communities.
F-30
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. 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
financial statements.
18. HOTEL AND SENIOR LIVING COMMUNITY OPERATIONS
As discussed in Note 1, revenues recorded in the consolidated financial
statements reflect house profit from the Company's hotel properties and senior
living communities. House profit reflects the net revenues flowing to the
Company as property owner and represents all gross hotel and senior living
communities' 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.
Accordingly, the following table presents sales and 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>
The following table presents the sales and details of house profit for the
Company's senior living communities for 1997 (in millions):
<TABLE>
<S> <C>
Senior Living Communities Sales........................................ $111
Department Costs....................................................... 74
----
House Profit........................................................... $ 37
====
</TABLE>
19. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton brands, contain
F-31
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Senior living
communities generally contain 100 to 300 units and offer a variety of senior
care services that include independent living, assisted living and health
care. The communities provide security, meals, housekeeping, linen service and
24-hour emergency health care.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable
income/loss and changes in temporary differences. The allocation of taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the consolidated financial statements.
The following table presents revenues and other financial information by
business segment (in millions):
<TABLE>
<CAPTION>
1997
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $1,093 $ 37 $ 17 $1,147
Operating profit (loss).................... 444 17 (12) 449
Interest expense........................... 281 15 6 302
Interest income............................ 40 1 11 52
Depreciation and amortization ............. 226 9 5 240
Capital expenditures....................... 153 3 4 160
Total assets............................... 5,787 623 116 6,526
<CAPTION>
1996
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 717 $ -- $ 15 $ 732
Operating profit (loss) ................... 256 -- (23) 233
Interest expense........................... 228 -- 9 237
Interest income............................ 31 -- 17 48
Depreciation and amortization.............. 165 -- 3 168
Capital expenditures....................... 156 -- 3 159
Total assets............................... 4,770 -- 382 5,152
<CAPTION>
1995
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 474 $ -- $ 10 $ 484
Operating profit (loss) ................... 193 -- (79) 114
Interest expense .......................... 161 -- 17 178
Interest income............................ 11 -- 16 27
Depreciation and amortization.............. 117 -- 5 122
Capital expenditures....................... 154 -- 6 160
Total assets............................... 3,175 -- 382 3,557
</TABLE>
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
F-32
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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...... $1,108 $4,995 $714 $3,587 $482 $2,842
International...... 39 222 18 218 2 40
------ ------ ---- ------ ---- ------
Total............ $1,147 $5,217 $732 $3,805 $484 $2,882
====== ====== ==== ====== ==== ======
</TABLE>
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 252 $ 270 $ 246 $ 379 $ 1,147
Operating profit before
minority interest,
corporate expenses and
interest............... 91 124 89 145 449
Income before
extraordinary items ... 6 26 6 9 47
Net income.............. 11 26 6 7 50
Basic earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .25
Diluted earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .24
<CAPTION>
1996
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 130 $ 167 $ 167 $ 268 $ 732
Operating profit before
minority interest,
corporate expenses and
interest............... 38 62 49 84 233
Income (loss) before
extraordinary items.... (12) 7 (2) (6) (13)
Net income (loss)....... (12) 7 (2) (6) (13)
Basic earnings (loss)
per common share:
Income (loss) before
extraordinary items .. (.07) .04 (.01) (.03) (.07)
Net income (loss)...... (.07) .04 (.01) (.03) (.07)
Diluted earnings (loss)
per common share:
Income (loss) before
extraordinary items... (.07) .03 (.01) (.03) (.07)
Net income (loss)...... (.07) .03 (.01) (.03) (.07)
</TABLE>
The first three quarters consist of 12 weeks each in both 1997 and 1996, and
the fourth quarter includes 16 weeks in 1997 and 17 weeks in 1996. The sum of
the basic and diluted earnings (loss) per common share for the four quarters
in 1997 and 1996 differs from the annual earnings per common share due to the
required method of computing the weighted average number of shares in the
respective periods.
F-33
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 19, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<S> <C>
ASSETS
Property and Equipment, net............................................. $5,698
Notes and Other Receivables (including amounts due from affiliates of $5
million)............................................................... 33
Due from Managers....................................................... 104
Investments in Affiliates............................................... 5
Other Assets............................................................ 364
Short-Term Marketable Securities........................................ 46
Cash and Cash Equivalents............................................... 515
------
$6,765
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior Notes Issued by the Company or its Subsidiaries................ $1,585
Mortgage Debt......................................................... 2,074
Other................................................................. 125
------
3,784
Accounts Payable and Accrued Expenses................................... 79
Deferred Income Taxes................................................... 526
Other Liabilities....................................................... 528
------
Total Liabilities................................................... 4,917
------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Substantially All of Whose Assets are
the Convertible Subordinated Debentures Due 2026 ("Convertible
Preferred Securities")................................................. 550
------
Shareholders' Equity
Common Stock, 600 million shares authorized; 204.2 million shares
issued and outstanding............................................... 204
Additional Paid-in Capital............................................ 938
Retained Earnings..................................................... 145
Accumulated Other Comprehensive Income................................ 11
------
Total Shareholders' Equity.......................................... 1,298
------
$6,765
======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-34
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUES
Hotels........................................................... $652 $512
Senior living communities........................................ 39 --
Net gains (losses) on property transactions...................... 52 2
Equity in earnings (losses) of affiliates........................ (1) 3
Other............................................................ 5 5
---- ----
Total revenues................................................. 747 522
---- ----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of $102
million and $78 million in 1998 and 1997, respectively)......... 343 291
Senior living communities (including Marriott International
management fees of $6 million in 1998).......................... 20 --
Other............................................................ 10 16
---- ----
Total operating costs and expenses............................. 373 307
---- ----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE AND REIT
CONVERSION EXPENSES AND INTEREST.................................. 374 215
Minority interest.................................................. (30) (24)
Corporate expenses................................................. (21) (18)
REIT Conversion expenses........................................... (6) --
Interest expense................................................... (162) (122)
Dividends on Convertible Preferred Securities of a subsidiary
trust............................................................. (17) (17)
Interest income.................................................... 25 22
---- ----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.................. 163 56
Provision for income taxes......................................... (67) (24)
---- ----
INCOME BEFORE EXTRAORDINARY ITEM................................... 96 32
Extraordinary item -- gain on extinguishment of debt (net of income
taxes of $3 million in 1997)...................................... -- 5
---- ----
NET INCOME......................................................... $ 96 $ 37
==== ====
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item................................... $.47 $.16
Extraordinary item................................................. -- .02
---- ----
NET INCOME......................................................... $.47 $.18
==== ====
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item................................... $.45 $.16
Extraordinary item................................................. -- .02
---- ----
NET INCOME......................................................... $.45 $.18
==== ====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-35
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED 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 before extraordinary item................................. $ 96 $ 32
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization.................................. 125 102
Income taxes................................................... 45 --
Gains on sales of hotel properties............................. (51) --
Equity in (earnings) losses of affiliates...................... 1 (3)
Changes in operating accounts.................................. (33) 24
Other.......................................................... 23 38
----- -----
Cash from operations........................................... 206 193
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.................................... 209 6
Acquisitions..................................................... (387) (156)
Capital expenditures:
Renewals and replacements...................................... (79) (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 --
Note receivable collections...................................... 3 4
Affiliate collections, net....................................... 14 10
Other............................................................ (25) 14
----- -----
Cash provided by (used in) investing activities................ 11 (200)
----- -----
FINANCING ACTIVITIES
Issuances of debt................................................ 5 84
Issuances of common stock........................................ 1 3
Scheduled principal repayments................................... (19) (44)
Debt prepayments................................................. (168) (236)
Other............................................................ (32) 5
----- -----
Cash used in financing activities.............................. (213) (188)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ 4 $(195)
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase
of controlling interests in, certain hotel properties and
senior living communities..................................... $ 164 $ 258
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-36
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company" or "Host Marriott") 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 consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended 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 January
2, 1998, and the results of operations for the twenty-four weeks ended June
19, 1998 and June 20, 1997 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, the Company 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 of the new
operating partnership (the "Operating Partnership"), to be formed as part of
the Company's reorganization, described below. Each Operating Partnership 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.
The Blackstone transaction is expected to close immediately after the REIT
Conversion, as described below. At that time, Blackstone's hotels and other
assets will be contributed into 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. The Company's board of directors (the "Board") has authorized the Company
to reorganize its business operations to qualify as a real estate investment
trust ("REIT"), effective as of January 1, 1999, and to spin-off its senior
living communities business ("Crestline") through a taxable stock dividend to
its shareholders (collectively, the "REIT Conversion"). After the REIT
Conversion, which is subject to shareholder and final Board approval, the
Company intends to operate as an "UPREIT," with all of its assets and
operations conducted through the newly formed Operating Partnership of which
Host Marriott will be the general partner.
Host Marriott will distribute shares in Crestline to its shareholders at the
time of the REIT Conversion and Host Marriott expects to make a cash
distribution at that time. The projected aggregate value of these
distributions, which are expected to be treated as taxable dividends to
shareholders, is currently estimated between $400 million and $550 million. An
additional taxable distribution may be required in 1999. Crestline is expected
to own Host Marriott's portfolio of senior living properties. This portfolio
currently consists of 31 retirement communities, totaling 7,218 units in 13
states. The communities will continue to be managed by Marriott International.
In addition, Crestline will lease substantially all of the hotels owned by the
Operating Partnership. Crestline will operate independently of Host Marriott.
In order to facilitate the transition, there may initially be limited board of
directors overlap, which will be eliminated over time.
F-37
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Following the REIT Conversion, Host Marriott will own Operating Partnership
units ("OP Units") equal to the number of outstanding shares of Host Marriott
common stock at the time of the REIT Conversion. The UPREIT structure will not
affect the ownership by shareholders of their existing Host Marriott shares.
In June 1998, as part of the REIT Conversion, the Company 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 limited partnerships (the "Partnerships") that own full-
service hotels in which the Company 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") or common stock in the
REIT, in exchange for their partnership interests in such Partnerships.
The REIT expects to qualify as a real estate investment trust under federal
income tax law, beginning January 1, 1999. 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 or that it will be
effective as of January 1, 1999.
On April 20, 1998, the Company 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. The Company anticipates that any net proceeds
from the sale of offered securities will be used for refinancing of the
Company'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 owned 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 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.
F-38
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 equity holders 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.
4. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, 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 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>
F-39
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
House profit generated by the Company's senior living communities for 1998
consists of (in millions):
<TABLE>
<CAPTION>
TWENTY-FOUR
WEEKS ENDED
JUNE 19, 1998
-------------
<S> <C> <C>
Sales......................................................... $ 110
Department Costs.............................................. 71
-------
House Profit................................................ $ 39
=======
</TABLE>
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Company has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires the Company to include
property-level sales and operating expenses of its hotels and senior living
communities in its statements of operations. The Company will adopt EITF 97-2
in the fourth quarter of 1998 and with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 to the consolidated
financial statements for the twenty-four weeks ended June 19, 1998 would have
increased both revenues and operating expenses by approximately $993 million
and would have had no impact on operating profit, net income or earnings per
share.
5. Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share is computed by dividing net income plus dividends by
the weighted average number of shares of common stock outstanding plus other
potentially dilutive securities. Diluted earnings per common share was not
adjusted for the impact of the Convertible Preferred Securities in 1997 as
they were anti-dilutive.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share 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 share................................................ 238.0 207.9
===== =====
</TABLE>
6. 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 losses of affiliates was $1 million for the twenty-four weeks ended
June 19, 1998, respectively. The Company's equity in earnings of affiliates
was $3 million for the twenty-four weeks ended June 20, 1997, respectively.
F-40
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 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.
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 held a note receivable interest of approximately $5 million.
7. 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.
Also, during the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities in Denver and Colorado
Springs, Colorado, for $35 million in 1999 after the anticipated completion of
construction, if they achieve certain operating performance criteria. All
three of these communities will be operated by Marriott Senior Living
Services, Inc. ("MSLS") under long-term operating agreements.
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. Also, during 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.
In the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton,
San Francisco for approximately $161 million and the 404-room Memphis Crowne
Plaza (which was converted to the Marriott brand upon acquisition) for
approximately $16 million.
8. In March 1997, the Company purchased 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott. The Company
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.
F-41
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
9. The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton brands. The Company's senior
living communities are operated under Marriott brands.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable income or
loss and changes in temporary differences. The allocation of income taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the condensed consolidated financial
statements.
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998
----------------------------------------------------
HOTELS SENIOR LIVING CORPORATE & OTHER CONSOLIDATED
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 652 $ 39 $ 56 $ 747
Operating profit........ 309 19 46 374
Interest income......... 24 1 -- 25
Interest expense........ (150) (10) (2) (162)
Other................... (30) -- (44) (74)
Income before income
taxes.................. 153 10 -- 163
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997
----------------------------------------------------
HOTELS SENIOR LIVING CORPORATE & OTHER CONSOLIDATED
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 512 $-- $ 10 $ 522
Operating profit
(loss)................. 221 -- (6) 215
Interest income......... 16 -- 6 22
Interest expense........ (119) -- (3) (122)
Other................... (24) -- (35) (59)
Income (loss) before in-
come taxes............. 94 -- (38) 56
</TABLE>
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, JUNE 20,
1998 1997
-------- --------
<S> <C> <C>
United States.............................................. $728 $508
International.............................................. 19 14
---- ----
Total.................................................... $747 $522
==== ====
</TABLE>
10. 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 non-owner
changes in equity.
F-42
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 $97 million. For the twenty-four weeks
ended June 20, 1997, other comprehensive income was $3 million. For the
twenty-four weeks ended June 20, 1997, comprehensive income was $40 million.
As of June 19, 1998, the Company's accumulated other comprehensive income was
approximately $11 million.
11. In the second quarter of 1998, the Company prepaid $92 million of 9%
unsecured debt provided by Marriott International related to the Company's
senior living communities.
12. In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Company, 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 the Company to the
extent the Issuer has funds available therefor. This guarantee, when taken
together with the Company's obligations under the indenture pursuant to which
the Debentures were issued, the Debentures, the Company'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 the Company. 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 the
Company's guarantee described above; the Company'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 Company 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 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 Convertible Preferred Securities.
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. The Company 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, the Company 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.
F-43
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company 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.
F-44
<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-45
<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-46
<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
Rooms................................................. $1,850 $1,302 $ 908
Food and beverage..................................... 776 515 363
Other................................................. 180 125 81
------ ------ -----
Total hotel revenues................................ 2,806 1,942 1,352
Net gains (losses) on property transactions........... (11) 1 (3)
Equity in earnings of affiliates...................... 5 3 --
Other................................................. 23 11 13
------ ------ -----
Total revenues...................................... 2,823 1,957 1,362
------ ------ -----
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................ 428 313 226
Food and beverage.................................... 592 406 284
Other department costs and deductions................ 693 506 368
------ ------ -----
Total hotel property-level costs and expenses....... 1,713 1,225 878
Other hotel operating costs and expenses (including
Marriott International management fees of $162 mil-
lion, $101 million, and $67 million, respectively)... 649 461 281
------ ------ -----
Total hotel operating costs and expenses............ 2,362 1,686 1,159
Other (including a $60 million write-down of undevel-
oped land in 1995)................................... 29 38 89
------ ------ -----
Total operating costs and expenses.................. 2,391 1,724 1,248
------ ------ -----
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-47
<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-48
<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") . In
these combined consolidated financial statements, Host Marriott Hotels 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-49
<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 sales generated by the Company's hotels. Other
hotel operating costs and expenses include depreciation, management fees, real
and personal property taxes, ground and equipment rent, insurance and certain
other costs.
F-50
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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)
===== ===== =====
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):
<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
comprehensive 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.
F-51
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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.
F-52
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-53
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-54
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-55
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-56
<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-57
<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
F-58
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-59
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-60
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-61
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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)
=== === ====
</TABLE>
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.
F-62
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<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>
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.
F-63
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-64
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-65
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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
F-66
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-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.
F-67
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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...................................................... $3,512 $3,267
Operating profit.............................................. 529 454
Income (loss) before extraordinary items...................... 37 (42)
</TABLE>
F-68
<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-69
<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-70
<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. 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.
F-71
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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...... $2,732 $4,412 $1,908 $3,587 $1,359 $2,842
International...... 91 222 49 218 3 40
------ ------ ------ ------ ------ ------
Total............ $2,823 $4,634 $1,957 $3,805 $1,362 $2,882
====== ====== ====== ====== ====== ======
</TABLE>
F-72
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
JUNE 19, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL (SEE NOTE 12)
ASSETS ---------- -------------
<S> <C> <C>
Property and Equipment, net........................... $ 5,054 $ 5,054
Notes and Other Receivables, net (including amounts
due from affiliates of $112 million)................. 137 137
Due from Managers..................................... 94 94
Investments in Affiliates............................. 5 5
Other Assets.......................................... 362 362
Short-term Marketable Securities...................... 46 46
Cash and Cash Equivalents............................. 496 271
------- -------
$ 6,194 $ 5,969
======= =======
LIABILITIES AND EQUITY
Debt
Senior Notes........................................ $ 1,585 $ 1,585
Mortgage Debt....................................... 1,890 1,890
Other............................................... 95 95
------- -------
3,570 3,570
Accounts Payable and Accrued Expenses................. 77 77
Deferred Income Taxes................................. 464 464
Other Liabilities..................................... 517 517
------- -------
Total Liabilities................................. 4,628 4,628
------- -------
Obligation to Host Marriott Corporation Related to
Mandatorily Redeemable Convertible Preferred Securi-
ties of a Subsidiary Trust of Host Marriott Corpora-
tion Substantially All of Whose Assets are the Con-
vertible Subordinated Debentures Due 2026 ("Convert-
ible Preferred Securities").......................... 550 550
Equity
Investments and Advances from Host Marriott Corpora-
tion............................................... 1,016 791
------- -------
$ 6,194 $ 5,969
======= =======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-73
<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
Rooms......................................................... $1,020 $831
Food and beverage............................................. 444 346
Other......................................................... 110 80
------ -----
Total hotel revenues........................................ 1,574 1,257
Net gains (losses) on property transactions................... 52 2
Equity in earnings of affiliates.............................. (1) 3
Other......................................................... 5 5
------ -----
Total revenues.............................................. 1,630 1,267
------ -----
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms....................................................... 227 187
Food and beverage........................................... 321 255
Other department costs and deductions....................... 374 303
------ -----
Total hotel property-level costs and expenses............. 922 745
Other hotel operating costs and expenses (including Marriott
International management fees of $162 million, $101 million
and $67 million, respectively)............................... 343 291
------ -----
Total hotel operating costs and expenses.................. 1,265 1,036
Other......................................................... 10 16
------ -----
Total operating costs and expenses........................ 1,275 1,052
------ -----
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-74
<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-75
<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 ("Crestline") 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, Crestline 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") or common stock in the REIT, 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
F-76
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-77
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 sales generated by the Company's hotels. Other
hotel operating costs and expenses include depreciation, management fees,
real and personal property taxes, ground and equipment rent, insurance and
certain other costs.
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 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>
F-78
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-79
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton,
San Francisco for approximately $161 million and the 404-room Memphis
Marriott (which was converted to the Marriott brand upon acquisition) for
approximately $16 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................................. $1,586 $1,230
International................................. 44 37
------ ------
Total..................................... $1,630 $1,267
====== ======
</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 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
F-80
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Crestline, 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
Crestline. Host Marriott also holds a $14.8 million, 6.375% unsecured
note due from Crestline which
F-81
<PAGE>
matures in December, 2007. Host Marriott holds a total of approximately
$107 million in notes due from Crestline which are included as notes and
other receivables in the accompanying condensed combined consolidated
balance sheet.
12. The pro forma June 19, 1998 balance sheet reflects the $225 million
earnings and profit distribution which is expected to be made by the end
of the fiscal year in connection with the REIT Conversion. The amount of
the earnings and profits distribution will be based upon Host Marriott's
accumulated earnings and profit for tax purposes at the time of the REIT
Conversion.
F-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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 not control,
are accounted for using the equity method. All material intercompany
transactions and balances have been eliminated.
F-88
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 requires 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 with
retroactive effect in 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 will have no impact on
operating profit or net income. See Note 3.
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.
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.
F-89
<PAGE>
HMC SENIOR COMMUNITIES, INC.,
WHICH IS THE SENIOR LIVING COMMUNITIES' BUSINESS
OF HOST MARRIOTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-90
<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-91
<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-92
<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-93
<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
interest 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-94
<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-95
<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-96
<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-97
<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
</TABLE>
<TABLE>
<S> <C> <C>
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-98
<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-99
<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-100
<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-101
<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 impact of EITF 97-2 on its financial statements and
has determined that it requires 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 with
retroactive effect in prior periods to conform to the new presentation. The
effect of this change will be to increase revenues and operating costs and
expenses for the twenty-four weeks ended June 19, 1998 by approximately $71
million and will 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-102
<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-103
<PAGE>
HOST MARRIOTT, L.P.
BALANCE SHEET
JUNE 19, 1998
ASSETS
<TABLE>
<CAPTION>
<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-104
<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. 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-105
<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-106
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Host Marriott Corporation
We have audited the accompanying balance sheet of Host Marriott Trust (the
"Trust"), a Maryland real estate investment trust, as of September 8, 1998.
This balance sheet is the responsibility of the Trust's officers. 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 Trust as of September 8,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
September 10, 1998
F-107
<PAGE>
HOST MARRIOTT TRUST
BALANCE SHEET
SEPTEMBER 8, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Cash................................................................... $ --
=====
EQUITY
Common shares of beneficial interest, no par value, 100 shares
authorized, issued and outstanding.................................... --
Additional paid-in capital............................................. 100
Less: subscription receivable.......................................... (100)
-----
$ --
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-108
<PAGE>
HOST MARRIOTT TRUST
NOTES TO BALANCE SHEET
SEPTEMBER 8, 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 ("Crestline") 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 (the "Trust"), a newly formed
Maryland Real Estate Investment Trust ("REIT") that will merge with Host
Marriott Corporation, a Delaware corporation subsequent to the Contribution.
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
Trust includes its accounts as of September 8, 1998, its formation date.
Subsequent to the REIT Conversion, it is expected that the sole asset of the
Trust will be its 76% ownership of the Operating Partnership.
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.
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.
F-109
<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.
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 Company. 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")
There is no minimum condition to participation in the Mergers and the
Company does not believe that the presentation of additional scenarios is
relevant to investors or required. 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
. Blackstone Acquisition
. 1998 Bond Refinancing
. 1998 acquisition of, or purchase of controlling interests in, eleven
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
. 1998 lease of certain hotel properties to Crestline and conversion of
revenues and certain operating expenses to rental income
F-110
<PAGE>
. 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 Crestline
. 1998 contribution of note receivable to Crestline
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.
Upon the REIT Conversion, Host REIT's only asset will be its 76% investment
in the Operating Partnership. In the Operating Partnership balance sheet the
limited partner interests of third parties will be presented outside of the
equity section due to put rights held by the outside limited partners. Host
REIT will present the limited partner equity of third parties as minority
interest. There will be no difference in the carrying amount of the equity
held by outsiders between the Operating Partnership and Host REIT. The impact
of this difference under the 100% Participation with No Notes Issued scenario
on the pro forma net income of Host REIT would be to decrease pro forma net
income for minority interest expense by $8 million and $25 million,
respectively, for fiscal year 1997 and the First Two Quarters 1998.
The Company has not included pro forma financial statements of Host REIT
because the pro forma financial data of the Operating Partnership is
substantially the same as the pro forma financial data of Host REIT.
The Emerging Issues Task Force (EITF) reached a concensus in May 1998 on
Issue 98-9, "Accounting for Contingent Rents in Interim Financial Periods."
EITF 98-9 will be discussed again at the EITF's September 23 and 24th meeting.
The Company is reviewing the impact of EITF 98-9 and the impact of EITF 98-9
could be significant to interim period reporting, but will have no impact on
full year reporting. The accompanying pro forma financial statements do not
reflect any impact for EITF 98-9.
F-111
<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 D
HOST HOST DEBT
MARRIOTT MARRIOTT REPAYMENT
CORPORATION CRESTLINE HOTELS BLACKSTONE &
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS REFINANCING
----------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $5,698 $(644) $5,054 $1,515 $ 243 $ --
Notes and other
receivables, net....... 33 104 137 63 -- --
Due from managers....... 104 (10) 94 5 -- --
Investments in
affiliates............. 5 -- 5 -- -- --
Other assets............ 364 (2) 362 -- -- 47
(55)
82
Receivable from Lessee
for working capital.... -- -- -- -- -- --
Cash, cash equivalents
and short-term
marketable
securities............. 561 (19) 542 (262) (250) 267
------ ----- ------ ------ ----- -------
$6,765 $(571) $6,194 $1,321 $ (7) $ 341
====== ===== ====== ====== ===== =======
LIABILITIES AND EQUITY
Debt(K)................. $3,784 $(214) $3,570 $ 600 $ -- $(1,550)
1,692
350
Accounts payable and
accrued expenses....... 79 (2) 77 -- -- --
Deferred income taxes... 526 (62) 464 -- -- --
Other liabilities....... 528 (11) 517 -- (7) --
------ ----- ------ ------ ----- -------
Total liabilities....... 4,917 (289) 4,628 600 (7) 492
Convertible Preferred
Securities............. 550 -- 550 -- -- --
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 65.9 million OP
Units
outstanding)(L)........ -- -- -- 721 -- --
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(L)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.0 million OP Units
outstanding)(L)........ 1,298 (282) 1,016 -- -- (151)
------ ----- ------ ------ ----- -------
$6,765 $(571) $6,194 $1,321 $ (7) $ 341
====== ===== ====== ====== ===== =======
Book value per OP Unit
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------
E F G H M I J
EARNINGS DEFERRED
NON- PRIVATE & PROFITS CONTRI- LEASE TAX
CONTROLLED PARTNER- DISTRIBU- BUTION TO CONVER- ADJUST- PRO
SUBSIDIARIES MERGERS SHIPS TION(2) CRESTLINE SION MENT FORMA
------------ ------- -------- --------- --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and equipment,
net.................... $(342) $560 $ 61 $ -- $-- $ -- $ -- $7,091
Notes and other
receivables, net....... 63 (3) -- -- (92) -- -- 168
Due from managers....... (2) 14 -- -- -- (100) -- 11
Investments in
affiliates............. 308 -- -- -- -- -- -- 313
Other assets............ 6 32 (11) -- -- -- -- 463
Receivable from Lessee
for working capital.... -- -- -- -- -- 100 -- 100
Cash, cash equivalents
and short-term
marketable
securities............. (13) 3 (11) (175) -- -- -- 101
------------ ------- -------- --------- --------- ------- -------- ------
$ 20 $606 $ 39 $(175) $(92) $ -- $ -- $8,247
============ ======= ======== ========= ========= ======= ======== ======
LIABILITIES AND EQUITY
Debt(K)................. $ 94 $327 $-- $ 50 $-- $ -- $ -- $5,133
Accounts payable and
accrued expenses....... (10) 12 -- -- -- -- -- 79
Deferred income taxes... (35) -- -- -- -- -- (154) 275
Other liabilities....... (28) (21) (6) -- -- -- -- 455
------------ ------- -------- --------- --------- ------- -------- ------
Total liabilities....... 21 318 (6) 50 -- -- (154) 5,942
Convertible Preferred
Securities............. -- -- -- -- -- -- -- 550
Limited Partner
interests of third
parties at redemption
value (on a pro forma
basis 65.9 million OP
Units
outstanding)(L)........ -- 288 45 -- -- -- -- 1,054
Equity
General Partner (on a
pro forma basis .2
million OP Units
outstanding)(L)
Limited Partner
interests of Host REIT
(on a pro forma basis
204.0 million OP Units
outstanding)(L)........ (1) -- -- (225) (92) -- 154 701
------------ ------- -------- --------- --------- ------- -------- ------
$ 20 $606 $ 39 $(175) $(92) $ -- $ -- $8,247
============ ======= ======== ========= ========= ======= ======== ======
Book value per OP Unit $ 6.50
======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-112
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to record the spin-off of Crestline:
. Reduce property and equipment by $644 million
. Record receivables of $104 million related to certain Crestline debt
held by the Company
. Reduce due from managers by $10 million
. Reduce other assets by $2 million
. Reduce cash, cash equivalents and short-term marketable securities by
$19 million
. Reduce debt by $214 million
. Reduce accounts payable and accrued expenses by $2 million
. Reduce deferred income taxes by $62 million
. Reduce other liabilities by $11 million
. Reduce equity by $282 million
B. 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 $1,515 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 $721
million using an assumed Host Marriott stock price of $16.50 (which
includes the value of Crestline since Blackstone will receive shares of
Crestline in addition to OP Units)
C. Represents the adjustment to record the 1998 purchase of the remaining
minority interests in the Norfolk Waterside Marriott and the Calgary Marriott,
and the acquisition of The Ritz-Carlton, Dearborn, The Ritz-Carlton, San
Francisco and the Memphis Crowne Plaza:
. Record property and equipment of $243 million
. Record the use of cash of $250 million
. Record a decrease in other liabilities of $7 million related to the
purchase of minority interests
D. 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>
F-113
<PAGE>
. 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
E. Represents the adjustment to record the investment in the Non-Controlled
Subsidiaries 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
Subsidiaries
. Record receivable from Non-Controlled Subsidiaries for the furniture and
equipment loan of $200 million, and transfer of other notes totaling $4
million
. Transfer of a $133 million mortgage note receivable (previously
eliminated in consolidation) to the Non-Controlled Subsidiaries
. Record decrease in due from managers of $2 million
. Record investment in the Non-Controlled Subsidiaries of $308 million
. 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 Subsidiaries as indicated
above, net of $39 million of debt transferred to the Non-Controlled
Subsidiaries. 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 19.2 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 1,600 $ 24
Desert Springs................................. 37 2,453 36
Hanover........................................ 5 361 5
MHP............................................ 73 4,872 54
MHP II......................................... 84 5,585 78
Chicago Suites................................. 11 748 38
MDAH........................................... 45 3,000 162
PHLP........................................... 9 604 163
---- ------ ----
$288 19,233 $560
==== ====== ====
</TABLE>
The number of OP Units was determined based on the purchase price, as
described below, and an estimated price of an OP Unit of $15.00 which is based
upon the recent trading range of Host Marriott Corporation's Stock as adjusted
for the proposed dividend of Crestline to its shareholders.
F-114
<PAGE>
The purchase price was determined based on the greater of the (1) Estimated
Adjusted Appraised Value; (2) Estimated Continuation Value and (3) Estimated
Liquidation Value. See "Determination of Exchange Values and Allocations of OP
Units" for a detailed description of the methodology for determining exchange
values.
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 other 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 3.0 million OP Units totaling approximately $45
million
H. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility at $50 million.(/1/)
I. Represents the adjustment to record the transfer of working capital to
Crestline 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.................................................................. 1,104
2002.................................................................. 155
Thereafter............................................................ 3,125
------
$5,133
======
</TABLE>
L. The number of OP Units includes the following (in millions):
<TABLE>
<S> <C>
Limited Partner interests of Host REIT................................. 204.0
General Partner interests of Host REIT................................. 0.2
Limited Partner interests of each Partnership.......................... 19.2
Limited Partner interests of Private Partnerships...................... 3.0
Limited Partner interests of Blackstone Group.......................... 43.7
-----
Total OP Units....................................................... 270.1
=====
</TABLE>
M. Represents the adjustment to record the contribution of the $92 million
note receivable to Crestline as a reduction in equity.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The amount of the earnings
and profits distribution will be based in part upon the estimated amount
of Host's accumulated earnings and profits for tax purposes. To the
extent that the distributions made in connection with the REIT Conversion
are not sufficient to eliminate Host's estimated accumulated earnings and
profits, Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions.
F-115
<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 C E G
HOST HOST
MARRIOTT MARRIOTT 1998
CORPORATION CRESTLINE HOTELS BLACKSTONE ACQUISI- BOND
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION TIONS DISPOSITIONS REFINANCING
----------- ---------- ---------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 652 -- 652 80 36 (6) --
Equity in earn-
ings (losses)
of affiliates.. (1) -- (1) -- -- -- --
Other revenues.. 96 (39) 57 -- -- (50) --
---- ---- ----- ----------- ----------- ----------- -----------
Total revenues.. 747 (39) 708 80 36 (56) --
---- ---- ----- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 343 -- 343 48 19 (3) --
Other........... 30 (20) 10 -- -- -- --
---- ---- ----- ----------- ----------- ----------- -----------
Total operating
costs and
expenses....... 373 (20) 353 48 19 (3) --
---- ---- ----- ----------- ----------- ----------- -----------
OPERATING PROF-
IT............. 374 (19) 355 32 17 (53) --
Minority inter-
est............ (30) -- (30) -- (1) 1 --
Corporate ex-
penses......... (21) 1 (20) -- -- -- --
REIT Conversion
expenses....... (6) -- (6) -- -- -- --
Interest ex-
pense.......... (162) 11 (151) (24) (1) 1 (9)
Dividends on
Convertible
Preferred Secu-
rities......... (17) -- (17) -- -- -- --
Interest in-
come........... 25 1 26 (4) (10) (1) --
---- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes.......... 163 (6) 157 4 5 (52) (9)
Benefit
(provision) for
income taxes... (67) 3 (64) (2) (2) 21 4
---- ---- ----- ----------- ----------- ----------- -----------
Income (loss)
before
extraordinary
items.......... $ 96 $ 3 $ 93 $ 2 $ 3 $ (31) $ (5)
==== ==== ===== =========== =========== =========== ===========
Earnings per OP
Unit...........
Ratio of
earnings to
fixed charges.. 2.0x 2.0x
==== =====
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------------
H J K L P/N I/M O
NON- EARNINGS OTHER LEASE INCOME
CONTROLLED PRIVATE & PROFITS REIT CONVER- TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- ------- ------------ --------------- ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental reve-
nues........... $ -- $ -- $ -- $ -- $ -- $ 639 $ -- $ 639
Hotel revenues.. (12) 42 -- -- -- (792) -- --
Equity in earn-
ings (losses)
of affiliates.. 7 -- -- -- -- -- -- 6
Other revenues.. (4) -- -- -- -- -- -- 3
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Total revenues.. (9) 42 -- -- -- (153) -- 648
---------- ------- ------------ --------------- ---------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (6) 25 1 -- -- (133) -- 294
Other........... (5) -- -- -- -- -- -- 5
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Total operating
costs and
expenses....... (11) 25 1 -- -- (133) -- 299
---------- ------- ------------ --------------- ---------- ------- ---------- ------
OPERATING PROF-
IT............. 2 17 (1) -- -- (20) -- 349
Minority inter-
est............ 2 17 -- -- -- -- -- (11)
Corporate ex-
penses......... -- -- -- -- -- -- -- (20)
REIT Conversion
expenses....... -- -- -- -- 6 -- -- --
Interest ex-
pense.......... (4) (15) -- (1) -- -- -- (204)
Dividends on
Convertible
Preferred Secu-
rities......... -- -- -- -- -- -- -- (17)
Interest in-
come........... (1) 1 -- (4) -- 6 -- 13
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before income
taxes.......... (1) 20 (1) (5) 6 (14) -- 110
Benefit
(provision) for
income taxes... 1 (8) -- 2 (2) 6 38 (6)
---------- ------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before
extraordinary
items.......... $ -- $ 12 $ (1) $ (3) $ 4 $ (8) $ 38 $ 104
========== ======= ============ =============== ========== ======= ========== ======
Earnings per OP
Unit........... $ .39
======
Ratio of
earnings to
fixed charges.. 1.5x
======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-116
<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 E
HOST HOST
MARRIOTT CRESTLINE MARRIOTT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 1997
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS
----------- --------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Hotel revenues.. 1,093 -- 1,093 148 112 89 (23)
Equity in
earnings of
affiliates..... 5 -- 5 -- -- -- --
Other revenues.. 49 (37) 12 -- -- --
------ ----- ------ ----- ----- ----- -----
Total revenues.. 1,147 (37) 1,110 148 112 89 (23)
------ ----- ------ ----- ----- ----- -----
OPERATING COSTS AND
EXPENSES
Hotels.......... 649 -- 649 102 62 42 (10)
Other........... 49 (20) 29 -- -- -- --
------ ----- ------ ----- ----- ----- -----
Total operating
costs and
expenses....... 698 (20) 678 102 62 42 (10)
------ ----- ------ ----- ----- ----- -----
OPERATING PROFIT.. 449 (17) 432 46 50 47 (13)
Minority
interest....... (32) -- (32) -- (4) 5 (1)
Corporate
expenses....... (47) 2 (45) -- -- -- --
Interest
expense........ (302) 15 (287) (48) (12) (12) 3
Dividends on Convertible
Preferred
Securities..... (37) -- (37) -- -- -- --
Interest
income......... 52 -- 52 (7) (14) (15) --
------ ----- ------ ----- ----- ----- -----
Income (loss) before income
taxes.......... 83 -- 83 (9) 20 25 (11)
Benefit
(provision) for
income taxes... (36) -- (36) 4 (8) (10) 4
------ ----- ------ ----- ----- ----- -----
Income (loss)
before
extraordinary items .. $ 47 $ -- $ 47 $ (5) $ 12 $ 15 $ (7)
====== ===== ====== ===== ===== ===== =====
Earnings per OP
Unit............
Ratio of
earnings to
fixed charges... 1.3x 1.3x
====== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
----------------------------------------------------------------------------------
F/G H J K L N I/M O
EARNINGS
DEBT NON- PRIVATE & PROFITS LEASE INCOME
REPAYMENT CONTROLLED PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
& REFINANCING SUBSIDIARY MERGERS SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,182 $ -- $1,182
Hotel revenues.. -- (23) 74 -- -- -- (1,470) -- --
Equity in
earnings of
affiliates..... -- 7 -- -- -- -- -- -- 12
Other revenues.. -- (9) -- -- -- -- -- -- 3
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
Total revenues.. -- (25) 74 -- -- -- (288) -- 1,197
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
OPERATING COSTS AND
EXPENSES
Hotels.......... -- (12) 51 2 -- -- (246) -- 640
Other........... -- (18) -- -- -- -- -- -- 11
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
Total operating
costs and
expenses....... -- (30) 51 2 -- -- (246) -- 651
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
OPERATING PROFIT.. -- 5 23 (2) -- -- (42) -- 546
Minority
interest....... -- 5 17 1 -- -- -- -- (9)
Corporate
expenses....... -- 1 -- -- -- -- -- -- (44)
Interest
expense........ (48) (8) (25) -- (4) -- -- -- (441)
Dividends on Convertible
Preferred
Securities..... -- -- -- -- -- -- -- -- (37)
Interest
income......... (3) -- 1 -- (9) 1 14 -- 20
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
Income (loss) before income
taxes.......... (51) 3 16 (1) (13) 1 (28) -- 35
Benefit
(provision) for
income taxes... 20 (3) (6) -- 5 -- 11 17 (2)
------------- ---------- ------- -------- --------- ---------- -------- ---------- -------
Income (loss)
before
extraordinary items .. $ (31) $ -- $ 10 $ (1) $ (8) $ 1 $ (17) $ 17 $ 33
============= ========== ======= ======== ========= ========== ======== ========== =======
Earnings per OP
Unit............ $ .12
=======
Ratio of
earnings to
fixed charges... 1.1x
=======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-117
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NO NOTES ISSUED
A. Represents the adjustment to reduce revenues, operating expenses,
corporate expenses, interest expense, interest income and income taxes for the
spin-off of Crestline.
B. 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.
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 1998 acquisition of, or purchase of
controlling interests in 11 full-service properties.
D. 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.
E. 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.
F. 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).
G. 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.
H. 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.
I. 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 Subsidiaries and reduce the lease payment to the Company from the
Lessee.
J. 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.
K. 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.
L. Represents the adjustment to reduce interest income and record interest
expense for the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $50 million.(1)
F-118
<PAGE>
M. Represents the adjustment to remove hotel revenues and management fees of
$120 million and $217 million for First Two Quarters 1998 and fiscal year
1997, and to record rental revenues associated with the leasing of certain
hotel properties to Crestline 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.
N. Represents the adjustment to record interest income on the $10 million
loan to Crestline.
O. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
P. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion. Management expects that the total
estimated non-recurring expenses to be incurred will be approximately $50
million.
- --------
(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).
[To be Revised]
F-119
<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 C E G
HOST HOST
MARRIOTT CRESTLINE MARRIOTT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 BOND
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
----------- --------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 96 $ (3) $ 93 $ 2 $ 3 $ (31) $ (5)
Adjustments to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 125 (11) 114 29 9 -- --
Income taxes.... 45 -- 45 -- -- -- --
Gains on sales
of hotel
properties...... (51) -- (51) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... 1 -- 1 -- -- -- --
Changes in
operating
accounts......... (33) 10 (23) -- -- -- --
Other assets..... 23 4 27 -- -- -- --
----- ---- ----- ---- ---- ----- -------
Cash provided by
(used in)
operations...... 206 -- 206 31 12 19 (5)
----- ---- ----- ---- ---- ----- -------
INVESTING
ACTIVITIES
Acquisitions..... (387) 29 (358) -- 358 -- --
Cash received
from sale of
assets........... 209 -- 209 -- -- (209) --
Capital
expenditures..... (111) 2 (109) (11) (4) 2 --
Purchases of
short-term
marketable
securities....... (97) -- (97) -- -- -- --
Sales of short-
term marketable
securities....... 405 -- 405 -- -- -- --
Other............ (8) (91) (99) -- -- 21 --
----- ---- ----- ---- ---- ----- -------
Cash provided by
(used in)
investing
activities...... 11 (60) (49) (11) 354 (186) --
----- ---- ----- ---- ---- ----- -------
FINANCING
ACTIVITIES
Issuances of
debt............. 5 -- 5 -- -- -- 2,042
Scheduled
principal
repayments....... (19) 1 (18) -- -- -- --
Debt
prepayments...... (168) 119 (49) -- -- 35 (1,550)
Transfers to Host
Marriott......... -- (62) (62) -- -- -- --
Other............ (31) -- (31) -- -- -- --
----- ---- ----- ---- ---- ----- -------
Cash provided by
(used in)
financing
activities...... (213) 58 (155) -- -- 35 492
----- ---- ----- ---- ---- ----- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 4 $ (2) $ 2 $ 20 $366 $(132) $ 487
===== ==== ===== ==== ==== ===== =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------
H I J K L/M O/P N
EARNINGS
NON- & PROFITS LEASE
CONTROLLED PRIVATE DISTRI- CONVER- OTHER REIT TAX PRO
SUBSIDIARY MERGERS PARTNERSHIPS BUTION(1) SION ACTIVITIES ADJUSTMENT FORMA
---------- ------- ------------ --------- ------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $-- $ 12 $ (1) $ (3) $ (8) $ 4 $ 38 $ 104
Adjustments 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) 23 -- (3) (21) 4 38 300
---------- ------- ------------ --------- ------- ---------- ---------- --------
INVESTING
ACTIVITIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (6) -- -- -- -- -- (127)
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) -- -- -- -- -- 103
---------- ------- ------------ --------- ------- ---------- ---------- --------
FINANCING
ACTIVITIES
Issuances of
debt............. -- -- -- 50 -- -- -- 2,097
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) -- -- 50 (15) -- -- 405
---------- ------- ------------ --------- ------- ---------- ---------- --------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (5) $ 17 $-- $ 47 $(36) $ 4 $ 38 $ 808
========== ======= ============ ========= ======= ========== ========== ========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-120
<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 B D C E F/G
HOST HOST
MARRIOTT CRESTLINE MARRIOTT DEBT
CORPORATION ADJUST- HOTELS BLACKSTONE 1997 1998 REPAYMENT &
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- --------- ---------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $ 47 $ -- $ 47 $ (5) $ 15 $ 12 $ (7) $ (31)
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... 240 (9) 231 62 17 31 (3) --
Income taxes.... (20) -- (20) -- -- -- -- --
Other........... 70 3 73 -- -- -- (2) --
Changes in
operating
accounts........ 127 (26) 101 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
operations...... 464 (32) 432 57 32 43 (12) (31)
------- ----- ----- ---- ---- ---- ---- -------
INVESTING
ACTIVITIES
Acquisitions.... (596) 237 (359) -- 359 -- -- --
Cash received
from sale of
assets.......... 51 -- 51 -- -- -- -- --
Purchase of
short-term
marketable
securities...... (354) -- (354) -- -- -- -- --
Capital
expenditures.... (160) 2 (158) (20) (13) (13) 4 --
Other........... 13 -- 13 -- -- -- 1 --
------- ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
investing
activities...... (1,046) 239 (807) (20) 346 (13) 5 --
------- ----- ----- ---- ---- ---- ---- -------
FINANCING
ACTIVITIES
Issuances of
debt............ 857 -- 857 -- -- -- -- 1,188
Scheduled
principal
payments........ (93) 3 (90) -- -- -- -- --
Debt
prepayments..... (403) -- (403) -- -- -- -- (1,147)
Transfers to
Host Marriott... -- (226) (226) -- -- -- -- --
Other........... 28 (1) 27 -- -- -- -- --
------- ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
financing
activities...... 389 (224) 165 -- -- -- -- 41
------- ----- ----- ---- ---- ---- ---- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $ (193) $ (17) $(210) $ 37 $378 $ 30 $ (7) $ 10
======= ===== ===== ==== ==== ==== ==== =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------
H I J K O L/M N
EARNINGS
NON- PRIVATE & PROFITS LEASE
CONTROLLED PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
SUBSIDIARY MERGERS SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- ------- -------- --------- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIV-
ITIES
Income before
extraordinary... $-- $10 $(1) $(8) $ 1 $(17) $17 $ 33
Adjustments to
reconcile to
cash provided by
operations:
Depreciation and
amortization.... (8) 26 2 -- -- (29) -- 329
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in
operating
accounts........ -- -- -- -- -- -- -- 101
---------- ------- -------- --------- ---------- ------- ---------- --------
Cash provided by
(used in)
operations...... (8) 36 1 (8) 1 (46) 17 514
---------- ------- -------- --------- ---------- ------- ---------- --------
INVESTING
ACTIVITIES
Acquisitions.... -- -- -- -- -- -- -- --
Cash received
from sale of
assets.......... (35) -- -- -- -- -- -- 16
Purchase of
short-term
marketable
securities...... -- -- -- -- -- -- -- (354)
Capital
expenditures.... 2 (11) -- -- -- -- -- (209)
Other........... 33 -- -- -- -- -- -- 47
---------- ------- -------- --------- ---------- ------- ---------- --------
Cash provided by
(used in)
investing
activities...... -- (11) -- -- -- -- -- (500)
---------- ------- -------- --------- ---------- ------- ---------- --------
FINANCING
ACTIVITIES
Issuances of
debt............ (3) -- -- 50 -- -- -- 2,092
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) -- 50 -- (30) -- 210
---------- ------- -------- --------- ---------- ------- ---------- --------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS..... $(17) $18 $ 1 $42 $ 1 $(76) $17 $ 224
========== ======= ======== ========= ========== ======= ========== ========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-121
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF CASH FLOWS
100% PARTICIPATION WITH NO NOTES ISSUED
A) Represents the adjustment for cash flow amounts related to Crestline.
B) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the Blackstone Acquisition.
C) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, 11 full-service properties.
D) 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.
E) 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.
F) 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.
G) 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.
H) 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.
I) Represents the adjustment to record depreciation expense and capital
expenditures related to the Mergers, including the scheduled principal
amortization of notes.
J) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
K) 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 and interest expense for the $50 million draw on the New Credit
Facility.
L) Represents the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.(1)
M) 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.
N) Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
O) Represents the adjustment to record interest income on the $10 million in
loans to Crestline.
P) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The amount of the earnings and
profits distribution will be based in part upon the estimated amount of
Host's accumulated earnings and profits for tax purposes. To the extent
that the distributions made in connection with the REIT Conversion are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions.
F-122
<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
--------------------------------------
A B C D E
HOST
MARRIOTT DEBT NON-
CORPORATION CRESTLINE BLACKSTONE 1998 REPAYMENT CONTROLLED
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS & REFINANCING SUBSIDIARY
----------- ---------- ---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $5,698 $(644) $5,054 $1,515 $243 $ -- $(342)
Notes and other
receivables,
net............ 33 104 137 63 -- -- 63
Due from
managers....... 104 (10) 94 5 -- -- (2)
Investments in
affiliates..... 5 -- 5 -- -- -- 308
Other assets.... 364 (2) 362 -- -- 47 6
(55)
82
Receivable from
Lessee for
working
capital........ -- -- -- -- -- -- --
Cash, cash
equivalents and
short-term
marketable
securities..... 561 (19) 542 (262) (250) 267 (13)
------ ----- ------ ------ ---- ------- -----
$6,765 $(571) $6,194 $1,321 $ (7) $ 341 $ 20
====== ===== ====== ====== ==== ======= =====
LIABILITIES AND EQUITY
Debt(K)......... $3,784 $(214) $3,570 $ 600 $-- $(1,550) $ 94
1,692
350
Accounts payable
and accrued
expenses....... 79 (2) 77 -- -- -- (10)
Deferred income
taxes.......... 526 (62) 464 -- -- -- (35)
Other
liabilities.... 528 (11) 517 -- (7) -- (28)
------ ----- ------ ------ ---- ------- -----
Total
liabilities.... 4,917 (289) 4,628 600 (7) 492 21
Convertible
Preferred
Securities..... 550 -- 550 -- -- -- --
Limited Partner
interests of
third parties
at redemption
value (on a pro
forma basis
46.7 million OP
Units
outstanding)(L).. -- -- -- 721 -- -- --
Equity..........
General Partner
(on a proforma
basis .2
million OP
Units
outstanding)
Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding)(L).. 1,298 (282) 1,016 -- -- (151) (1)
------ ----- ------ ------ ---- ------- -----
$6,765 $(571) $6,194 $1,321 $ (7) $ 341 $ 20
====== ===== ====== ====== ==== ======= =====
Book value per
OP Unit........
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
--------------------------------------------------------------
F G H M I J
EARNINGS
& PROFITS LEASE DEFERRED
PRIVATE DISTRIBU- CONTRIBUTION CONVER- TAX PRO
MERGERS PARTNERSHIPS TION(2) TO CRESTLINE SION ADJUSTMENT FORMA
------- ------------ --------- ------------ ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Property and
equipment,
net............ $519 $ 61 $ -- $ -- $ -- $ -- $7,050
Notes and other
receivables,
net............ (3) -- -- (92) -- -- 168
Due from
managers....... 15 -- -- -- (100) -- 12
Investments in
affiliates..... -- -- -- -- -- -- 313
Other assets.... 32 (11) -- -- -- -- 463
Receivable from
Lessee for
working
capital........ -- -- -- -- 100 -- 100
Cash, cash
equivalents and
short-term
marketable
securities..... 3 (11) (175) -- -- -- 101
------- ------------ --------- ------------ ------- ---------- ------
$566 $ 39 $(175) (92) $ -- $ -- $8,207
======= ============ ========= ============ ======= ========== ======
LIABILITIES AND EQUITY
Debt(K)......... $575 $-- $ 50 $ -- $ -- $ -- $5,381
Accounts payable
and accrued
expenses....... 12 -- -- -- -- -- 79
Deferred income
taxes.......... -- -- -- -- -- (154) 275
Other
liabilities.... (21) (6) -- -- -- -- 455
------- ------------ --------- ------------ ------- ---------- ------
Total
liabilities.... 566 (6) 50 -- -- (154) 6,190
Convertible
Preferred
Securities..... -- -- -- -- -- -- 550
Limited Partner
interests of
third parties
at redemption
value (on a pro
forma basis
46.7 million OP
Units
outstanding)(L).. -- 45 -- -- -- -- 766
Equity..........
General Partner
(on a proforma
basis .2
million OP
Units
outstanding)
Limited
Partner
interests of
Host REIT (on
a pro forma
basis 204.0
million OP
Units
outstanding)(L).. -- -- (225) (92) -- 154 701
------- ------------ --------- ------------ ------- ---------- ------
$566 $ 39 $(175) $ (92) $ -- $ -- $8,207
======= ============ ========= ============ ======= ========== ======
Book value per
OP Unit........ $ 5.85
======
</TABLE>
See Notes to the Unaudited Pro Forma Balance Sheet.
F-123
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to record the spin-off of Crestline:
. Reduce property and equipment by $644 million
. Record receivables of $104 million related to certain Crestline debt held
by the Company
. Reduce due from managers by $10 million
. Reduce other assets by $2 million
. Reduce cash, cash equivalents and short-term marketable securities by $19
million
. Reduce debt by $214 million
. Reduce accounts payable and accrued expenses by $2 million
. Reduce deferred income taxes by $62 million
. Reduce other liabilities by $11 million
. Reduce equity by $282 million
B. 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 $1,515 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 $721 million
using an assumed Host Marriott stock price of $16.50 (which includes the
value of Crestline since Blackstone will receive shares of Crestline in
addition to OP Units).
C. Represents the adjustment to record the 1998 purchase of the remaining
minority interests in the Norfolk Waterside Marriott and the Calgary Marriott
and the acquisitions of The Ritz-Carlton, Dearborn, The Ritz-Carlton, San
Francisco and the Memphis Crowne Plaza.
. Record property and equipment of $243 million
. Record the use of cash of $250 million
. Record a decrease in other liabilities of $7 million related to the
purchase of minority interests
D. 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
F-124
<PAGE>
E. Represents the adjustment to deconsolidate the assets and liabilities of
the Non-Controlled Subsidiaries 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 Subsidiaries
. 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
. Record increase in debt of $133 million related to the mortgage
transferred to and due to the Non-Controlled Subsidiaries as indicated
above, net of $39 million of debt transferred to the Non-Controlled
Subsidiaries. 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 80% of Exchange
Value) to the Limited Partners:
. Record property and equipment of $519 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 $575 million including $248 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 6.56% 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................................ $ 19 $ 19
Desert Springs................................. 29 28
Hanover........................................ 4 4
MHP............................................ 64 45
MHPII.......................................... 73 67
Chicago Suites................................. 11 37
MDAH........................................... 41 157
PHLP........................................... 7 162
---- ----
$248 $519
==== ====
</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.
F-125
<PAGE>
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 3.0 million OP Units totaling approximately $45
million
H. Represents the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $50 million.(/1/)
I. Represents the adjustment to record the transfer of working capital to
Crestline 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............................................................... 1,104
2002............................................................... 155
Thereafter......................................................... 3,373
------
$5,381
======
</TABLE>
L. The number of OP Units includes the following (in millions):
<TABLE>
<S> <C>
General Partner interests of Host REIT.............................. .2
Limited Partner interests of Host REIT.............................. 204.0
Limited Partner interests of Private Partnerships................... 3.0
Limited Partner interests of Blackstone Group....................... 43.7
-----
Total OP Units.................................................... 250.9
=====
</TABLE>
M. Represents the adjustment to record the contribution of the $92 million
note receivable to Crestline as a reduction in equity.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The amount of the earnings and
profits distribution will be based in part upon the estimated amount of
Host's accumulated earnings and profits for tax purposes. To the extent
that the distributions made in connection with the REIT Conversion are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions.
F-126
<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 C E G
HOST HOST
MARRIOTT MARRIOTT
CORPORATION CRESTLINE HOTELS BLACKSTONE 1998 BOND
HISTORICAL ADJUSTMENT HISTORICAL ACQUISITION ACQUISITIONS DISPOSITIONS REFINANCING
----------- ---------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $-- $ -- $-- $-- $-- $--
Hotel revenues.. 652 -- 652 80 36 (6) --
Equity in
earnings of
affiliates..... (1) -- (1) -- -- -- --
Other revenues.. 96 (39) 57 -- -- (50) --
---- ---- ----- ---- ---- ---- ----
Total revenues.. 747 (39) 708 80 36 (56) --
---- ---- ----- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 343 -- 343 48 19 (3) --
Other........... 30 (20) 10 -- -- -- --
---- ---- ----- ---- ---- ---- ----
Total operating
costs and
expenses....... 373 (20) 353 48 19 (3) --
---- ---- ----- ---- ---- ---- ----
OPERATING
PROFIT......... 374 (19) 355 32 17 (53) --
Minority
interest....... (30) -- (30) -- (1) 1 --
Corporate
expenses....... (21) 1 (20) -- -- -- --
REIT Conversion
expenses....... (6) -- (6) -- -- -- --
Interest
expense........ (162) 11 (151) (24) (1) 1 (9)
Dividends on
Convertible
Preferred
Securities..... (17) -- (17) -- -- -- --
Interest
income......... 25 1 26 (4) (10) (1) --
---- ---- ----- ---- ---- ---- ----
Income (loss)
before income
taxes.......... 163 (6) 157 4 5 (52) (9)
Benefit
(provision) for
income taxes... (67) 3 (64) (2) (2) 21 4
---- ---- ----- ---- ---- ---- ----
Income (loss)
before
extraordinary
items.......... $ 96 $ (3) $ 93 $ 2 $ 3 $(31) $ (5)
==== ==== ===== ==== ==== ==== ====
Loss per OP
Unit...........
Ratio of
earnings to
fixed charges.. 2.0x
=====
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-------------------------------------------------------------------------------------
H J K L P/N I/M O
NON- MERGERS EARNINGS LEASE INCOME
CONTROLLED & NOTES PRIVATE & PROFITS OTHER REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- -------- ------------ --------------- ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $-- $ -- $ -- $ -- $ 639 $-- $ 639
Hotel revenues.. (12) 42 -- -- -- (792) -- --
Equity in
earnings of
affiliates..... 7 -- -- -- -- -- -- 6
Other revenues.. (4) -- -- -- -- -- -- 3
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Total revenues.. (9) 42 -- -- -- (153) -- 648
---------- -------- ------------ --------------- ---------- ------- ---------- ------
OPERATING COSTS
AND EXPENSES
Hotels.......... (6) 24 1 -- -- (133) -- 293
Other........... (5) -- -- -- -- -- -- 5
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Total operating
costs and
expenses....... (11) 24 1 -- -- (133) -- 298
---------- -------- ------------ --------------- ---------- ------- ---------- ------
OPERATING
PROFIT......... 2 18 (1) -- -- (20) -- 350
Minority
interest....... 2 17 -- -- -- -- -- (11)
Corporate
expenses....... -- -- -- -- -- -- -- (20)
REIT Conversion
expenses....... -- -- -- -- 6 -- -- --
Interest
expense........ (4) (23) -- (1) -- -- -- (212)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- (17)
Interest
income......... (1) 1 -- (4) -- 6 -- 13
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before income
taxes.......... (1) 13 (1) (5) 6 (14) -- 103
Benefit
(provision) for
income taxes... 1 (5) -- 2 (2) 6 36 (5)
---------- -------- ------------ --------------- ---------- ------- ---------- ------
Income (loss)
before
extraordinary
items.......... $-- $ 8 $ (1) $ (3) $ 4 $ (8) $ 36 $ 98
========== ======== ============ =============== ========== ======= ========== ======
Loss per OP
Unit........... $ .39
======
Ratio of
earnings to
fixed charges.. 1.5x
======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-127
<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/G
HOST HOST
MARRIOTT CRESTLINE MARRIOTT DEBT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 1997 REPAYMENT
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS & REFINANCING
----------- --------- ---------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $-- $-- $-- $-- $--
Hotel revenues.. 1,093 -- 1,093 148 112 89 (23) --
Equity in
earnings of
affiliates..... 5 -- 5 -- -- -- -- --
Other revenues.. 49 (37) 12 -- -- -- -- --
------ ---- ------ ---- ---- ---- ---- ----
Total revenues.. 1,147 (37) 1,110 148 112 89 (23) --
------ ---- ------ ---- ---- ---- ---- ----
OPERATING COSTS
AND EXPENSES
Hotels.......... 649 -- 649 102 62 42 (10) --
Other........... 49 (20) 29 -- -- -- -- --
------ ---- ------ ---- ---- ---- ---- ----
Total operating
costs and
expenses....... 698 (20) 678 102 62 42 (10) --
------ ---- ------ ---- ---- ---- ---- ----
OPERATING
PROFIT.......... 449 (17) 432 46 50 47 (13) --
Minority
interest........ (32) -- (32) -- (4) 5 (1) --
Corporate
expenses........ (47) 2 (45) -- -- -- -- --
Interest
expense......... (302) 15 (287) (48) (12) (12) 3 (48)
Dividends on
Convertible
Preferred
Securities...... (37) -- (37) -- -- -- -- --
Interest income.. 52 -- 52 (7) (14) (15) -- (3)
------ ---- ------ ---- ---- ---- ---- ----
Income (loss)
before income
taxes........... 83 -- 83 (9) 20 25 (11) (51)
Benefit
(provision) for
income taxes.... (36) -- (36) 4 (8) (10) 4 20
------ ---- ------ ---- ---- ---- ---- ----
Income (loss)
before
extraordinary
items........... $ 47 $-- $ 47 $ (5) $ 12 $ 15 $ (7) $(31)
====== ==== ====== ==== ==== ==== ==== ====
Earnings per OP
Unit............
Ratio of earnings
to fixed
charges......... 1.3 1.3x
====== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
-----------------------------------------------------------------------------
H J K L N I/M O
EARNINGS
NON- MERGERS PRIVATE & PROFITS OTHER LEASE INCOME
CONTROLLED & NOTES PARTNER- DISTRI- REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- -------- -------- --------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $-- $-- $-- $-- $-- $ 1,182 $-- $1,182
Hotel revenues.. (23) 74 -- -- -- (1,470) -- --
Equity in
earnings of
affiliates..... 7 -- -- -- -- -- -- 12
Other revenues.. (9) -- -- -- -- -- -- 3
---------- -------- -------- --------- ---------- -------- ---------- -------
Total revenues.. (25) 74 -- -- -- (288) -- 1,197
---------- -------- -------- --------- ---------- -------- ---------- -------
OPERATING COSTS
AND EXPENSES
Hotels.......... (12) 49 2 -- -- (246) -- 638
Other........... (18) -- -- -- -- -- -- 11
---------- -------- -------- --------- ---------- -------- ---------- -------
Total operating
costs and
expenses....... (30) 49 2 -- -- (246) -- 649
---------- -------- -------- --------- ---------- -------- ---------- -------
OPERATING
PROFIT.......... 5 25 (2) -- -- (42) -- 548
Minority
interest........ 5 17 1 -- -- -- -- (9)
Corporate
expenses........ 1 -- -- -- -- -- -- (44)
Interest
expense......... (8) (42) -- (4) -- -- -- (458)
Dividends on
Convertible
Preferred
Securities...... -- -- -- -- -- -- -- (37)
Interest income.. -- 1 -- (9) 1 14 -- 20
---------- -------- -------- --------- ---------- -------- ---------- -------
Income (loss)
before income
taxes........... 3 1 (1) (13) 1 (28) -- 20
Benefit
(provision) for
income taxes.... (3) -- -- 5 11 12 (1)
---------- -------- -------- --------- ---------- -------- ---------- -------
Income (loss)
before
extraordinary
items........... $-- $ 1 $ (1) $ (8) $ 1 $ (17) $ 12 $ 19
========== ======== ======== ========= ========== ======== ========== =======
Earnings per OP
Unit............ $ .08
=======
Ratio of earnings
to fixed
charges......... 1.1x
=======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Operations.
F-128
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
ASSUMING 100% PARTICIPATION WITH NOTES ISSUED
A. Represents the adjustment to reduce revenues, operating expenses,
corporate expenses, interest expense, interest income and income taxes for the
spin-off of Crestline.
B. 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.
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 1998 acquisition of, or purchase of
controlling interests in, 11 full-service properties.
D. 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.
E. 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.
F. 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).
G. 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.
H. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses and income taxes to
deconsolidate the Non-Controlled Subsidiaries and reflect the Company's share
of income as equity in earnings of affiliate.
I. 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.
J. 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 $248 million in 6.56% Notes issued in lieu of
OP Units.
K. 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.
L. Represents the adjustment to reduce interest income and record interest
expense for the estimated $225 million cash payment of the earnings and
profits distribution to shareholders of Host Marriott including a draw on the
New Credit Facility of $50 million.(/1/)
F-129
<PAGE>
M. Represents the adjustment to remove hotel revenues and management fees of
$120 million and $217 million for First Two Quarters 1998 and Fiscal 1997 and
record rental revenues associated with the leasing of certain hotel properties
to Crestline 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.
N. Represents the adjustment to record interest income on the $10 million
loan to Crestline.
O. Represents the adjustment to the income tax provision to reflect the REIT
Conversion.
P. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion. Management expects that the total
estimated nonrecurring expenses to be incurred will be approximately $50
million.
- --------
(1) The amount of earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The amount of the earnings and
profits distribution will be based in part upon the estimated amount of
Host's accumulated earnings and profits for tax purposes. To the extent
that the distributions made in connection with the REIT Conversion are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions.
F-130
<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 C E G
HOST HOST
MARRIOTT CRESTLINE MARRIOT
CORPORATION ADJUST- HOTELS BLACKSTONE 1998 BOND
HISTORICAL MENTS HISTORICAL ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- --------- ---------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $ 96 $ (3) $ 93 $ 2 $ 3 $ (31) $ (5)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 125 (11) 114 29 9 -- --
Income taxes.... 45 -- 45 -- -- -- --
Gains on sales
of hotel
properties...... (51) -- (51) -- -- 50 --
Equity
(earnings)
losses of
affiliates...... 1 -- 1 -- -- -- --
Changes in
operating
accounts......... (33) 10 (23) -- -- -- --
Other assets..... 23 4 27 -- -- -- --
----- ---- ----- ---- ---- ----- ------
Cash provided by
(used in)
operations...... 206 -- 206 31 12 19 (5)
----- ---- ----- ---- ---- ----- ------
INVESTING ACTIVI-
TIES
Acquisitions..... (387) 29 (358) -- 358 -- --
Cash received
from sale of
assets........... 209 -- 209 -- -- (209) --
Capital
expenditures..... (111) 2 (109) (11) (4) 2 --
Purchases of
short-term
marketable
securities....... (97) -- (97) -- -- -- --
Sales of short-
term marketable
securities....... 405 -- 405 -- -- -- --
Other............ (8) (91) (99) -- -- 21 --
----- ---- ----- ---- ---- ----- ------
Cash provided by
(used in)
investing
activities...... 11 (60) (49) (11) 354 (186) --
----- ---- ----- ---- ---- ----- ------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 5 -- 5 -- -- -- 2,042
Scheduled
principal
repayments....... (19) 1 (18) -- -- -- --
Debt repayments.. (168) 119 (49) -- -- 35 (1,550)
Transfers to Host
Marriott......... -- (62) (62) -- -- -- --
Other............ (31) -- (31) -- -- -- --
----- ---- ----- ---- ---- ----- ------
Cash provided by
(used in)
financing
activities...... (213) 58 (155) -- -- 35 492
----- ---- ----- ---- ---- ----- ------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ 4 $ (2) $ 2 $ 20 $366 $(132) $ 487
===== ==== ===== ==== ==== ===== ======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
------------------------------------------------------------------------------
H I J K L/M O/P N
NON- MERGERS EARNINGS LEASE
CONTROLLED & NOTES PRIVATE & PROFITS CONVER- OTHER REIT TAX
SUBSIDIARY ISSUANCE PARTNERSHIPS DISTRIBUTION(1) SION ACTIVITIES ADJUSTMENT PRO FORMA
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVI-
TIES
Income before
extraordinary
items ........... $-- $ 8 $ (1) $ (3) $ (8) $ 4 $ 36 $ 98
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 -- (3) (21) 4 36 294
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INVESTING ACTIVI-
TIES
Acquisitions..... -- -- -- -- -- -- -- --
Cash received
from sale of
assets........... -- -- -- -- -- -- -- --
Capital
expenditures..... 1 (6) -- -- -- -- -- (127)
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) -- -- -- -- -- 103
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
FINANCING ACTIVI-
TIES
Issuances of
debt............. -- -- -- 50 -- -- -- 2,097
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) -- -- 50 (15) -- -- 405
---------- -------- ------------ --------------- ------- ---------- ---------- ---------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (5) $ 13 $-- $ 47 $(36) $ 4 $ 36 $ 802
========== ======== ============ =============== ======= ========== ========== =========
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-131
<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 B D C E F/G
HOST HOST
MARRIOTT CRESTLINE MARRIOTT DEBT
CORPORATION ADJUST- HOTELS BLACKSTONE 1997 1998 REPAYMENTS &
HISTORICAL MENT HISTORICAL ACQUISITION ACQUISITIONS ACQUISITIONS DISPOSITIONS REFINANCING
----------- --------- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $ 47 $ -- $ 47 $ (5) $ 15 $ 12 $ (7) $ (31)
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... 240 (9) 231 62 17 31 (3) --
Income taxes.... (20) -- (20) -- -- -- -- --
Other........... 70 3 73 -- -- -- (2) --
Changes in oper-
ating accounts... 127 (26) 101 -- -- -- -- --
------ ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
operations...... 464 (32) 432 57 32 43 (12) (31)
------ ----- ----- ---- ---- ---- ---- -------
INVESTING ACTIVI-
TIES
Acquisitions..... (596) 237 (359) -- 359 -- -- --
Cash received
from sale of
assets........... 51 -- 51 -- -- -- -- --
Purchase of
short-term mar-
ketable securi-
ties............. (354) -- (354) -- -- -- -- --
Capital expendi-
tures............ (160) 2 (158) (20) (13) (13) 4 --
Other............ 13 -- 13 -- -- -- 1 --
------ ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
investing
activities....... (1,046) 239 (807) (20) 346 (13) 5 --
------ ----- ----- ---- ---- ---- ---- -------
FINANCING ACTIVI-
TIES
Issuances of
debt............. 857 -- 857 -- -- -- -- 1,188
Scheduled princi-
pal repayments... (93) 3 (90) -- -- -- -- --
Debt prepay-
ments............ (403) -- (403) -- -- -- -- (1,147)
Transfers to Host
Marriott......... -- (226) (226) -- -- -- -- --
Other............ 28 (1) 27 -- -- -- -- --
------ ----- ----- ---- ---- ---- ---- -------
Cash provided by
(used in)
financing
activities....... 389 (224) 165 -- -- -- -- 41
------ ----- ----- ---- ---- ---- ---- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $ (193) $ (17) $(210) $ 37 $378 $ 30 $ (7) $ 10
====== ===== ===== ==== ==== ==== ==== =======
<CAPTION>
MERGERS AND REIT CONVERSION ACTIVITIES
--------------------------------------------------------------------
H I J K O L/M N
EARNINGS
NON- MERGERS PRIVATE & PROFITS LEASE
CONTROLLED & NOTES PARTNER- DISTRI- OTHER REIT CONVER- TAX PRO
SUBSIDIARY ISSUANCE SHIPS BUTION(1) ACTIVITIES SION ADJUSTMENT FORMA
---------- -------- -------- --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
ACTIVITIES
Income before ex-
traordinary
items............ $ -- $ 1 $(1) $(8) $1 $(17) $12 $ 19
Adjustment to
reconcile to cash
provided by
operations:
Depreciation and
amortization.... (8) 23 2 -- -- (29) -- 326
Income taxes.... -- -- -- -- -- -- -- (20)
Other........... -- -- -- -- -- -- -- 71
Changes in oper-
ating accounts... -- 15 -- -- -- -- -- 116
---------- -------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
operations...... (8) 39 1 (8) 1 (46) 12 512
---------- -------- -------- --------- ---------- ------- ---------- -------
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) -- -- -- -- -- (209)
Other............ 33 -- -- -- -- -- -- 47
---------- -------- -------- --------- ---------- ------- ---------- -------
Cash provided by
(used in)
investing
activities....... -- (11) -- -- -- -- -- (500)
---------- -------- -------- --------- ---------- ------- ---------- -------
FINANCING ACTIVI-
TIES
Issuances of
debt............. (3) -- -- 50 -- -- -- 2,092
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) -- 50 -- (30) -- 210
---------- -------- -------- --------- ---------- ------- ---------- -------
INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS...... $(17) $ 21 $ 1 $42 $1 $(76) $12 $ 222
========== ======== ======== ========= ========== ======= ========== =======
</TABLE>
See Notes to the Unaudited Pro Forma Statements of Cash Flows.
F-132
<PAGE>
NOTES TO UNAUDITED CASH FLOW STATEMENTS
100% PARTICIPATION WITH NOTES ISSUED
A) Represents the adjustment for cash flow amounts related to the
distribution of Crestline.
B) Represents the adjustment to record the depreciation expense and
estimated capital expenditures for the Blackstone Acquisition.
C) Represents the adjustment to record depreciation expense and estimated
capital expenditures for the 1998 acquisition of, or purchase of controlling
interests in, 11 full-service properties.
D) 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.
E) 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.
F) 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.
G) 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.
H) 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
Subsidiaries.
I) Represents the adjustment to record depreciation expense and capital
expenditures related to the Merger, including the scheduled principal
amortization of notes.
J) Represents the adjustment to record depreciation expense related to the
acquisition of the Private Partnerships.
K) 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 and the interest expense for the $50 million draw on the New
Credit Facility.
L) Represent the adjustment to revenues to reflect lease income and remove
hotel revenues and management fees.(/1/)
M) 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.
N) Represents the adjustment to the income tax provision to reflect the REIT
conversion.
O) Represents the adjustment to record interest income on the $10 million in
loans to Crestline.
P) Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.
- --------
(1) The amount of the earnings and profit distribution shown reflects only the
estimated distribution to be made in connection with the REIT Conversion,
and could consist of a combination of cash and other consideration,
including possibly securities of Host REIT. The amount of the earnings and
profits distribution will be based in part upon the estimated amount of
Host's accumulated earnings and profits for tax purposes. To the extent
that the distributions made in connection with the REIT Conversion are not
sufficient to eliminate Host's estimated accumulated earnings and profits,
Host REIT will make one or more additional distributions to its
shareholders (in the form of cash or securities) prior to the last day of
its first taxable year as a REIT (currently expected to be December 31,
1999) in a sufficient amount to eliminate such earnings and profits, and
the Operating Partnership will make corresponding extraordinary
distributions to all holders of OP Units (including Host REIT) in an
amount sufficient to permit Host REIT to make such additional
distributions.
F-133
<PAGE>
PRO FORMA FINANCIAL STATEMENTS OF CRESTLINE
The unaudited pro forma condensed consolidated statements of operations of
Crestline 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, which will be forgiven
in conjunction with the REIT Conversion
. 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 Crestline through contributions from Host Marriott
. 1998 spin off of Crestline from Host Marriott and the concurrent lease of
hotels from Host Marriott
. 1998 adoption of EITF 97-2 to reflect the change in presentation to
present property-level sales and operating expenses
. Adjustment to corporate expenses as if Crestline were operated on a stand
alone basis.
The adjustments to the unaudited pro forma balance sheet of Crestline
reflect the lease of substantially all of Host Marriott's hotels in
conjunction with the REIT Conversion.
In 1998, Crestline acquired one senior living community for $21 million.
Also, during 1998, Host Marriott prepaid approximately $26 million of
Crestline's mortgage debt and repaid $92 million of unsecured debt to Marriott
International. The prepayment was recorded as a capital contribution to
Crestline and the $92 million was repaid in exchange for a $92 million note
due to Host Marriott with similar terms. The $92 million note will be forgiven
in conjunction with the REIT Conversion.
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 Crestline. In addition,
during 1997, Crestline 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. Crestline currently owns 99% of the
partnership.
The unaudited pro forma financial statements present the financial position
and the results of operations of Crestline as if the transactions described
above were completed. These presentations do not purport to represent what
Crestline'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 Crestline'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 Crestline 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-134
<PAGE>
CRESTLINE
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 $(92,000)(B) $229,752
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 8,000 412,701
-------- -------- --------
Shareholder's equity
Common stock, 100 shares authorized, issued
and outstanding .......................... -- -- --
Additional paid-in capital................. 278,783 92,000(B) 370,783
Retained earnings.......................... 3,855 -- 3,855
-------- -------- --------
Total shareholder's equity............... 282,638 92,000 374,638
-------- -------- --------
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-135
<PAGE>
CRESTLINE
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FIRST TWO QUARTERS 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
D E F G H
DEBT
REFINANCING/ CORPORATE LEASE ADOPTION OF
HISTORICAL REPAYMENTS ACQUISITIONS EXPENSES CONVERSION EITF 97-2 PRO FORMA
---------- ------------ ------------ --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Rooms.................. $ -- $ -- $ -- $ -- $ -- $1,113,385 $1,113,385
Food and beverage...... -- -- -- -- -- 577,368 577,368
Other.................. -- -- -- -- -- 113,522 113,522
House profit........... -- -- -- -- 792,500 (792,500) --
-------- ------- ----- ------- -------- ---------- ----------
Total hotels........... -- -- -- -- 792,500 1,011,775 1,804,275
-------- ------- ----- ------- -------- ---------- ----------
Senior living
communities
Routine................ 37,256 -- 84 -- -- 62,066 99,406
Ancillary.............. 1,996 -- 1 -- -- 8,942 10,939
-------- ------- ----- ------- -------- ---------- ----------
Total senior living
communities........... 39,252 -- 85 -- -- 71,008 110,345
-------- ------- ----- ------- -------- ---------- ----------
Total revenues......... 39,252 -- 85 -- 792,500 1,082,783 1,914,620
-------- ------- ----- ------- -------- ---------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms.................. -- -- -- -- -- 354,121 354,121
Food and beverage...... -- -- -- -- -- 495,770 495,770
Other department costs
and deductions........ -- -- -- -- -- 161,884 161,884
-------- ------- ----- ------- -------- ---------- ----------
Total property-level
hotel cost and
expenses............. -- -- -- -- -- 1,011,775 1,011,775
-------- ------- ----- ------- -------- ---------- ----------
Management fees........ -- -- -- -- 120,300 -- 120,300
Lease expense.......... -- -- -- -- 659,200 -- 659,200
-------- ------- ----- ------- -------- ---------- ----------
Total hotels.......... -- -- -- -- 779,500 1,011,775 1,791,275
-------- ------- ----- ------- -------- ---------- ----------
Senior living
communities
Property-level costs
and expenses
Routine................ -- -- -- -- -- 62,066 62,066
Ancillary.............. -- -- -- -- -- 8,942 8,942
-------- ------- ----- ------- -------- ---------- ----------
Total property-level
community costs and
expenses............. -- -- -- -- -- 71,008 71,008
Other operating costs
and expenses.......... 19,206 -- 49 -- -- -- 19,255
-------- ------- ----- ------- -------- ---------- ----------
Total senior living
communities.......... 19,206 -- 49 -- -- 71,008 90,263
-------- ------- ----- ------- -------- ---------- ----------
Total operating costs
and expenses......... 19,206 -- 49 -- 779,500 1,082,783 1,881,538
-------- ------- ----- ------- -------- ---------- ----------
Operating profit ....... 20,046 -- 36 -- 13,000 -- 33,082
Corporate expenses...... (1,616) -- -- (8,384) -- -- (10,000)
Interest expense........ (13,185) 2,526 -- -- -- -- (10,659)
Interest income......... 681 -- 6 -- -- -- 687
-------- ------- ----- ------- -------- ---------- ----------
Income (loss) before
income taxes........... 5,926 2,526 42 (8,384) 13,000 -- 13,110
Benefit (provision) for
income taxes........... (2,429) (1,036) (17) 3,437 (5,330) -- (5,375)
-------- ------- ----- ------- -------- ---------- ----------
Income (loss) before
extraordinary item..... $ 3,497 $ 1,490 $ 25 $(4,947) $ 7,670 $ -- $ 7,735
======== ======= ===== ======= ======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-136
<PAGE>
CRESTLINE
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
C D E F G H
DEBT
FORUM REFINANCING/ CORPORATE LEASE ADOPTION OF
HISTORICAL ACQUISITION REPAYMENT ACQUISITIONS EXPENSES CONVERSION(/1/) EITF 97-2 PRO FORMA
---------- ----------- ------------ ------------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room................. $ -- $ -- $ -- $ -- $ -- $ -- $2,205,380 $2,205,380
Food and beverage.... -- -- -- -- -- -- 1,141,228 1,141,228
Other................ -- -- -- -- -- -- 237,087 237,087
House profit......... -- -- -- -- -- 1,469,400 (1,469,400) --
------- ------- ------ ------ -------- --------- ---------- ----------
Total hotels........ -- -- -- -- -- 1,469,400 2,114,295 3,583,695
Senior living
communities..........
Routine.............. 35,473 30,859 -- 7,031 -- -- 127,135 200,498
Ancillary............ 1,427 1,983 -- 188 -- -- 18,693 22,291
------- ------- ------ ------ -------- --------- ---------- ----------
Total senior living
communities........ 36,900 32,842 -- 7,219 -- -- 145,828 222,789
------- ------- ------ ------ -------- --------- ---------- ----------
Total revenues...... 36,900 32,842 -- 7,219 -- 1,469,400 2,260,123 3,806,484
------- ------- ------ ------ -------- --------- ---------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms................ -- -- -- -- -- -- 740,003 740,003
Food and beverage.... -- -- -- -- -- -- 1,036,004 1,036,004
Other department
costs and
deductions.......... -- -- -- -- -- -- 338,288 338,288
------- ------- ------ ------ -------- --------- ---------- ----------
Total property-level
hotel costs and ex-
penses............. -- -- -- -- -- -- 2,114,295 2,114,295
Management fees...... -- -- -- -- -- 217,000 -- 217,000
Lease expense........ -- -- -- -- -- 1,226,400 -- 1,226,400
------- ------- ------ ------ -------- --------- ---------- ----------
Total hotels........ -- -- -- -- -- 1,443,400 2,114,295 3,557,695
------- ------- ------ ------ -------- --------- ---------- ----------
Senior living communi-
ties
Property-level costs
and expenses --
Routine.............. -- -- -- -- -- -- 127,135 127,135
Ancillary............ -- -- -- -- -- -- 18,693 18,693
------- ------- ------ ------ -------- --------- ---------- ----------
Total property-level
community costs and
expenses........... -- -- -- -- -- -- 145,828 145,828
Other operating costs
and expenses........ 20,929 17,988 -- 4,413 -- -- -- 43,330
------- ------- ------ ------ -------- --------- ---------- ----------
Total senior living
communities........ 20,929 17,988 -- 4,413 -- -- 145,828 189,158
------- ------- ------ ------ -------- --------- ---------- ----------
Total operating
costs and
expenses........... 20,929 17,988 -- 4,413 -- 1,443,400 2,260,123 3,746,853
------- ------- ------ ------ -------- --------- ---------- ----------
Operating profit ..... 15,971 14,854 -- 2,806 -- 26,000 -- 59,631
Corporate expenses.... (2,304) (2,098) -- 745 (14,343) -- -- (18,000)
Interest expense...... (13,396) (9,432) 5,834 (2,118) -- -- -- (19,112)
Interest income....... 336 598 -- -- -- -- -- 934
------- ------- ------ ------ -------- --------- ---------- ----------
Income (loss) before
income taxes......... 607 3,922 5,834 1,433 (14,343) 26,000 -- 23,453
Benefit (provision)
for income taxes..... (249) (1,608) (2,392) (588) 5,881 (10,660) -- (9,616)
------- ------- ------ ------ -------- --------- ---------- ----------
Income (loss) before
extraordinary item... $ 358 $ 2,314 $3,442 $845 $ (8,462) $ 15,340 $ -- $ 13,837
======= ======= ====== ====== ======== ========= ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements.
F-137
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF CRESTLINE
A. Represents the adjustment to record the transfer of hotel working capital
to Crestline 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 forgiveness of the $92 million intercompany loan between
Host Marriott and Crestline in conjunction with the REIT Conversion.
C. 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).
D. Represents the adjustment to eliminate the interest expense on $92
million of intercompany debt which will be forgiven by Host Marriott upon the
REIT Conversion. The adjustment also includes the elimination of interest
expense on $26.4 million of debt repaid by Crestline during 1998 through a
capital contribution by Host Marriott.
E. Represents the adjustment to record the historical revenues, operating
expenses, corporate expenses, and interest income related to the acquisition
of one senior living community in 1998 and the acquisition of one senior
living community in 1997. The adjustment also includes the elimination of $745
of minority interest expense included in corporate expenses related to the
purchase of minority interests in certain consolidated subsidiaries of
Crestline in 1997.
F. Represents the adjustment to record additional corporate expenses
anticipated to be incurred when Crestline is operated as a stand alone company
subsequent to the REIT Conversion. The adjustment includes the following (in
thousands):
<TABLE>
<CAPTION>
FIRST TWO FISCAL YEAR
QUARTERS 1998 1997
------------- -----------
<S> <C> <C>
Payroll costs......................................... $5,103 $8,731
Rent and insurance.................................... 740 1,605
Other general and administrative costs................ 2,541 4,007
------ -------
$8,384 $14,343
====== =======
</TABLE>
G. Represents the adjustment to record the historical hotel revenues and
hotel expenses and pro forma lease expense associated with the leasing of
certain hotel properties from the Company.
H. Represents the adjustment to reflect Crestline'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.
F-138
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
Atlanta Marriott Marquis Limited Partnership ("AMMLP") financial statements
for the five most recent fiscal years in the period ended December 31, 1997
and the unaudited condensed financial statements for the First Two Quarters
1998 and the First Two Quarters 1997. The following data should be read in
conjunction with AMMLP financial statements and the notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 41,957 $ 43,764 $ 85,397 $ 88,464 $ 81,171 $ 77,889 $ 75,233
Operating profit........ 12,897 12,808 23,933 24,782 21,770 19,071 16,008
Income (loss) before
extraordinary item(2).. 5,087 2,325 (569) 2,543 (413) (3,073) (5,935)
Net income (loss)....... 9,261 2,325 (569) 2,543 (413) (3,073) (5,935)
Distributions:
General partner........ -- -- -- 8 23 19 16
Limited partners--Class
A..................... 2,650 -- -- 811 2,324 1,870 1,581
Limited partners--Class
B(3).................. -- -- -- -- -- -- --
--------- --------- ----------- ----------- ----------- ----------- ----------
Total.................. 2,650 -- -- 819 2,347 1,889 1,597
Per Partnership Unit--
Class A(4)
Net income (loss)...... -- 4,343 (1,062) 4,751 (772) (5,740) (11,087)
Distributions.......... 5,000 -- 284 1,522 4,386 4,288 4,390
Cash provided by (used
in) operating
activities............. (4,909) 15,068 21,608 9,893 10,062 5,602 4,422
Cash used in investing
activities............. (4,764) (2,310) (4,403) (4,483) (3,740) (3,099) (3,002)
Cash provided by (used
in) financing
activities............. (5,638) -- (1,304) (819) (5,847) (4,589) 518
Increase (decrease) in
cash and cash
equivalents............ (15,311) 12,758 15,901 4,591 475 (2,086) 1,938
Ratio of earnings to
fixed charges
(unaudited)(5)......... 1.64x 1.21x -- 1.10x -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(5)......... -- -- 569 -- 413 3,073 5,935
Total assets at book
value.................. 209,192 195,701 194,376 181,508 175,963 179,821 186,138
Cash and cash
equivalents............ 6,191 18,359 21,502 5,601 1,010 535 2,621
Total debt(6)........... 183,366 236,638 229,543 235,708 233,877 235,723 235,658
Total liabilities....... 185,689 250,914 246,484 239,047 235,226 236,324 237,679
Partner's capital
(deficit):
Limited partners--Class
A..................... (60,238) (54,723) (57,588) (57,025) (58,732) (55,999) (51,087)
Limited partner--Class
B..................... 84,261 -- 6,000 -- -- -- --
General partner........ (520) (491) (520) (514) (531) (504) (454)
Book Value per
Partnership Unit (Class
A) (unaudited)(4)...... (113,657) (103,251) (108,657) (107,594) (110,815) (105,658) (96,391)
Exchange value per
Partnership Unit
(unaudited)(4)......... 45,425 -- -- -- -- -- --
</TABLE>
- --------
(1) Revenues represent sales generated by the Partnership's hotel.
(2) During the First Two Quarters 1998, AMMLP recorded an extraordinary gain
of $4,174,000 from the forgiveness of deferred incentive management fees
and early extinguishment of debt recorded in conjunction with the
refinancing of the mortgage debt of AMMLP.
(3) The Class B Limited Partner is Host Marriott Corporation, which does not
own Units, but is entitled to a preferred return.
(4) A Partnership Unit represents a $100,000 original investment in Atlanta
Marquis.
(5) The ratio of earnings to fixed charges is computed by dividing net income
(loss) 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 $5,250,000, $6,608,000, $7,464,000 and
$7,406,000 as of December 31, 1997, 1995, 1994 and 1993, respectively.
(6) Total debt includes amounts due to Host Marriott under the Term Loan of
$20,134,000 as of June 19, 1998 and $30,524,000, $23,634,000 and
$26,334,000 as of December 31, 1997, 1994 and 1993, respectively, and
$20,134,000 as of December 31, 1996 and 1995 under the Original Debt
Service, Commitment and Interest Guarantees.
F-139
<PAGE>
THE AMMLP MERGER
On December 31, 1997 limited partners holding a majority of the limited
partner Units in AMMLP consented to the merger of AMMLP with and into Atlanta
Marquis. The merger was part of a series of transactions. On December 31,
1997, AMMLP merged with and into Atlanta Marquis pursuant to an agreement and
plan of merger (the "AMMLP Merger"). The requisite number of AMMLP limited
partners approved the AMMLP Merger in accordance with the applicable
provisions of the partnership agreement and the Delaware Revised Uniform
Limited Partnership Act.
In conjunction with the AMMLP Merger and the refinancing of the mortgage
debt, the following transactions occurred:
. AMMLP was merged with and into Atlanta Marquis. With the AMMLP Merger,
the separate existence of AMMLP ceased and AMMLP limited partnership
units ("Units") were converted on a one-for-one basis into Class A
limited partnership new units ("Partnership Units"). AMMLP limited
partners who held fractional interests in Units received the same
interest in the Partnership Units.
. On December 31, 1997, the General Partner made an initial capital
contribution of $6 million to the Partnership. On January 30, 1998 the
General Partner contributed an additional $69 million. In return for such
additional capital contributions, the General Partner received a new
Class B limited partnership interest in Atlanta Marquis entitling the
General Partner to a 13.5% cumulative, compounding annual preferred
return and priority return of such capital. The General Partner also
surrendered its then existing Class B interest on distributions.
. Partnership Class A limited partners will receive an annual return of 5%
on their initial investment in AMMLP, ratably with a 5% return to the
General Partner on its initial investment in AMMLP, after payment of the
preferred return on the Class B interest. To the extent unpaid in any
year, such return will accumulate and compound and be payable from sale
or refinancing proceeds.
. The General Partner caused the Partnership to contribute the Land to a
subsidiary of Ivy Street Hotel Limited Partnership ("Ivy"), in return for
a credit to the Partnership's capital account of $26.5 million
(represented by a Class C limited partnership interest in Ivy) and a 10%
cumulative, compounding annual preferred return and a priority return.
The General Partner also caused the Partnership to reinvest the capital
contributions received from the General Partner in Ivy (represented by a
Class B partnership interest in Ivy) for a 13.5% cumulative, compounding
annual preferred return and priority return of such capital.
. To facilitate the refinancing of Ivy's mortgage debt, the Hotel and the
Land were conveyed to a special purpose, bankruptcy remote entity, HMA
Realty Limited Partnership ("HMA"). The sole general partner of HMA, with
a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy. Accordingly, the new
mortgage debt agreements were entered into by HMA.
. Host Marriott waived its existing right to priority repayment of the
$20.1 million in prior non-interest bearing Interest Guarantee advances
to Ivy and restructured such advances as a loan with a 15-year term
(interest only for the first five years) bearing interest at a rate of 9%
per annum (the "Term Loan"). Payments are due monthly in arrears from
cash available after payment of debt service on the New Mortgage Debt.
Upon a sale of the Hotel, the Term Loan will accelerate and become due
and payable.
. The outstanding amount of the Interest Guarantee of $10.4 million and
related interest was repaid to Host Marriott.
. The $30 million Principal Guarantee provided by Host Marriott was
eliminated.
. The Partnership distributed funds to Class A limited partners of
approximately $5,000 per Partnership Unit. This distribution represented
the excess of the Partnership's reserve after payment of a majority of
the transaction costs related to the Mortgage Debt refinancing.
F-140
<PAGE>
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the AMMLP Merger to incorporate the following
revisions: (i) a revised provision regarding a sale of the Hotel to permit
Atlanta Marquis to sell the Hotel to an unaffiliated third party without the
consent of the limited partners; (ii) a revised provision limiting the voting
rights of the General Partner and its affiliates to permit the General Partner
and its affiliates to have full voting rights with respect to all Partnership
Units currently held by or acquired by the General Partner and its affiliates;
(iii) extinguishment of the original Class B limited partner interest held by
the General Partner and replacement of it with a new Class B interest which is
entitled to a 13.5% cumulative, compounded annual return; (iv) addition of a
mechanism that allows the Class B limited partner to contribute up to an
additional $20 million should the Hotel require additional funding (such
contribution would also be entitled to the 13.5% return discussed above); (v)
a revised right of removal of the General Partner clause so that an
affirmative vote of 66 2/3% would be needed to effect a removal of the General
Partner and; (vi) revisions to the provisions for allocations and
distributions (see Item 8 "Financial Statements and Supplementary Data"
below). As a result of the approval of the AMMLP Merger, the AMMLP-II
Partnership Agreement became effective December 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenues represent sales generated by the Partnership's hotel. Total hotel
revenues less hotel property-level costs and expenses equals house profit
which reflects the net revenues flowing to the Partnership as property owner.
As discussed further below, the Partnership previously recorded only the house
profit generated by the Partnership's hotel properties as revenues.
The Partnership adopted EITF 97-2 which requires that the Partnership
include property-level sales and operating costs and expenses in the statement
of operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying statement of operations.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. Partnership revenues for the first two quarters 1998 decreased 4%,
or $1.8 million, to $42.0 million, when compared to the same period in 1997
due to decreases in room and food and beverage sales. Room sales decreased 3%,
or $801,000, to $27.0 million for the first two quarters 1998, when compared
to the same period in 1997. Food and beverage sales decreased 7%, or $1.0
million, to $12.3 million for the first two quarters 1998 when compared to the
same period in 1997. The decrease in food and beverage sales is primarily due
to lower occupancy levels at the Hotel for the first two quarters 1998 as
compared to the same period in 1997. Room sales decreased due to a 3% decrease
in REVPAR for the first two quarters 1998 when compared to the same period in
1997. REVPAR, or revenue per available room, represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. (although it is not a GAAP,
or generally accepted accounting principles, measure of revenue). REVPAR
decreased for the first two quarters 1998 due to a 5.4 percentage point
decrease in average occupancy to 69%, respectively, when compared to the same
period in 1997. The decrease in occupancy was partially offset by a 5%, or $6,
increase in average room rate to $139 for the first two quarters 1998 when
compared to the same period in 1997. The increase in average room rate is due
to a shift in group mix to higher-rated group business. The decrease in
average occupancy is primarily due to a decrease in the number of city-wide
conventions in the first two quarters of 1998 when compared to the same period
in 1997. Additional supply added to the Atlanta suburbs has also impacted 1998
occupancy levels.
Operating Costs and Expenses. For first two quarters 1998, operating costs
and expenses decreased 6%, or $1.9 million, to $29.1 million when compared to
the same periods in 1997, primarily due to decreases in hotel property-level
costs and expenses and incentive management fees. For the first two quarters
1998 hotel property-level costs and expenses decreased 3%, or $694,000, to
$22.9 million when compared to the same period in 1997
F-141
<PAGE>
primarily because of lower occupancy levels and lower sales at the hotel. For
the first two quarters 1998, $90,000 of incentive management fees were earned
as compared to $2.0 million for 1997. Incentive management fees decreased due
to an increase in Owner's Priority. Pursuant to the new management agreement,
effective January 3, 1998, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit.
Thereafter, the Manager will receive 20% of the profit in excess of such
figure. As a percentage of revenues, operating costs and expenses represented
32% and 37% of revenues for the first two quarters 1998 and 1997,
respectively.
Operating Profit. As a result of the changes in revenues and expenses
discussed above, operating profit increased 1%, or $89,000, to $12.9 million
for the first two quarters 1998 when compared to the same period in 1997.
Interest Expense. Interest expense decreased 27%, or $2.9 million, to $8.0
million for the first two quarters 1998, when compared to the same period in
1997. The decrease is primarily due to the refinancing of the mortgage debt on
February 2, 1998. On that date, HMA obtained new 12-year first mortgage
financing of $164 million (the "Mortgage Debt") which, together with $35
million from the additional $69 million capital contributed by the General
Partner, was used to pay the $199 million maturing mortgage debt. The Mortgage
Debt bears interest at a fixed rate of 7.4% and required monthly principal and
interest payments based on a 25-year amortization schedule. The prior mortgage
debt bore interest at a fixed rate of 10.3%.
Net Income Before Extraordinary Items. Net income before extraordinary items
increased 119%, or $2.8 million, to $5.1 million for the first two quarters
1998 when compared to the same period in 1997. The increase is primarily due
to decreases in incentive management fees and interest expense.
Extraordinary Items. Pursuant to the terms of the new management agreement,
all unpaid incentive management fees accrued through December 31, 1997
amounting to $4.2 million were forgiven by the Manager. During the first two
quarters 1998, the Partnership recorded an extraordinary gain in conjunction
with the write off. In addition, the Partnership recorded a $19,000
extraordinary gain on extinguishment of debt during the first two quarters
1998.
1997 Compared to 1996:
Revenues. Partnership revenues for 1997 decreased 4% to $85.4 million from
$88.5 million in 1996. The decrease in revenues is primarily due to a 2%
decrease in REVPAR or revenue per available room. REVPAR decreased due to a 3%
decrease in average room rate to approximately $127 partially offset by a 1.2
percentage point increase in average occupancy to 69.8. These results are
primarily due to the impact of the 1996 summer Olympic Games. In 1996, the
Hotel was able to drive up the average room rate throughout the year as room
rates throughout the Atlanta market were high. Occupancy levels, however, were
more directly tied to the timing of the Olympic Games. While occupancy levels
were high during the course of the Olympic Games, there was a significant
decline in demand in the months immediately prior to and subsequent to the
Olympic Games.
No new full-service hotels opened in the Atlanta market in 1997 and none are
expected to open in 1998. However, during 1997, 38 new limited service hotels
opened thus adding 3,422 new rooms and 13 more properties containing a total
of 1,498 rooms are expected to open in 1998 in the Atlanta suburbs. These
additions did not have and are not expected to have a significant impact on
the Hotel's revenues as these hotels target a significantly different market
segment. Construction has been started on a 320-room Doubletree guest suite
hotel which is expected to open in mid-1999. The number of city-wide
conventions is expected to be down only slightly, however, roomnights
associated with these conventions are expected to be down by 80,000. The
Hotel's strategy to mitigate the impact of this will be to continue to focus
on customer service, to work closely with the Atlanta Convention and Visitors
Bureau to generate short term business for 1998 and to put into effect the
marketing plan developed with the other Atlanta Marriott products targeting
leisure weekend and summer customers.
F-142
<PAGE>
Operating Costs and Expenses. In 1997, operating costs and expenses
decreased $2.2 million to $61.5 million primarily due to decreases in hotel
property-level costs and expenses and in incentive management fees. In 1997,
hotel property-level costs and expenses decreased by $884,000 when compared to
1996, primarily due to decreased costs associated with the decreases in
revenues discussed above. In 1997, $1.2 million of incentive management fees
were earned as compared to $2.0 million earned in 1996. The decrease in
incentive management fees earned was the result of decreased Hotel operating
results. As a percentage of revenues, operating costs and expenses represented
34% of revenues for 1997 and 36% in 1996.
Operating Profit. In 1997, operating profit decreased $849,000 to $23.9
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 66% in 1997 and 64% in 1996.
Interest Expense. In 1997, interest expense increased $2.5 million to $25.4
million primarily due to a 2.0 percentage point increase in the interest rate
charged on the mortgage debt for the period from the Maturity Date through the
New Maturity Date coupled with financing costs of $900,000 incurred in
connection with the extension of the maturity date of the Mortgage Debt.
Net Income (Loss). In 1997, the Partnership had a net loss of $569,000, a
decrease of $3.1 million over 1996's net income of $2.5 million. This decrease
was primarily due to lower Hotel revenues and an increase in the Partnership's
interest expense, partially offset by a decrease in incentive management fees.
1996 Compared to 1995:
Revenues. Partnership revenues for 1996 increased 9% to $88.5 million from
$81.2 million in 1995. The increase in revenues is the result of a 9% increase
in REVPAR. REVPAR increased due to a 14% increase in average room rate to
approximately $132 partially offset by a 3.0 percentage point decrease in
average occupancy to the high-60's. These changes in average room rate and
average occupancy are primarily due to the impact on the city of the 17-day
Centennial Olympic Games. The increase in average room rate was due to an
increase in room rates throughout the Atlanta market. The decline in average
occupancy was due to a decline in city-wide demand for the months prior to and
immediately after the Olympics. During the Olympic Games, the Hotel hosted the
"Olympic Family" which was comprised of the International Olympic Committee,
the Atlanta Committee for the Olympic Games and federations from each of the
participating countries.
Total Hotel Property-Level Costs and Expenses. In 1996, total hotel property
level costs and expenses increased $3.5 million, or 8%, when compared to 1995
due to higher costs associated with the increased revenues discussed above.
Operating Costs and Expenses. In 1996, operating costs and expenses
increased $4.3 million to $63.7 million. The increase was primarily due to the
changes in the following:
Depreciation. Depreciation decreased $1.1 million, or 16%, in 1996 when
compared to 1995 due to a portion of the Hotel's furniture and equipment
becoming fully depreciated in 1995.
Incentive Management Fees. In 1996, $2.0 million of incentive management
fees were earned as compared to $1.0 million earned in 1995. The increase in
incentive management fees earned was the result of improved Hotel operating
results resulting in certain cash flow priorities having been met.
Equipment Rent and Other. Equipment rent and other increased $460,000 due to
the inclusion of a property tax credit in 1995 results which did not occur in
1996.
As a percentage of revenues, operating costs and expenses represented 36% of
revenues for 1996 and 38% in 1995.
Operating Profit. In 1996, operating profit increased $3.0 million to $24.8
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 64% in 1996 and 63% in 1995.
F-143
<PAGE>
Net Income (Loss). In 1996, the Partnership had a net income of $2.5
million, an increase of $3.0 million over 1995's net loss of $413,000. This
increase was primarily due to higher Hotel revenues.
Inflation
The rate of inflation has been relatively low and accordingly has not had a
significant impact on the Partnership's operating results. However, the
Hotel's room rates and occupancy levels are sensitive to inflation. The
Manager is generally able to pass through increased costs to customers through
higher room rates.
CAPITAL RESOURCES AND LIQUIDITY
AMMLP's financing needs have been historically funded through loan
agreements with independent financial institutions. As a result of the
successful refinancing of the Partnership's Mortgage Debt, the General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to conduct its operations in the ordinary course of business.
Mortgage Debt
On February 2, 1998, the mortgage debt was successfully refinanced with a
third party lender. The Partnership's debt now consists of a $164 million
mortgage loan, which is nonrecourse to HMA, which bears interest at a fixed
rate of 7.4% for a 12-year term. The mortgage loan requires payments of
principal and interest based upon a 25-year amortization schedule. As part of
the refinancing, HMA was required to establish certain reserves which are held
by an agent of the lender including:
. $3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and site
improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
. $1.3 million tax and insurance reserve--This reserve will be used to pay
real estate tax and insurance premiums for the Hotel.
In addition, HMA advanced an additional $2.6 million to the Manager for
working capital needs and used the remaining cash to pay transaction costs
associated with the refinancing.
PRINCIPAL SOURCES AND USES OF CASH
General
The Partnership's principal source of cash is cash from Hotel operations.
Its principal uses of cash are to pay debt service payments on the
Partnership's mortgage debt, to make guarantee repayments, to fund the
property improvement fund and to make cash distributions to the partners.
Additionally, in 1998 the Partnership received cash through an equity infusion
by the General Partner and utilized cash to pay financing costs incurred in
connection with the refinancing of the Partnership's mortgage debt and to
establish reserves required by the lender.
First Two Quarters 1998 Compared to First Two Quarters 1997
Total cash used in operating activities was $4.9 million for the first two
quarters 1998 as compared to total cash provided by operations of $15.1
million for the first two quarters of 1997. In 1998, cash was used to pay
accrued interest on the Partnership's debt. In addition, pursuant to the terms
of the Mortgage Debt, the Partnership was required to establish with the
lender a separate reserve account for payments of insurance premiums and real
estate taxes for the mortgaged property as a result of the credit rating of
Marriott International,
F-144
<PAGE>
Inc. Thus, the Partnership has transferred $2.2 million into the reserve
through June 19, 1998. The reserve is included in restricted cash reserves and
the resulting tax and insurance liability is included in accounts payable and
accrued expenses in the accompanying balance sheet.
Cash used in investing activities was $4.8 million for the first two
quarters 1998 as compared to $2.3 million for the first two quarters 1997. The
increase in cash used in investing activities is primarily due to an advance
of $2.6 million to the Manager for working capital needs.
Cash used in financing activities was $5.6 million for the first two
quarters 1998. For the first two quarters 1997, no cash was provided by or
used in financing activities. The increase in cash used in financing
activities is primarily the result of the restructuring and refinancing
transactions. During 1998, the Partnership acquired new mortgage debt
financing of $164 million and received the remaining $69 million of the $75
million equity infusion from the General Partner. These proceeds were used as
follows: to repay the $199.8 million of mortgage debt; to repay $10.4 million
of the debt service guarantee and related interest outstanding under the Host
Marriott interest guarantee; to establish $22.5 million of reserves required
by the lender; and, to pay financing costs of $3.0 million. The Partnership
made a cash distribution in February 1998 to the Class A limited partners of
$2.7 million, or $5,000 per limited partner unit, from 1997 operations.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the partnership.
1997, 1996 and 1995:
Cash used in investing activities was $4.4 million, $4.5 million and $3.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Contributions to the property improvement fund for the years ended December
31, 1997, 1996, and 1995, were $3.9 million, $4.1 million, and $3.3 million,
respectively. Property and equipment additions increased in 1997 due to
increased expenditures at the Hotel associated with the first half of the
rooms refurbishment completed in 1997.
Cash used in financing activities was $1.3 million, $1.0 million and $5.8
million for the years ended December 31, 1997, 1996 and 1995, respectively. In
1997, the Partnership drew $10.4 million pursuant to the Interest Guarantee
and received $6 million of the $75 million total equity infusion from the
General Partner. The Partnership paid $28.5 million, $20.4 million and $20.4
million of interest on the mortgage debt for the years ended December 31,
1997, 1996 and 1995, respectively. On the Maturity Date, the Partnership was
required to pay $17.6 million representing the Deferred Interest on the
Mortgage Debt. No guarantee repayments to Host Marriott were made in 1997 and
1996. The Partnership made a guarantee repayment of $3.5 million in 1995. No
distributions to partners were made in 1997 as all cash flow was being
reserved in anticipation of the Mortgage Debt maturity. Distributions to
partners were $819,000 in 1996 and $2.3 million in 1995. Subsequent to year
end, the Partnership made a cash distribution to the Class A limited partners
of $2,648,562 ($5,000 per Partnership Unit).
Total cash provided from operations was $21.6 million, $9.9 million and
$10.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Partnership did not pay the interest payment of the Mortgage
Debt which was due on January 10, 1998 until January 9, 1998. In both 1996 and
1995, the majority of the January interest payment was paid in December of the
preceding year. This difference in the timing of the interest payments
accounts for the difference in the total cash provided from operations.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the Partnership. In addition, the
General Partner believes the property improvement fund and the capital
reserves established in conjunction with the refinancing will be adequate for
the future capital repairs and replacement needs of the Hotel.
F-145
<PAGE>
Capital Expenditures
The Partnership is required to maintain the Hotel in good repair and
condition. The new management agreement provides for the establishment of a
property improvement fund to cover the cost of non-routine repairs and
maintenance and renewals and replacements to the Hotel's property and
equipment. Contributions to the fund are 5% of Hotel gross sales. Annual
contributions to the fund equaled 4% of gross Hotel sales through June 1995
and are 5% thereafter. Per the terms of the New Management Agreement,
contributions to the property improvement fund will remain at 5%.
In 1997, the Hotel completed a $7.0 million refurbishment of approximately
half its guest rooms which included the replacement of the carpeting,
bedspreads, upholstery, drapes and other similar items and also the dressers,
chairs, beds and other furniture. The refurbishment of the remaining 711 rooms
and 16 suites began in mid-1998. This portion of the refurbishment will be
funded from a reserve which was established by the Partnership with the lender
on February 2, 1998. The facade repair project which entails a repair of the
entire facade of the building is underway. The project is expected to cost
$9.0 million and will be funded by the Partnership from a reserve which was
also established with the lender in conjunction with the refinancing on the
Maturity Date. The project is expected to be completed by mid-1999.
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotel exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
F-146
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Atlanta
Marriott Marquis II Limited Partnership (a Delaware limited partnership) and
Ivy Street Hotel Limited Partnership, its majority-owned subsidiary
partnership, as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlanta
Marriott Marquis II Limited Partnership and subsidiary as of December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Partnership has
given retroactive effect to the adoption of EITF 97-2 which required the
Partnership to report gross hotel sales and operating expenses in its
statement of operations.
Arthur Andersen LLP
Washington, D.C.
March 11, 1998
F-147
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net................................ $165,372 $162,111
Due from Marriott International, Inc....................... 4,425 6,390
Property improvement fund.................................. 2,756 6,864
Deferred financing costs, net of accumulated amortization.. 321 542
Cash and cash equivalents.................................. 21,502 5,601
-------- --------
$194,376 $181,508
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $199,019 $215,574
Due to Host Marriott under Original Debt Service Guaran-
tee and Commitment and Interest Guarantee............... 30,524 20,134
Due to Marriott International, Inc....................... 4,198 3,030
Accounts payable and accrued expenses.................... 12,743 309
-------- --------
Total Liabilities...................................... 246,484 239,047
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contributions.................................. 536 536
Capital distributions.................................. (165) (165)
Cumulative net losses.................................. (891) (885)
-------- --------
(520) (514)
-------- --------
Class A Limited Partners
Capital contributions, net of offering costs of
$6,430................................................ 46,570 46,570
Capital distributions.................................. (15,982) (15,982)
Cumulative net losses.................................. (88,176) (87,613)
-------- --------
(57,588) (57,025)
-------- --------
Class B Limited Partner
Capital contribution................................... 6,000 --
-------- --------
Total Partners' Deficit................................ (52,108) (57,539)
-------- --------
$194,376 $181,508
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-148
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
HOTEL REVENUES
Rooms......................................... $ 54,102 $ 56,115 $ 50,515
Food and beverage............................. 25,821 25,968 25,379
Other......................................... 5,474 6,381 5,277
-------- -------- --------
85,397 88,464 81,171
-------- -------- --------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Rooms....................................... 11,485 11,508 10,821
Food and beverage........................... 17,776 18,003 17,289
Other departmental costs and deductions..... 19,665 20,299 18,230
-------- -------- --------
Total property--level costs and expenses.. 48,926 49,810 46,340
Depreciation.................................. 5,250 5,525 6,608
Property taxes................................ 2,754 2,858 2,692
Base management fee........................... 2,562 2,654 2,435
Incentive management fee...................... 1,167 2,018 969
Equipment rent and other...................... 805 817 357
-------- -------- --------
61,464 63,682 59,401
-------- -------- --------
OPERATING PROFIT................................ 23,933 24,782 21,770
Interest expense.............................. (25,389) (22,890) (22,712)
Interest income............................... 887 651 529
-------- -------- --------
NET (LOSS) INCOME $ (569) $ 2,543 $ (413)
======== ======== ========
ALLOCATION OF NET (LOSS) INCOME
General Partner............................... $ (6) $ 25 $ (4)
Limited Partners.............................. (563) 2,518 (409)
-------- -------- --------
$ (569) $ 2,543 $ (413)
======== ======== ========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT (530
Units)......................................... $ (1,062) $ 4,751 $ (772)
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-149
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
GENERAL LIMITED LIMITED
PARTNER PARTNERS PARTNER TOTAL
------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994................. $(504) $(55,999) $ -- $(56,503)
Capital distributions.................... (23) (2,324) -- (2,347)
Net loss................................. (4) (409) -- (413)
----- -------- ------ --------
Balance, December 31, 1995................. (531) (58,732) -- (59,263)
Capital distributions.................... (8) (811) -- (819)
Net income............................... 25 2,518 -- 2,543
----- -------- ------ --------
Balance, December 31, 1996................. (514) (57,025) -- (57,539)
Capital contributions.................... -- -- 6,000 6,000
Net loss................................. (6) (563) -- (569)
----- -------- ------ --------
Balance, December 31, 1997................. $(520) $(57,588) $6,000 $(52,108)
===== ======== ====== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-150
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................ $ (569) $ 2,543 $ (413)
Noncash items:
Depreciation................................... 5,250 5,525 6,608
Deferred interest.............................. 1,035 1,831 1,654
Amortization of financing costs as interest.... 325 621 619
(Gain) loss on disposition of assets........... -- (1) 64
Changes in operating accounts:
Accounts payable and accrued expenses.......... 12,434 24 (178)
Due from Marriott International, Inc........... 1,965 (2,616) 782
Due to Marriott International, Inc............. 1,168 1,966 926
-------- ------- -------
Cash provided by operating activities........ 21,608 9,893 10,062
-------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment, net......... (8,511) (3,444) (2,643)
Change in property improvement fund.............. 4,108 (1,039) (1,097)
-------- ------- -------
Cash used in investing activities............ (4,403) (4,483) (3,740)
-------- ------- -------
FINANCING ACTIVITIES
Advances under Original Debt Service Guarantee
and Commitment and Interest Guarantee........... 10,390 -- --
Payment of deferred interest on mortgage debt.... (17,590) -- --
Capital contributions from General Partner for
Class B Limited Partnership Interest............ 6,000 -- --
Payment of deferred financing costs.............. (104) -- --
Capital distributions............................ -- (819) (2,347)
Repayments under Original Debt Service Guarantee
and Commitment and Interest Guarantee........... -- -- (3,500)
-------- ------- -------
Cash used in financing activities............ (1,304) (819) (5,847)
-------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.............. 15,901 4,591 475
CASH AND CASH EQUIVALENTS at beginning of year..... 5,601 1,010 535
-------- ------- -------
CASH AND CASH EQUIVALENTS at end of year........... $ 21,502 $ 5,601 $ 1,010
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................. $ 28,470 $20,438 $20,438
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-151
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Atlanta Marriott Marquis Limited Partnership ("AMMLP"), a Delaware limited
partnership, was formed on May 28, 1985 (the "Closing Date"), to (i) acquire
an 80% general partnership interest in the Ivy Street Hotel Limited
Partnership ("Ivy"), a partnership between John C. Portman, Jr. ("Portman")
and Host Marriott Corporation ("Host Marriott") that was formed to develop,
own and operate the 1,671 room Atlanta Marriott Marquis Hotel (the "Hotel"),
and (ii) purchase from Ivy the parcel of land (the "Land") on which the Hotel
is located. The sole general partner of the Partnership, with a 1% interest,
is Marriott Marquis Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott. Marriott International, Inc. serves as the
manager of the Hotel ("Marriott International" or the "Manager").
On the Closing Date, 530 Class A limited partnership interests of $100,000
per Unit ("Unit") were sold in a private placement. The General Partner made a
capital contribution of $536,000 on May 28, 1985 for its 1% general
partnership interest. In addition, the General Partner acquired a Class B
limited partnership interest without making any additional capital
contribution.
The Partnership purchased its 80% general partnership interest in Ivy from
Host Marriott for a total price of $28.8 million. The Partnership also
acquired the Land from Ivy for $10 million in a separate transaction. The
Partnership subsequently leased the Land to Ivy under a 99-year lease with
rentals based primarily on Hotel sales.
On July 9, 1997, Atlanta Marriott Marquis II Limited Partnership (the
"Partnership") was formed in anticipation of the merger discussed below. The
general partner of the Partnership is also Marriott Marquis Corporation. Prior
to December 31, 1997, the Partnership did not engage in any active business
and was organized solely to succeed AMMLP's interest in Ivy. Effective
December 31, 1997, the Partnership succeeded AMMLP as the managing general
partner of Ivy.
On December 31, 1997, AMMLP merged with and into the Partnership (the
"Merger"). The Merger of AMMLP and AMMLP-II was treated as a reorganization of
affiliated entities and AMMLP's basis in its assets and liabilities were
carried over. In conjunction with the Merger, the following transactions
occurred:
. AMMLP was merged with and into the Partnership. With the Merger, the
separate existence of AMMLP ceased and AMMLP limited partner units
("Units") were converted on a one-for-one basis into Partnership Class A
limited partnership units ("Partnership Units"). AMMLP limited partners
who held fractional interests in Units received the same interest in
Partnership Units.
. On December 31, 1997, the General Partner made an initial capital
contribution of $6 million to the Partnership. Subsequent to year end, on
January 30, 1998, the General Partner contributed an additional $69
million. In return for such additional capital contributions, the General
Partner received a new Class B limited partnership interest in the
Partnership entitling the General Partner to a 13.5% cumulative,
compounding annual preferred return and priority return of such capital.
The General Partner also surrendered its then existing Class B interest
on distributions.
. The Partnership Class A limited partners will receive an annual return of
5% on their initial investment in AMMLP, ratably with a 5% return to the
General Partner on its initial investment in AMMLP, after payment of the
preferred return on the Class B interest. To the extent unpaid in any
year, such return will accumulate and compound and be payable from sale
or refinancing proceeds.
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the Merger to incorporate the following revisions:
(i) a revised provision regarding a sale of the Hotel to permit
F-152
<PAGE>
the Partnership to sell the Hotel to an unaffiliated third party without the
consent of the limited partners; (ii) a revised provision limiting the voting
rights of the General Partner and its affiliates to permit the General Partner
and its affiliates to have full voting rights with respect to all Partnership
Units currently held by or acquired by the General Partner and its affiliates;
(iii) extinguishment of the original Class B limited partner interest held by
the General Partner and replacement of it with a new Class B interest which is
entitled to a 13.5% cumulative, compounded annual return; (iv) addition of a
mechanism that allows the Class B limited partner to contribute up to an
additional $20 million should the Hotel require additional funding (such
contribution would also be entitled to the 13.5% return discussed above); (v)
a revision of the right of removal of the General Partner clause so that an
affirmative vote of 66 2/3% would be needed to effect a removal of the General
Partner and; (v) revised provisions for allocations and distributions (see
Note 8). As a result of the approval of the Merger, the AMMLP-II Partnership
Agreement became effective December 31, 1997.
Partnership Allocations and Distributions
Ivy generally allocates operating income, gains and losses, deductions and
cash available for distribution 80% to the Partnership and 20% to Portman.
However, the first $1 million plus 5% of annual gross room sales of annual
cash available for distribution from Ivy was paid to AMMLP unless Ivy
exercised its option to repurchase the Land.
During 1990, AMMLP determined that the probability of collecting the
minority interest receivable from Portman was remote. Thus, AMMLP wrote off
this receivable which totaled $3,542,000 and began recording 100% of the
losses of Ivy. In future years, if AMMLP-II records income, 100% of the income
will be allocated to AMMLP-II until such excess income allocated to AMMLP-II
equals the excess losses previously recorded by AMMLP. Thereafter, any income
would be allocated 80% to AMMLP-II and 20% to Portman. As of December 31, 1997
and 1996, excess losses recognized by AMMLP and the Partnership were $621,000
and $50,000, respectively. AMMLP net losses, as defined, were generally
allocated as follows:
(i) beginning in 1991 and continuing until the Class A limited partners
and the General Partner had received sale or refinancing proceeds ("Capital
Receipts") equal to their total cumulative capital contributions ("Original
Capital"), 1% to the General Partner, 80% to the Class A limited partners
and 19% to the Class B limited partner; and
(ii) thereafter, 1% to the General Partner, 65% to the Class A Limited
Partners and 34% to the Class B Limited Partner.
These allocations could have been subject to certain special allocations of
net profit or net loss to the General Partner required by Federal income tax
regulations.
Cash Available for Distribution, as defined, generally was distributed as
follows:
(i) beginning in 1991, and continuing until the Class A Limited Partners
and the General Partner had received distributions of Capital Receipts
equal to their Original Capital, 1% to the General Partner, 80% to the
Class A Limited Partners and 19% to the Class B Limited Partner; and
(ii) thereafter, 1% to the General Partner, 65% to the Class A Limited
Partners and 34% to the Class B Limited Partner. However, until the General
Partner and the Class A Limited Partners had received a return of their
Original Capital through distributions of Capital Receipts, the Class B
Limited Partner will subordinate its cash distributions to an annual non-
cumulative 10% return on Original Capital to the General Partner and the
Class A Limited Partners.
Net profits, as defined, generally were allocated in the same ratio as Cash
Available for Distribution. Excess net profits were then to be applied to
offset prior net losses in excess of the partners' remaining invested capital.
Notwithstanding the above allocations, the Partnership Agreement provided for
specific allocation to the partners of gain realized and proceeds received by
the Partnership upon sale, condemnation or other disposition of the Hotel or
assets of the Partnership. In addition, the Partnership Agreement provided for
specific allocations of any excess refinancing or land sale proceeds.
F-153
<PAGE>
As discussed above, on December 31, 1997, the Partnership executed the
AMMLP-II Partnership Agreement which provides for a change in the above
allocations (see Note 8).
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year. The Partnership's
financial statements consolidate the financial statements of Ivy, its
majority-owned subsidiary partnership. All material intercompany transactions,
including the land lease between the Partnership and Ivy described in Note 7,
have been eliminated. All assets and liabilities of AMMLP have been carried
over to the Partnership at their historical basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenues and Expenses
Revenues represent sales generated by the Partnership's hotel. Total hotel
sales less hotel property-level costs and expenses equals house profit which
reflects the net revenues flowing to the Partnership as property owner. As
discussed below, the Partnership previously recorded only the house profit
generated by the Partnership's hotel properties as revenues.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires that the Partnership
include property-level revenues and operating costs and expenses in its
statement of operations. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying consolidated statement of
operations. The adoption of EITF 97-2 increased both revenues and operating
costs and expenses by $48.9 million in 1997, $49.8 million in 1996 and $46.3
million in 1995. There was no impact on operating profit or net income related
to the adoption of EITF 97-2.
Property and Equipment
Property and equipment is recorded at cost which includes interest, rent and
real estate taxes incurred during development. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
Building and improvements................................... 50 years
Furniture and equipment..................................... 3 to 20 years
</TABLE>
All land, property and equipment is pledged as security for the mortgage
debt described in Note 5.
F-154
<PAGE>
The Partnership assesses impairment of its real estate property based on
whether estimated undiscounted future cash flows for the property will be less
than its net book value. If the property is impaired, its basis is adjusted to
fair market value.
Deferred Financing Costs
Financing costs incurred in connection with obtaining the mortgage debt have
been deferred and are being amortized using the straight-line method, which
approximates the effective interest rate method, over three to ten years. A
portion of the deferred financing costs totaling $4,249,000 were fully
amortized as of July 10, 1997. Additional financing costs of $104,000 were
incurred in 1997 in connection with the refinancing of the Partnership's
mortgage debt. Accumulated amortization of the deferred financing costs
totaled $4,413,000 and $4,090,000 at December 31, 1997 and 1996, respectively.
This amount includes amortization of deferred financing costs for both Ivy and
the Partnership. Of the total, the Partnership has accumulated amortization of
$164,000 and $151,000 at December 31, 1997 and 1996, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
There are significant differences between the net income/loss reported in
these financial statements and the net income/loss determined for income tax
purposes. These differences are due primarily to the use, for tax purposes, of
accelerated depreciation methods and shorter depreciable lives for the assets,
the timing of the recognition of incentive management fee expense and the
treatment of the minority interest receivable. As a result of these
differences, the (deficit)/excess of the tax basis in net Partnership
liabilities and the net liabilities reported in the accompanying financial
statements is $(90,642,000) and $72,111,000 as of December 31, 1997 and 1996,
respectively. For tax purposes, the assets of the Partnership were stepped up
to fair market value on December 31, 1997 when the General Partner made an
initial capital contribution of $6.0 million to the Partnership for a Class B
limited partnership interest in the Partnership.
Statement of Financial Accounting Standards
In 1996, AMMLP adopted Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an effect on
its financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Leased land acquisition costs and land................... $ 12,617 $ 12,617
Building and improvements................................ 182,629 182,597
Furniture and equipment.................................. 42,621 34,142
-------- --------
237,867 229,356
Less accumulated depreciation............................ (72,495) (67,245)
-------- --------
$165,372 $162,111
======== ========
</TABLE>
For financial reporting purposes the Land is carried at its historical
purchase cost of $10 million as required by generally accepted accounting
principles.
F-155
<PAGE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------ ------------------------
<S> <C> <C> <C> <C>
Mortgage debt............. $ 199,019 $ 199,019 $ 215,574 $ 215,574
Due to Host Marriott under
Original Debt Service
Guarantee and Commitment
and Interest Guarantee... 30,524 30,524 20,134 14,300
Incentive management fees
due to Marriott
International, Inc....... 4,155 -- 2,987 --
</TABLE>
The 1997 and 1996 estimated fair value of the mortgage debt is stated at its
carrying value as it was repaid on February 2, 1998. The amounts held in Due
to Host Marriott under original debt service and commitment consist of the
interest guarantee in the amount of $10,390,000 and the original debt service
commitment in the amount of $20,134,000. The estimated fair value of the
interest guarantee is the carrying value as it was also repaid on February 2,
1998. The estimated fair value of the original debt service commitment is its
carrying value as the obligation earns interest at 9% as of February 2, 1998.
The estimated fair value of incentive management fees due to Marriott
International is zero. As part of the new management agreement effective
January 3, 1998, all accrued incentive management fees were waived by the
Manager and the Partnership's accrued liability was written off to income in
1998.
NOTE 5. MORTGAGE DEBT
As of December 31, 1996, the AMMLP's mortgage debt consisted of a total of
$215,574,000 in nonrecourse mortgage notes (the "Mortgage Debt"). Through July
10, 1997 (the "Maturity Date"), interest accrued on the Mortgage Debt at a
fixed rate of 10.3%. Interest only was payable semiannually in arrears. The
cash payment rate was 10.17%. The difference between the cash payment rate and
the accrual rate (the "Deferred Interest") was added to the balance of the
Mortgage Debt. The cumulative Deferred Interest added to the Mortgage Debt
balance amounted to $17.6 million and $16.5 million at July 10, 1997 and
December 31, 1996, respectively. On the Maturity Date, the Mortgage Debt
matured, at which time AMMLP and Ivy entered into a letter agreement (the
"Letter Agreement") with the lender which effectively extended the maturity of
the Mortgage Debt until February 2, 1998 (the "New Maturity Date"). On the
Maturity Date, AMMLP and Ivy were required to pay $17.6 million representing
the Deferred Interest on the Mortgage Debt in addition to the scheduled
interest payment of $ 10.1 million. As a result, the Mortgage Debt balance
outstanding was reduced to $ 199,019,000.
The payment of Deferred Interest was funded from $7.2 million of Ivy cash
reserves established by the General Partner in anticipation of the Mortgage
Debt maturity and $10.4 million drawn pursuant to the Host Marriott interest
guarantee (the "Interest Guarantee"). Host Marriott had agreed to advance up
to $50 million to cover interest and principal shortfalls. Had cash flow from
operations been insufficient to fully fund interest due, $20 million was
available under the Interest Guarantee through the Maturity Date. The
remaining $30 million was available under the Principal Guarantee. Prior to
the payment of Deferred Interest in the amount of $10.4 million on the
Maturity Date, there were no amounts outstanding under either the Principal
Guarantee or the Interest Guarantee. In conjunction with the extension, Host
Marriott reaffirmed its obligations pursuant to these guarantees through the
New Maturity Date. The Principal Guarantee was available in case of a sale,
refinancing or acceleration of the principal amount of the underlying notes
resulting from an Event of Default, as defined. To the extent the Interest
Guarantee was not used, it became available as a Principal Guarantee.
During the term of the Letter Agreement, the Mortgage Debt continued to be
nonrecourse, and accrued interest at 12.3% with interest payments due on
January 10 and February 2, 1998. Additionally, all funds remitted
F-156
<PAGE>
by the Manager during the term of the extension were held for the benefit of
the lender. In conjunction with the Letter Agreement, Ivy paid an extension
fee of $500,000 as well as approximately $410,000 representing costs and
expenses related to the transaction.
Host Marriott had guaranteed up to $33 million of the original debt (the
"Original Debt Service Guarantee" and the "Commitment") under which Host
Marriott was obligated to make certain required debt service payments and
restore any cash flow deficits to the extent that Partnership cash flow, as
defined, was insufficient. Pursuant to the terms of the Mortgage Debt, the
Commitment was modified to fund only certain furniture, fixtures and equipment
expenditures and ground rent shortfalls. Any interest, principal or guarantee
loans made at a time when the Commitment was not fully funded reduced, dollar
for dollar, but not below zero, the remaining unfunded amount of the
Commitment. Advances under the Principal Guarantee, Interest Guarantee and
Original Debt Service Guarantee and Commitment up to cumulative fundings of
$33 million did not bear interest. Amounts advanced in excess of $33 million
accrued interest at 1% over the prime rate. As of December 31, 1997,
cumulative fundings equaled $41.6 million, exceeding the $33 million by $8.6
million. The excess fundings accrued interest until they were repaid
subsequent to year-end. Total accrued interest on the cumulative advances for
the period from the Maturity Date through December 31, 1997 equaled $398,000.
As of December 31, 1997 and 1996, Ivy had $20.1 million due to Host Marriott
under the Commitment.
On March 24, 1994, the note holders of the Mortgage Debt voted to accept the
Manager as a back-up guarantor and on December 21, 1994, the agreement was
finalized. The Manager, as back-up guarantor, was required to perform the
obligations under the guarantees in the event that Host Marriott failed to do
so. In conjunction with the extension, the Manager reaffirmed its obligations
pursuant to these guarantees through the New Maturity Date.
Subsequent to year-end, the Mortgage Debt was refinanced (see Note 8).
NOTE 6. HOTEL MANAGEMENT AGREEMENT
Ivy entered into a hotel management agreement (the "Management Agreement")
with the Manager to manage the Hotel for a term of 25 years, renewable at
Ivy's or the Manager's option for five additional 10-year terms. The Manager
was entitled to compensation for its services in the form of a base management
fee equal to 3% of gross sales. Base management fees paid in 1997, 1996 and
1995 were $2,562,000, $2,654,000 and $2,435,000, respectively.
In addition, the Manager earned an incentive management fee equal to 50% of
assumed net cash flow of the Hotel, as defined. However, once total cumulative
incentive management fees reached an amount equal to or greater than 20% of
total cumulative Hotel profit, as defined, the Manager earned an incentive
management fee equal to the average of (i) 50% of assumed net cash flow and
(ii) 20% of Hotel profit. The incentive management fee was paid out of cash
flow available for incentive management fees, as defined, and was subordinated
to the Mortgage Debt, guarantee repayments and rent under the Land lease. Any
incentive management fees earned but not paid were deferred without interest
and paid out of the first cash flow available for the incentive management
fee. During 1997 and 1996, $1,167,000 and $2,018,000, respectively, in
incentive management fees had been earned. Through December 31, 1997, no
incentive management fees had ever been paid. Deferred incentive management
fees as of December 31, 1997 and 1996 were $4,154,000 and $2,987,000,
respectively, and are included in Due to Marriott International, Inc. in the
accompanying consolidated balance sheet. Subsequent to year-end, a new
management agreement was entered into. As part of this new agreement, all
accrued incentive management fees were waived by the Manager (see Note 8) and
the Partnership's accrued liability was written off in 1998 (see Note 8).
Pursuant to the terms of the Management Agreement, the Manager is required
to furnish the Hotel with certain services ("Chain Services") which are
generally provided on a central or regional basis to all domestic full-service
hotels managed, owned or leased by the Manager or its subsidiaries. Chain
Services include central training, advertising and promotion, a national
reservation system, computerized payroll and accounting services
F-157
<PAGE>
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 hotels in the Manager's full-service hotel system. In
addition, the Hotel also participates in the Manager's Marriott Rewards
Program ("MRP"). This program succeeded the Honored Guest Awards Program. The
cost of this program is charged to all hotels in the Manager's hotel system.
The total amount of Chain Services and MRP costs allocated to the Hotel were
$2,685,000 in 1997, $1,968,000 in 1996 and $2,431,000 in 1995.
Pursuant to the terms of the Management Agreement, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotel. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Management
Agreement, the working capital and supplies will be returned to the
Partnership. As of December 31, 1997 and 1996, $3,077,000 has been advanced to
the Manager for working capital and supplies which is included in Due from
Marriott International, Inc. in the accompanying consolidated balance sheet.
The supplies advanced to the Manager are recorded at their estimated net
realizable value. At December 31, 1997 and 1996, accumulated amortization
related to the revaluation of these supplies totaled $177,000. Subsequent to
year-end, an additional $2,639,000 was advanced to the Manager for working
capital needs at the Hotel (see Note 8).
The Partnership is required to maintain the Hotel in good repair and
condition. Pursuant to the Agreement, annual contributions to a property
improvement fund provide for the replacement of furniture, fixtures and
equipment. Annual contributions to the fund equaled 4% of gross Hotel sales
through June 1995 and 5% thereafter. Total contributions to the property
improvement fund for the years ended December 31, 1997, 1996, and 1995 were
$3,929,000, $4,122,000 and $3,302,000, respectively.
NOTE 7. LAND LEASE
On the Closing Date, AMMLP acquired the Land on which the Hotel is located
from Ivy for $10 million. AMMLP has leased the Land to Ivy for a period of 99
years. Annual rent was equal to 5% of annual gross room sales from the Hotel.
Ivy had an option to repurchase the Land at any time through 1999. Through
1995, the option price was $25 million and for the ensuing four years the
option price will be adjusted for changes in the Consumer Price Index. At
December 31, 1997 and 1996, the option price was $26,500,000 and $25,825,000,
respectively. Total rentals under the lease, which were eliminated in
consolidation, were $2,705,000 in 1997, $2,806,000 in 1996 and $2,526,000 in
1995.
Subsequent to year-end, the Land lease was terminated (see Note 8) because
the Land was contributed to a subsidiary of Ivy.
NOTE 8. SUBSEQUENT EVENTS
Bankruptcy Remote Entity
To facilitate the refinancing of AMMLP's Mortgage Debt, on January 29, 1998
the Hotel and the Land were conveyed to a special purpose, bankruptcy remote
entity, HMA Realty Limited Partnership ("HMA"). The sole general partner of
HMA with a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy.
Mortgage Debt
On the New Maturity Date, the following transactions occurred:
. HMA obtained new 12-year first mortgage financing of $164 million (the
"New Mortgage Debt") which, together with $35 million from the additional
$69 million capital contributed by the General Partner were used to pay
the maturing Mortgage Debt. The New Mortgage Debt is nonrecourse to HMA,
bears interest at a fixed rate of 7.4% and will require monthly payments
of principal and interest calculated to fully
F-158
<PAGE>
amortize the loan over 25 years resulting in annual debt service of $14.1
million for 1998 and $14.4 million annually until the end of the 12-year
term.
. Host Marriott waived its existing right to priority repayment of the
$20.1 million in prior non-interest bearing Interest Guarantee advances
to Ivy and restructured such advances as a loan with a 15 year term
(interest only for the first five years) bearing interest at a rate of 9%
per annum (the "Term Loan"). Payments are due monthly in arrears from
cash available after payment of debt service on the New Mortgage Debt.
Upon a sale of the Hotel, the Term Loan will accelerate and become due
and payable.
. The outstanding amount of the Interest Guarantee of $10.4 million and
related interest was repaid to Host Marriott.
. The $30 million Principal Guarantee provided by Host Marriott was
eliminated.
. The Partnership distributed funds to Class A limited partners of
approximately $5,000 per Partnership Unit. This distribution represented
the excess of the Partnership's reserve after payment of a majority of
the transaction costs related to the Mortgage Debt refinancing.
As part of the refinancing, HMA was required to establish certain reserves
which are held by an agent of the lender including:
. $3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and site
improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
. $1.3 million tax and insurance reserve--This reserve will be used to pay
real estate tax and insurance premiums for the Hotel.
In addition, HMA advanced an additional $2,639,000 to the Manager for
working capital needs and used the remaining cash to pay transaction costs
associated with the refinancing.
New Management Agreement
To facilitate the refinancing effective January 3, 1998, a new management
agreement (the "New Management Agreement") was entered into by HMA and the
Manager. The New Agreement expires on July 1, 2010 and is renewable at the
Manager's option for five additional 10-year terms. Pursuant to the terms of
the New Management Agreement, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit (the
"Owner's Priority"). Thereafter, the Manager will receive 20% of the profit in
excess of such Owner's Priority. The amount of the Owner's Priority will not
be reduced but may be increased to take into account additional capital
contributions by the General Partner or its affiliates. As part of the New
Management Agreement, all accrued incentive management fees amounting to $4.5
million were waived by the Manager and the Partnership's accrued liability was
written off in 1998.
Land Lease
As part of the Merger transactions, the Partnership contributed the Land to
a subsidiary of Ivy. This transaction terminated the Land lease and resulted
in cessation of Land lease payments from Ivy to the Partnership. The
Partnership received a credit to its capital account in Ivy of $26.5 million
in consideration of the Land contribution. For financial reporting purposes
the Land will continue to be carried at its historical purchase cost of $10
million as required by generally accepted accounting principles.
New Partnership Agreement
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the Merger to incorporate the following revisions:
F-159
<PAGE>
(i) a revised provision regarding a sale of the Hotel to permit the
Partnership to sell the Hotel to an unaffiliated third party without the
consent of the limited partners;
(ii) a revised provision limiting the voting rights of the General
Partner and its affiliates to permit the General Partner and its affiliates
to have full voting rights with respect to all Partnership Units currently
held by or acquired by the General Partner and its affiliates;
(iii) extinguishment of the original Class B limited partner interest
held by the General Partner and replacement of it with a new Class B
interest which is entitled to a 13.5% cumulative, compounded annual return;
(iv) addition of a mechanism that allows the Class B limited partner to
contribute up to an additional $20 million should the Hotel require
additional funding (such contribution would also be entitled to the 13.5%
return discussed above);
(v) a revised right of removal of the General Partner clause so that an
affirmative vote of 66 2/3% would be needed to effect a removal of the
General Partner and;
(vi) a revision of AMMLP's allocations and distributions such that
Partnership cash available for distribution is generally allocated as
follows:
(a) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested
capital,
(b) to the General Partner and Class A limited partners, until the
General Partner and the Class A limited partners have received a non-
cumulative, non-compounded annual return of 5% on their initial
investment in AMMLP-II, and
(c) thereafter, in proportion to total invested capital through
completion of the Restructuring Transactions of approximately 41% to
limited partners and 59% to the General Partner; and
(vii) a revision of AMMLP's allocations and distributions such that
Partnership sale or refinancing proceeds are generally allocated as
follows:
(a) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested
capital,
(b) to the General Partner and Class A limited partners, until the
General Partner and the Class A limited partners have received a non-
cumulative, non-compounded annual return of 5% on their initial
investment in AMMLP-II,
(c) to the General Partner, until its Class B invested capital of up
to $75 million has been fully returned, taking into account all
distributions to such Partners following the effective date of the
Restructuring Transactions (other than the approximately $5,000 per
Partnership Unit distributed as part of the Restructuring
Transactions),
(d) to the General Partner and Class A limited partners until they
have received a cumulative, compounded return on their original
invested capital of 5% per annum from the effective date of the
Restructuring Transactions,
(e) to the General Partner and Class A limited partners, until such
partners' original invested capital of $536,000 and $53,000,000,
respectively, has been fully returned, and
(f) thereafter, in proportion to total invested capital through
completion of the Restructuring Transactions of approximately 41% to
limited partners and 59% to the General Partner.
As a result of the approval of the Merger, the AMMLP-II Partnership
Agreement became effective December 31, 1997.
Ivy Partnership Agreement
In conjunction with the Merger transactions, the Ivy partnership agreement
was amended to incorporate the following revisions: (i) provide that the $75
million contributed by the General Partner of the Partnership to Ivy
F-160
<PAGE>
will be entitled to receive an annual preferred return equal to 13.5%
compounding to the extent unpaid; (ii) provide that the Land, after
contribution by the Partnership to Ivy at an agreed upon value of $26.5
million, will be entitled to receive an annual compounding preferred return
equal to 10%, after payment of the 13.5% return described above; and (iii)
allows the Partnership the unilateral right, as managing general partner of
Ivy, to make most major decisions on behalf of Ivy, including, without
limitation, the sale or other disposition of the Hotel, except where such
disposition is to a party related to Host Marriott or an affiliate of Host
Marriott.
F-161
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
HOTEL REVENUES
Rooms....................... $ 26,909 $ 27,710
Food and beverage........... 12,269 13,254
Other....................... 2,779 2,800
--------- ---------
41,957 43,764
--------- ---------
OPERATING COSTS AND EXPENSES
Property-level costs and ex-
penses
Rooms..................... 5,536 5,752
Food and beverage......... 8,186 8,370
Other departmental costs
and deductions........... 9,175 9,469
--------- ---------
Total property-level
costs and expenses..... 22,897 23,591
--------- ---------
Depreciation................ 2,891 2,349
Property taxes and other.... 1,923 1,707
Base management fees........ 1,259 1,311
Incentive management fees... 90 1,998
--------- ---------
29,060 30,956
--------- ---------
OPERATING PROFIT.............. 12,897 12,808
Interest expense............ (7,964) (10,862)
Interest income............. 154 379
--------- ---------
NET INCOME BEFORE
EXTRAORDINARY ITEMS.......... 5,087 2,325
EXTRAORDINARY ITEMS
Gain on extinguishment of
debt....................... 19 --
Gain on forgiveness of in-
centive management fees.... 4,155 --
--------- ---------
NET INCOME.................... $ 9,261 $ 2,325
========= =========
ALLOCATION OF NET INCOME
General Partner............. $ -- $ 23
Class A Limited Partners.... -- 2,302
Class B Limited Partner..... 9,261 --
--------- ---------
$ 9,261 $ 2,325
========= =========
NET INCOME PER CLASS A LIMITED
PARTNER UNIT (530 Units)..... $ -- $ 4,343
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-162
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $164,005 $165,372
Due from Marriott International, Inc.................. 7,434 4,425
Property improvement fund............................. 3,357 2,756
Deferred financing costs, net of accumulated amortiza-
tion................................................. 3,174 321
Restricted cash reserves.............................. 25,031 --
Cash and cash equivalents............................. 6,191 21,502
-------- --------
$209,192 $194,376
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt....................................... $163,232 $199,019
Due to Host Marriott Corporation under Original Debt
Service Guarantee and Commitment and Interest Guar-
antee.............................................. -- 30,524
Term loan payable to Host Marriott Corporation...... 20,134 --
Due to Marriott International, Inc.................. 133 4,198
Accounts payable and accrued expenses............... 2,190 12,743
-------- --------
Total Liabilities................................. 185,689 246,484
-------- --------
PARTNERS' CAPITAL (DEFICIT)
General Partner..................................... (520) (520)
Class A Limited Partners............................ (60,238) (57,588)
Class B Limited Partner............................. 84,261 6,000
-------- --------
Total Partners' Capital (Deficit)................... 23,503 (52,108)
-------- --------
$209,192 $194,376
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-163
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 9,261 $ 2,325
Net extraordinary items.................................. (4,174) --
--------- -------
Income before extraordinary items........................ 5,087 2,325
Noncash items.......................................... 2,994 3,567
Changes in operating accounts.......................... (12,990) 9,176
--------- -------
Cash (used in) provided by operating activities...... (4,909) 15,068
--------- -------
INVESTING ACTIVITIES
Working capital provided to Marriott International,
Inc..................................................... (2,639) --
Additions to property and equipment, net................. (1,524) (1,109)
Change in property improvement fund...................... (601) (1,201)
--------- -------
Cash used in investing activities.................... (4,764) (2,310)
--------- -------
FINANCING ACTIVITIES
Proceeds from mortgage debt.............................. 164,000 --
Repayment of mortgage debt............................... (199,768) --
Capital contributions from General Partner for Class B
Limited Partnership Interest............................ 69,000 --
Changes in restricted lender reserves.................... (22,873) --
Repayments under Original Debt Service Guarantee and Com-
mitment and Interest Guarantee to Host Marriott Corpora-
tion.................................................... (10,390) --
Payment of financing costs............................... (2,957) --
Capital distributions.................................... (2,650) --
--------- -------
Cash used in financing activities.................... (5,638) --
--------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (15,311) 12,758
CASH AND CASH EQUIVALENTS at beginning of period........... 21,502 5,601
--------- -------
CASH AND CASH EQUIVALENTS at end of period................. $ 6,191 $18,359
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................ $ 19,127 $ 662
========= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-164
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by the Atlanta Marriott Marquis II Limited Partnership (the
"Partnership" and "AMMLP-II") without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading. However,
the condensed consolidated financial statements should be read in conjunction
with the Partnership's consolidated financial statements and notes thereto
included in the Partnership's Form 10-K for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998, the results of operations and
cash flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
Through December 31, 1997, for financial reporting purposes the net
income/(loss) of the Partnership was allocated 99% to the limited partners and
1% to Marriott Marquis Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"). As reported in the
Partnership's Form 10-K for the fiscal year ended December 31, 1997, Atlanta
Marriott Marquis Limited Partnership's ("AMMLP") partnership agreement was
amended as a result of the Merger to incorporate a revision of AMMLP's
allocations and distributions such that Partnership net income is generally
allocated (i) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested capital,
(ii) to the General Partner and Class A limited partners, until the General
Partner and the Class A limited partners have received a non-cumulative, non-
compounded annual return of 5% on their initial investment in the Partnership,
and (iii) thereafter, in proportion to total invested capital through
completion of the merger transactions of approximately 41% to limited partners
and 59% to the General Partner. Net losses are generally allocated in
proportion to the partners capital accounts. Significant differences exist
between the net income/(loss) for financial reporting purposes and the net
income/(loss) reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives for the assets, and differences in the
timing of the recognition of 1997 incentive management fee expense.
Through December 31, 1997, AMMLP owned an 80% general partnership interest
in Ivy Street Hotel Limited Partnership ("Ivy") which owned the Atlanta
Marriott Marquis Hotel (the "Hotel"). The Partnership also owned the land (the
"Land") on which the Hotel is located. On December 31, 1997 AMMLP merged (the
"Merger") with and into the Partnership. The Merger of AMMLP and the
Partnership was treated as a reorganization of affiliated entities and AMMLP's
basis in its assets and liabilities were carried over. On January 29, 1998,
the Hotel and the Land were conveyed to a special purpose, bankruptcy remote
entity, HMA Realty Limited Partnership ("HMA"). The sole general partner of
HMA with a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy. The Partnership
consolidates Ivy and HMA, and all significant intercompany transactions and
balances between the Partnership, Ivy and HMA have been eliminated. In 1990,
the Partnership determined that the probability of collecting the receivable
from the minority partner in Ivy was remote. Thus, the Partnership wrote off
this receivable and is now recording 100% of the income/(loss) of Ivy until
excess income allocated to the Partnership equals the excess losses previously
recorded by the Partnership.
F-165
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
3. The Partnership's revenues represent gross sales generated by the
Partnership's hotel. Total hotel sales less hotel property-level costs and
expenses equals house profit which reflects the net revenues flowing to the
Partnership as property owner. As discussed below, the Partnership previously
recorded only the house profit generated by the Partnership's hotel properties
as revenues,
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires that the Partnership
include property-level revenues and operating costs and expenses in its
statement of operations. The Partnership was required to apply EITF 97-2 on
January 3, 1998 to the modified management agreement with Marriott
International, Inc. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying consolidated statement of
operations. The adoption of EITF 97-2 increased both revenues and operating
costs and expenses by $22.9 million and $23.6 million in first two quarters
1998 and 1997, respectively and will have no impact on taxable income.
The statements of operations for the first and second quarter of 1998
included in the Partnership Form 10-Q filings did not reflect hotel sale and
property-level expenses. These financial statements have been amended to
conform to the presentation of sales and expenses in the financial statements
included herein.
4. On February 2, 1998, HMA obtained new 12-year first mortgage financing of
$164 million which, together with $35 million from the additional $69 million
capital contributed by the General Partner, was used to pay the mortgage debt.
The mortgage debt is nonrecourse to HMA, bears interest at a fixed rate of
7.4% and requires monthly payments of principal and interest calculated to
fully amortize the loan over 25 years. Annual debt service on the new mortgage
debt is $14.1 million for 1998 and $14.4 million annually until the end of the
12-year term.
5. To facilitate the refinancing, effective January 3, 1998, a new
management agreement was entered into by HMA and the Manager. The new
management agreement expires on July 1, 2010 and is renewable at the Manager's
option for five additional 10-year terms. Pursuant to the terms of the new
management agreement, no incentive management fees are payable to the Manager
with respect to the first $29.7 million of operating profit (the "Owner's
Priority"). Thereafter, the Manager will receive 20% of the profit in excess
of such Owner's Priority. As part of the new management agreement, all accrued
incentive management fees totaling $4.2 million were forgiven by the Manager.
The Partnership recorded an extraordinary gain in conjunction with the
forgiveness in the accompanying condensed consolidated financial statements.
6. Pursuant to the terms of the Mortgage Debt, HMA was required to establish
with the lender a separate reserve account for payments of insurance premiums
and real estate taxes for the mortgaged property as a result of the credit
rating of Marriott International, Inc. Thus, the Partnership has transferred
$2.2 million into the reserve through June 19, 1998. The reserve is included
in restricted cash reserves and the resulting tax and insurance liability is
included in accounts payable and accrued expenses in the accompanying balance
sheet.
F-166
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, HMA was required to establish the following reserves which are
classified as restricted cash reserves in the accompanying condensed
consolidated balance sheet and are held by the agent of the lender including:
. $3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and
site improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
7. On April 17, 1998, Host Marriott, parent company of the General Partner
of the Partnership, announced that its Board of Directors authorized Host
Marriott to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999. As part
of the REIT conversion, Host Marriott formed a new operating Partnership (the
"Operating Partnership") and limited partners in certain Host Marriott full-
service hotel partnerships and joint ventures, including the Atlanta Marriott
Marquis II Limited Partnership, are expected to be given an opportunity to
receive, on a tax-deferred basis, Operating Partnership units in the Operating
Partnership in exchange for their current Partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
the Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission on June 2, 1998. Limited Partners will be
able to vote on this Partnership's participation in the merger later this year
through a consent solicitation.
F-167
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited financial statements for the
First Two Quarters 1998 and First Two Quarters 1997. The following data should
be read in conjunction with the financial statements and the notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(3)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 65,051 $ 12,488 $ 33,369 $ 24,681 $ 22,688 $ 21,407 $ 21,289
Operating profit........ 18,545 7,756 16,381 14,510 13,293 9,873 9,990
Income (loss) before
extraordinary item(2).. 10,196 1,199 2,161 109 1,585 (2,264) (3,099)
Net income (loss)....... 10,196 1,199 29,699 109 1,585 (2,264) (3,099)
Distributions:
General partner....... 23 -- 227 15 51 40 50
Limited partners...... 2,248 -- 22,500 1,532 5,020 3,964 4,948
-------- --------- ---------- ---------- ---------- ---------- ----------
Total................. 2,271 -- 22,727 1,547 5,071 4,004 4,998
Per Partnership Unit:(3)
Net income (loss)..... 11,216 1,319 32,669 120 1,743 (2,490) (3,409)
Distributions......... 2,500 -- 25,000 1,702 5,577 4,404 5,498
Cash provided by
operating activities... 14,881 14,862 12,441 7,017 6,724 5,859 5,541
Cash used in investing
activities............. (3,948) (1,787) (3,862) (3,096) (2,050) (4,437) (3,760)
Cash used in financing
activities............. (1,842) (11,921) (9,781) (8,379) (1,399) (740) (2,855)
Increase (decrease) in
cash and cash
equivalents............ 9,091 1,154 (1,202) (4,458) 3,275 682 (1,074)
Ratio of earnings to
fixed charges(4)
(unaudited)............ 2.16x 1.18x 1.14x 1.01x 1.12x -- --
Deficiency of earnings
to fixed charges(4)
(unaudited)............ -- -- -- -- -- 2,264 3,099
Total assets at book
value.................. 181,624 175,567 172,156 164,882 173,742 172,238 175,451
Cash and cash
equivalents............ 13,644 6,909 4,553 5,755 10,213 6,938 6,256
Total debt(5)........... 181,644 187,136 182,727 185,913 190,087 186,415 183,196
Total liabilities....... 188,364 196,005 186,821 186,519 193,941 188,951 185,941
Partner's capital
(deficit):
Limited partners...... (6,798) (20,359) (14,644) (21,546) (20,122) (16,671) (10,511)
General partner....... 58 (79) (21) (91) (77) (42) 21
Book Value per
Partnership Unit
(unaudited)(3)......... (7,553) (22,621) (16,271) (23,940) (22,358) (18,523) (11,679)
Exchange Value per
Partnership Unit
(unaudited)(3)......... 40,880 -- -- -- -- -- --
</TABLE>
- --------
(1) On November 25, 1997, the Partnership converted its Operating Lease with
Marriott Hotel Services, Inc. to a management agreement.
(2) In 1997, Desert Springs Marriott Limited Partnership recognized an
extraordinary gain of $27,538,000 on the forgiveness of additional rental
paid by hotel lessee at the conversion of the Operating Lease to a
management agreement.
(3) A Partnership Unit represents a $100,000 original investment in Desert
Springs.
(4) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense
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that is deemed to represent interest. The deficiency of earnings of fixed
charges is largely the result of depreciation and amortization of
$8,932,000 and $8,502,000 as of December 31, 1994 and 1993, respectively.
(5) Total debt includes amounts due Host Marriott under the Junior Loan of
$59,727,000 as of June 19, 1998 and December 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis addresses the results of operations of
the Partnership for the First Two Quarters 1998 and the fiscal years ended
December 31, 1997, 1996 and 1995.
Growth in the Partnership's total Hotel room sales, and thus rental income
and hotel revenue, is primarily a function of average occupancy and average
room rates, as well as control of hotel operating costs. In addition, due to
the amount of meeting/convention business at the Hotel, food and beverage and
golf and spa operations have a direct effect on the Partnership's rental
income and hotel revenue. REVPAR, or revenue per available room, represents
the combination of the average daily room rate charged and the average daily
occupancy achieved and is a commonly used indicator of hotel performance.
REVPAR does not include food and beverage or other ancillary revenues
generated by the Hotel. REVPAR for the years ended December 31, 1997, 1996 and
1995 was $124, $113 and $104, respectively. Food and beverage sales increased
to $40.4 million in 1997 from $38.4 million in 1996 from $33.5 million in 1995
due to increased group sales.
Hotel revenue for the period of November 25 through December 31, 1997 and
net rental income from the Hotel rental and the airline equipment lease with
Trans World Airline, Inc. (the "Equipment") are applied to debt service,
property taxes, partnership administrative costs, Partnership funded capital
expenditures and cash distributions to the partners.
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Hotel revenues. As discussed in Note 3 to the Condensed Consolidated
Financial Statements, the Partnership converted its operating lease to a
management agreement in connection with its debt refinancing. Revenues reflect
hotel sales in 1998. Revenues reported for the first two quarters 1998 are not
comparable to the Hotel Rentals reported for the first two quarters 1997.
Prior to the Conversion, the Partnership recognized estimated annual hotel
rental income on a straight-line basis throughout the year. The profits from
the Hotel are seasonal and first and second quarter results are generally
higher than the last two quarters of the year. Lease payments in excess of the
income recognized by the Partnership were deferred and, to the extent not
subject to possible future repayment to the Hotel lessee, were recognized as
income during the remainder of the year. Pursuant to the terms of the
Operating Lease, Annual Rental, as defined, was equal to the greater of Basic
Rental (80% of Operating Profit, as defined) and Owner's Priority, as defined.
Additionally, the Hotel tenant was required to pay taxes, make contributions
equal to a percentage of Hotel sales to a property improvement fund (4.5% in
1997 and 5.5% thereafter) and pay rental on the second golf course.
Subsequent to the Conversion, the Partnership records revenues which
represent sales generated by the Partnership's hotel. Hotel property-level
costs and expenses reflect all property-level costs and expenses.
For the first two quarters 1998, on a comparative basis, revenues increased
$5.7 million or 9.6% from $59.4 million in first two quarters 1998 to $65.0
million in the first two quarters 1997 primarily due to the Conversion
discussed above and to increases in rooms revenues. For the year, REVPAR
increased 10% over the same period of the prior year to approximately $171 due
primarily to a 9% increase in the average room rate to approximately $214
coupled with a 1.1 percentage point increase in average occupancy to
approximately 80%. Room sales and profit increased 10% and 9% respectively,
due to strong demand in the leisure transient segment and improvements in the
Hotel's rooms amenity package and guest services. With the increase in
transient demand,
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the hotel increased its group average room rate by approximately 12% for the
first two quarters 1998 compared to the same period in 1997.
Operating Costs and Expenses. On a comparative basis, operating costs and
expenses increased $7.1 million from $39.4 million for the first two quarters
1997 to $46.5 million for the first two quarters 1998. The increase is
primarily due to the impact of the Conversion. Prior to the Conversion, hotel
property-level costs and expenses and incentive management fee expense was not
a component of operating expense. Rather, hotel property-level costs and
expenses was a deduction to arrive at hotel rental and accrued incentive
management fee expense was deducted from the additional lease payments in
excess of rental income that were deferred by the Partnership. Additionally,
base management fees, though a component in the calculation of Operating
Profit prior to the Conversion, were not a component of the Partnership's
operating costs.
Depreciation. For the first two quarters 1998, depreciation decreased
$254,000, or 7%, when compared to the same quarters in 1997 as the
Partnership's original 10-year equipment became fully depreciated during 1997.
Interest Expense. On November 25, 1997 the Partnership refinanced its $160
million mortgage debt with $182.7 million of debt. The increase in debt along
with an increase in the weighted average interest rate from 8.3% in the first
two quarters 1997 to 9.8% in the first two quarters 1998 resulted in an
increase in interest expense of approximately $2.0 million, or 30%, from $6.8
million to $8.8 million. For the first two quarters 1998, the weighted average
interest rate increased from 8.3% in 1997 to 9.8% in 1998.
Interest Income and Other. Interest income and other includes $132,000 for
the first two quarters which represents payments made to the Partnership by
Marriott Vacation Club International ("MVCI") for the rental of a gallery and
marketing desk in the Hotel's lobby. For the first two quarters 1997, $140,000
was recognized and included in the $12.5 million of Hotel rental income.
Net Income. Net income increased $9.0 million for the first two quarters
1998 to $10.2 million for the first two quarters 1997 as a result of the
changes discussed above, primarily the Conversion, and improved hotel
operating results.
1997 Compared to 1996
Hotel Rental Income. On November 25, 1997, in connection with the
refinancing, the General Partner and the Tenant/Manager converted the
Operating Lease to a management agreement (the "Management Agreement"). As a
result of this conversion, full year 1997 hotel rental income is not
comparable to full year 1996 hotel rental income. Hotel rental income for the
period January 1 through November 25, 1997 was $24 million. For the year,
total Hotel sales increased 6% due primarily to a 7.6% increase in rooms
revenue. REVPAR improved 10% to $124 due to a 7% increase in average room rate
to approximately $170 and a 2.0 percentage point increase in average daily
occupancy to approximately 73%.
Hotel Revenues. Effective November 25, 1997, the Partnership records hotel
operations as revenues. As a result of the conversion from an Operating Lease
to a Management Agreement, Partnership hotel revenues were $9.4 million. This
consists of the Hotel's operating results for the period of November 25
through December 31, 1997.
Airline Equipment Rental Income. Airline equipment rental income was $1.2
million in 1996. The airline equipment lease was terminated in April 1996. On
April 24, 1996, Trans World Airlines, Inc. ("TWA"), the lessee, terminated the
lease and purchased the equipment, as permitted under the lease agreement.
Depreciation. Depreciation and amortization decreased by $550,000 due to the
retirement of $7 million of equipment in 1997.
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Property Taxes. Property taxes were unchanged at $2.0 million for both 1997
and 1996.
Partnership Administration and Other. Partnership administration and other
decreased from $474,000 in 1996 to $445,000 in 1997 due to a slight decrease
in administrative costs related to the refinancing.
Base Management Fee. As a result of the conversion to a management
agreement, the Partnership recorded base management fees from November 26
through December 31, 1997. Base management fees are calculated as 3% of sales
or $281,000 for 1997.
Insurance and Other. As a result of the conversion to a management
agreement, insurance and other expense was $256,000. This expense includes a
loss of $163,000 on the retirement of fixed assets, $65,000 of insurance
expense and $28,000 in equipment rental and permits and licenses.
Incentive Management Fee. As a result of the conversion to a management
agreement, the Partnership's incentive management fee expense from November 26
through December 31, 1997 was $123,000. As further explained in Note 7 to the
financial statements, Marriott International is entitled to a total of $2
million in fees for 1997, $123,000 of which is incentive management fee
expense.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $1.9 million or 13%
to $16.4 million for 1997 when compared to 1996.
Interest Expense. Interest expense decreased 5% from $15.5 million in 1996
to $14.8 million in 1997 due to a decrease in the Partnership's weighted
average interest rate from 9.0% to 8.4%. The Partnership's $160 million Bridge
Loan accrued interest at LIBOR plus 2.75 percentage points from January 1
through November 25, 1997, the closing date of the Bridge Loan refinancing.
The weighted average interest rate for the Bridge Loan (see "--Debt
financing") for this period was 8.4% compared to 9.0% in 1996. The refinancing
of the Bridge Loan consists of three tiers of debt: a senior loan which bears
interest at a fixed rate of 7.8%; a mezzanine loan, which bears interest at a
fixed rate of 10.365%; and a Host Marriott junior loan which bears interest at
a fixed rate of 13%.
Interest Income and Other. Interest income and other decreased 45% from $1.1
million in 1996 to $607,000 in 1997. The decrease is primarily due to the
Partnership utilizing $8.2 million of cash and cash equivalents to reduce the
balance of its outstanding mortgage debt combined with paying $2.7 million in
refinancing costs which decreased the cash balance on which interest income is
earned.
Extraordinary Items. The Partnership recognized an extraordinary gain in
1997 of $27.5 million representing the forgiveness of additional rental by the
Tenant/Manager.
1996 Compared to 1995
Hotel Rental Income. Hotel rental income for 1996 increased 18% from $19.9
million in 1995 to $23.4 million in 1996. For the year, total Hotel revenues
increased 15% due to increases in all areas of the Hotel including rooms, food
and beverage, golf and spa and other ancillary revenues. REVPAR improved 9% to
$113 due to a 5% increase in average room rate to approximately $158 and a 2.5
percentage point increase in average daily occupancy to approximately 71%.
Food and beverage revenues increased 15% from $33.5 million in 1995 to $38.4
million in 1996.
Airline Equipment Rental Income. Airline equipment rental income decreased
56% from $2.8 million in 1995 to $1.2 million in 1996 due to the termination
of the airline equipment lease in April 1996. On April 24, 1996, TWA, the
lessee, terminated the lease and purchased the equipment, as permitted under
the lease agreement.
Depreciation. Depreciation and amortization decreased by $91,000 due to the
write-off in 1995 of the airline equipment partially offset by an increase in
building and equipment depreciation due to the $9.1 million rooms renovation.
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Property Taxes. Property tax expense increased 61% to $2.0 million in 1996
from $1.2 million in 1995 primarily due to a nonrecurring $600,000 refund
received in 1995 related to property taxes paid in prior years.
Partnership administration and other. Partnership administration and other
increased 34% primarily due to an increase in administrative costs due to the
refinancing of the mortgage debt.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $1.2 million or 9.2%,
to $14.5 million for 1996 when compared to 1995.
Interest Expense. Interest expense increased 16% from $13.4 million in 1995
to $15.5 million in 1996 due to an increase in the weighted average interest
rate. The mortgage debt matured on July 27, 1996 and went into default on the
maturity date. Pursuant to the loan documents, the mortgage debt accrued
interest at the default rate of 10.75% until the refinancing on December 23,
1996. The weighted average interest rate on the first mortgage debt was 9.0%
in 1996 and 7.8% in 1995.
Interest Income and Other. Interest income and other decreased 34% from $1.6
million in 1995 to $1.1 million in 1996. The decrease is primarily due to
$692,000 of income recognized in 1995 on the funding of the pool expansion by
Marriott Vacation Club International ("MVCI") offset by a $108,000 increase in
interest income earned in 1996 on the Partnership's cash held for refinancing.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded primarily
through loan agreements with independent financial institutions. The General
Partner believes that the Partnership will have sufficient capital resources
and liquidity to continue to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel operations. Its
principal uses of cash are to make debt service payments, fund the Hotel's
property improvement fund and establish reserves required by the lender.
Cash provided by operating activities for the first two quarters 1998 and
1997 was $14.9 million. Cash provided by operating activities increased
$19,000 primarily due to the Conversion, as discussed in Note 3, combined with
improved hotel operations. Prior to the Conversion, the Partnership recognized
estimated annual hotel rental income on a straight-line basis throughout the
year. This charge combined with an overall improvement in hotel operations, an
increase in accounts payable of $2.8 million due to increased accrued interest
liability, offset by the payment of $2.0 million of accrued incentive
management fees to MHS in second quarter 1998 resulted in the increase in cash
from operations. Additionally, through June 19, 1998, an additional $1.5
million was transferred into the tax and insurance reserve account and
$984,000 was disbursed to pay accrued real estate taxes. The tax and insurance
reserve is included in restricted cash reserves and the resulting tax and
insurance liability is included in accounts payable and accrued expenses in
the accompanying balance sheet.
Cash used in investing activities for the first two quarters 1998 and 1997
was $3.9 million and $1.8 million, respectively. The Partnership's cash used
in investing activities consists primarily of contributions to the property
improvement fund and capital expenditures for improvements at the hotel.
Contributions to the property improvement fund for the first two quarters 1998
were $3.6 million and $2.7 million for the first two quarters 1997.
Contributions in 1998 increased due to a $5.7 million increase in gross hotel
sales and an increase in the contribution rate from 4.5% in 1997 to 5.5% in
1998. Capital expenditures from the property improvement fund were $2.3
million and $1.3 million for the first two quarters 1998 and 1997,
respectively.
Cash used in financing activities for the first two quarters 1998 and 1997
was $1.8 million and $11.9 million, respectively. The Partnership's cash used
in financing activities consists primarily of payments of the mortgage debt,
contributions to the restricted cash reserves and cash distributions.
Contributions for the first two quarters
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1998 to the restricted cash reserves consist of $500,000 for the replacement
of the Hotel's air conditioning system and interest income earned for the
first two quarters 1998 of $153,000. Disbursements from the reserves include
$270,000 for the air conditioning work and $2.0 million for accrued incentive
management fees payable to MHS. Contributions for the first two quarters 1998
to the restricted cash reserves in 1997 consisted of $10.9 million of excess
cash from Hotel operations held for future debt service. During the second
quarter of 1998, the Partnership distributed $2.3 million to the partners
($2,500 per limited partner unit) from 1997 operations. Additionally, for the
first two quarters 1998 and 1997, the Partnership made $900,000 of loan
repayments from the property improvement fund on the rooms refurbishment loan
from Marriott International, Inc.
The Partnership's principal source of cash was from the Hotel Operating
Lease up until November 25, 1997, at which time the Operating Lease was
converted to the Management Agreement. Prior to the Equipment Lease
termination, the Partnership's principal sources of cash included rents
received under the Equipment Lease and proceeds from Equipment sales. Its
principal uses of cash are to fund the property improvement fund, pay debt
service and cash distributions to the partners. Additionally, during 1996 and
1997, the Partnership utilized cash to pay financing costs incurred in
connection with the refinancing of the mortgage debt.
The Hotel Operating Lease provided for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equaled 80% of Operating Profit, as
defined in the Hotel Operating Lease. Owner's Priority equaled the greater of
(i) $20 million plus debt service on certain additional debt to expand the
Hotel or (ii) Debt Service, as defined.
Pursuant to an agreement reached with Marriott International, for fiscal
year 1997, the $20 million Owner's Priority was increased to $20.5 million.
Marriott International was entitled only to the next $2 million of Operating
Profit. Any additional Operating Profit in excess of $22.5 million was
remitted entirely to the Partnership. For 1997, Operating Profit was $23.7
million, Marriott International earned $2.0 million and the remaining $1.2
million was remitted to the Partnership. In connection with the long-term
financing, Marriott International agreed to waive any and all claims to
Additional Rental (as defined in the Operating Lease) that accrued prior to
the consummation of the loan ($27.5 million).
On November 25, 1997, in connection with the refinancing, the General
Partner also negotiated with the Tenant/Manager to convert the Operating Lease
to a management agreement (the "Management Agreement"). The Tenant/Manager
would become manager of the Hotel (the "Manager"). The initial term of the
Management Agreement continues through 2022 with four successive renewal
options of ten years each.
Beginning with fiscal year 1998 forward, the Management Agreement provides
that no incentive fee will be paid to the Manager with respect to the first
$21.5 million of Operating Profit (the "Owner's Priority"). Thereafter the
Manager will receive the next $1.8 million of Operating Profit as an incentive
management fee and any Operating Profit in excess of the $23.3 million will be
divided 75% to the Partnership and 25% to the Manager. Any such payments will
be made annually after completion of the audit of the Partnership's books.
Total cash provided by operations of the Hotel was $12.4 million, $7.0
million and $6.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Proceeds from the sale of airline equipment were $2.5 million
for the year ended December 31, 1996, and $4.0 million for the year ended
December 31, 1995 due to the sale of the equipment in 1996. Cash contributed
to the property improvement fund of the Hotel was $4.6 million, $4.4 million
and $3.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Cash distributed to the partners was $22.7 million, $1.5 million
and $5.1 million during the years ended December 31, 1997, 1996 and 1995,
respectively. Financing costs related to refinancing the mortgage debt were
$1.2 million in 1997 and $2.7 million in 1996. There were no refinancing costs
in 1995.
The General Partner expects that contributions to the property improvement
fund will be a sufficient reserve for the future capital repair and
replacement needs of the Hotel's property and equipment.
Pursuant to the terms of the Hotel Operating Lease and Management Agreement,
the Partnership is obligated to fund major improvements for the Hotel's
mechanical and heating systems. During 1998, the
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Partnership expects to fund approximately $2.0 million for improvements to the
Hotel's HVAC system (heating, ventilating and air conditioning). Also, during
1998, the Partnership expects to fund approximately $350,000 on roof repair
projects. The Partnership has established a reserve to pay for these
improvements which is expected to be sufficient. This reserve is being held by
the mortgage loan lender. There are currently no additional Partnership funded
capital expenditure items expected for 1998.
DEBT FINANCING
On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
Commercial Mortgage Corporation ("GMAC") purchased the existing mortgage debt
of the Partnership and amended and restated certain terms thereof (as amended
and restated, the "Bridge Loan"). The Bridge Loan consisted of a $160 million
nonrecourse mortgage loan. The Partnership utilized $8.2 million from its
refinancing reserve to reduce the outstanding principal balance of the
existing mortgage debt to the $160 million outstanding under the Bridge Loan.
In addition, the Partnership utilized $2.6 million from the refinancing
reserve to pay costs associated with the financing including lender's fees,
property appraisals, environmental studies and legal fees. Approximately half
of the $2.6 million was for fees related to the long-term financing. The
Bridge Loan was originated by Goldman Sachs Mortgage Company ("GSMC"), matured
on October 31, 1997 and bore interest at the London Interbank Offered Rate
("LIBOR") plus 2.75 percentage points and required that all excess cash from
Hotel operations, if any, be held in a debt service reserve for future debt
service or to reduce the outstanding principal balance of the Bridge Loan upon
maturity. For the year ended December 31, 1996, the weighted-average interest
rate on the Partnership's mortgage debt was 9.0%. For the period of January 1
through November 25, 1997 the weighted average interest rate was 8.4%.
The Bridge Loan was secured by the Partnership's fee interest in the Hotel,
a security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles and
a security interest in the Partnership's rights under the Hotel operating
lease, the Hotel purchase agreement and other related agreements.
Pursuant to the terms of the debt refinancing, there are no continuing
requirements for a debt service guarantee. Host and the General Partner were
released from their obligations to the Partnership under their original debt
service guarantee with the refinancing of the Partnership's mortgage debt.
In conjunction with the refinancing of the mortgage debt, the General
Partner reaffirmed a foreclosure guarantee to the lender in the amount of $50
million. Pursuant to the terms of the foreclosure guarantee, amounts would be
payable only upon a foreclosure of the Hotel and only to the extent that the
gross proceeds from a foreclosure sale were less than $50 million. The
foreclosure guarantee was not reaffirmed with the refinancing of the Bridge
Loan.
On September 26, 1997, the General Partner received unrevoked consents
approving a new loan structure and certain amendments to the Partnership
Agreement which were necessary to refinancing negotiations of the Bridge Loan.
An extension agreement was signed with the current lender on October 30, 1997,
extending the maturity date and loan terms of the Bridge Loan from October 31,
1997 until December 31, 1997, without penalty.
On November 25, 1997, the Partnership secured long-term refinancing for its
$160 million Bridge Loan. The new financing consists of three tranches: 1) a
$103 million senior loan, 2) a $20 million loan and 3) a $59.7 million junior
loan. The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of
the Partnership, DS Hotel LLC, which owns the Hotel and related assets. The
Senior Loan matures in December, 2022 and is secured by a first mortgage lien
on the Hotel. The loan bears interest at a fixed rate of 7.8% and requires
monthly payments of interest and principal with amortization over its twenty-
five year term. On June 11, 2010 the interest rate increases to 200 basis
points over the then current yield on 12 year U.S. treasuries and also
additional principal payments will be required as defined in the loan
agreement.
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The second tranche of debt consists of a $20 million loan (the "Mezzanine
Loan") from Goldman Sachs Mortgage Company ("GSMC") to a newly formed
bankruptcy remote subsidiary of the Partnership, Marriott DSM LLC, which
secures the loan. Marriott DSM LLC owns a 100% interest in DS Hotel LLC. The
Mezzanine Loan consists of a fully amortizing $20 million loan maturing in
December, 2010. The loan bears interest at a fixed rate of 10.365% and
requires monthly payments of interest and principal with amortization over a
twelve and one-half year term.
The third tranche of debt consists of a junior loan, (the "HM Junior Loan")
to the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary
of the General Partner. The HM Junior Loan has a term of thirty years and
requires no principal amortization for the first twelve and one-half years
with a seventeen and one-half year amortization schedule thereafter. Security
for the HM Junior Loan is the Partnership's 100% interest in Marriott DSM LLC.
If remaining cash flow is insufficient to pay interest on the HM Junior Loan,
interest is deferred and will accrue and compound and be payable from future
cash flow. The HM Junior Loan also entitles MDSM to receive 30% of any excess
cash flow, as defined, available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan.
In conjunction with the refinancing of the mortgage debt, the Partnership
was required to establish cash reserves which are held by an agent of the
lender including:
. $6.2 million debt service reserve
. $1.5 million reserve for capital expenditures
. $2.0 million reserve for payment of fees to the Tenant/Manager
The reserves were established from the Partnership's restricted cash related
to the Bridge Loan in addition to Partnership operating cash.
In addition, the Partnership is required to establish with the lender a
separate escrow account for payments of insurance premiums and real estate
taxes for the Hotel if the credit rating of Marriott International is
downgraded by Standard and Poor's Rating Services. The Manager is a wholly-
owned subsidiary of Marriott International. In March 1997, Marriott
International acquired the Renaissance Hotel Group N.V., adding greater
geographic diversity and growth potential to its lodging portfolio. The
assumption of additional debt associated with this transaction resulted in a
single downgrade of Marriott International's long-term senior unsecured debt
effective April, 1997. Therefore, the Partnership was required to establish a
reserve account for insurance and real estate tax. As of December 31, 1997,
$581,000 remains available to pay insurance and real estate taxes. The escrow
reserve is included in restricted cash and the resulting tax and insurance
liability is included in accounts payable and accrued liabilities in the
accompanying balance sheet.
The Partnership utilized $1.2 million from the refinancing reserve to pay
costs associated with the financing including lender or subsidiary fees,
property appraisals, environmental studies and legal fees.
Debt to Marriott International
On April 30, 1996, the Partnership entered into a short-term loan with
Marriott International in the amount of $1,700,000 to fund a portion of the
Hotel's rooms refurbishment project. The loan's stated maturity was June 13,
1997, bore interest at 8.5% and was to be repaid from the property improvement
fund as contributions were made during the year. At December 31, 1996, the
loan balance was $900,000. The loan was fully repaid on March 28, 1997.
Property Improvement Fund
The Partnership is required to maintain the Hotel in good repair and
condition. The Hotel Operating Lease agreement and Management Agreement
require the Tenant/Manager to make annual contributions to the property
improvement fund for the Hotel on behalf of the Partnership. Contributions to
the fund are equal to 4.5% of Hotel gross revenues through 1997 increasing to
5.5% thereafter. Total contributions to the fund were $3.8
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<PAGE>
million in 1995, $4.4 million in 1996 and $4.6 million in 1997. The balance of
the Hotel's property improvement fund was $1.6 million as of December 31,
1997.
During the summer of 1996, a $9.1 million rooms refurbishment was completed
at the Hotel. The property improvement fund was not sufficient to fund the
refurbishment. The Partnership arranged a short-term loan from Marriott
International of up to $1.7 million at a fixed rate of 8.5% to finance the
anticipated shortfall. The loan was repaid from the property improvement fund
prior to its maturity on June 13, 1997. The General Partner believes that
funds available from the property improvement fund will be adequate for
anticipated renewal and replacement expenditures.
During 1995, the Hotel's main swimming pool was expanded. This $2.1 million
expansion was funded partially with $692,000 in proceeds received from
Marriott Vacation Club International ("MVCI") pursuant to an agreement between
the Partnership and MVCI for the development of additional time share units on
land adjacent to the Hotel. The Partnership funded the remaining $1.4 million
from cash reserves.
Equipment Lease
The Partnership leased airline equipment to TWA under an operating lease
which expired in April 1995. On April 20, 1995, the Partnership reached an
agreement with TWA whereby TWA was obligated to pay quarterly payments of
$780,000 plus interest in arrears at 17%. At the end of the lease in July 1996
(or earlier if a termination option was exercised), TWA had the option to
purchase the equipment for one dollar ($1). The lease generated $5.4 million
in cash flow during the 1995 fiscal year. As a result of the lease renewal
terms, the Partnership recorded a receivable for the future lease payments due
from TWA and deferred the gain on the transaction. The deferred gain was
recognized as income as lease payments were received. Total rental income
recognized in 1995 and 1996 on the lease was $2.8 million and $1.2 million,
respectively. The original cost of the airline equipment was depreciated over
the life of the operating lease. Depreciation expense on the airline equipment
was $526,000 for the year ended December 31, 1995.
On April 24, 1996, TWA exercised its early termination option under the
airline equipment lease and paid the rent due on that date of $847,000 along
with the termination value of $780,000 plus the $1 purchase option. Rental
income of $1,248,000 was generated by the lease in 1996.
Golf Course Lease
The Second Golf Course is located near the Hotel on approximately 100 acres
of land and is leased to the Partnership by a subsidiary of Marriott
International. The Second Golf Course and related facilities were subleased by
the Partnership to the Tenant/Manager pursuant to an operating lease with
annual rental equal to $100,000. The term of the lease for the Second Golf
Course expires on December 31, 2011, with five 10-year renewal periods at the
option of the Partnership. Under the terms of the lease for the Second Golf
Course, the Partnership pays annual rent equal to $100,000 and is responsible
for all costs of operating and maintaining the Second Golf Course. Upon
termination of the lease for the Second Golf Course, the Second Golf Course
and all facilities and improvements thereon will become the property of
Marriott's Desert Springs Development Corporation. All costs of operating and
maintaining the course are deductions from gross revenues and all revenues
from operation of the course are items of gross revenues of the Hotel. In
conjunction with the refinancing of the mortgage debt, the golf course is no
longer subleased to the Operating Tenant. The Manager manages the golf course
for the Partnership pursuant to the terms of the Golf Course Lease.
Homeowners Agreement
A subsidiary of Marriott International, MVCI has been developing a portion
of land adjacent to the golf courses for time shares. The Partnership,
Marriott International, Marriott's Desert Springs Development Corporation and
MVCI entered into an Agreement (the "Homeowners Agreement") whereby it was
agreed that each purchaser of a time share unit will receive certain golf
course and other privileges (including preferred tee
F-176
<PAGE>
times at the golf courses equal to one tee time per week per time share unit)
at the Hotel. Time share purchasers will not pay membership fees, but rather
will pay regular green fees for use of the golf courses, and do not receive
preferred tennis court times or free access to the health spa. Time share
purchasers will have use of the latter facilities and other Hotel facilities,
if they are available, on the same basis as regular Hotel guests and will pay
the same fees as regular Hotel guests.
Office Space Rental Agreement
On January 27, 1995, the Partnership entered into an agreement with MVCI
whereby MVCI occupies the space of eleven guest rooms and built a vacation
gallery. The initial term of the agreement is April 1, 1995 to March 31, 1999,
with initial annual rental of $150,000. The annual rental may be increased in
the second, third and fourth year of the lease by the local area Consumer
Price Index plus 1% subject to a maximum of 10%.
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact on the Partnership's gross income and net
income. The Operating Tenant/Manager is generally able to pass through
increased costs to customers through higher room rates. In 1997, the increase
in average room rates at the Hotel exceeded those of direct competitors as
well as the general level of inflation.
SEASONALITY
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
F-177
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Desert Springs Marriott
Limited Partnership and subsidiaries (a Delaware limited partnership) as of
December 31, 1997 and 1996, and the related statements of operations, changes
in partners' (deficit) capital and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Desert Springs Marriott
Limited Partnership and subsidiaries as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 18, 1998
F-178
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment,
net...................... $151,401 $155,441
Due from Marriott Interna-
tional, Inc.............. 1,368 8
Property improvement
fund..................... 1,598 1,041
Deferred financing, net of
accumulated amortiza-
tion..................... 3,000 2,637
Restricted cash........... 10,236 --
Cash and cash equiva-
lents.................... 4,553 5,755
-------- --------
$172,156 $164,882
======== ========
LIABILITIES AND PARTNERS'
DEFICIT
LIABILITIES
Mortgage debt............. $103,000 $160,000
Note payable.............. 20,000 --
Due to Host Marriott and
affiliates............... 59,727 --
Additional rental paid by
hotel lessee............. -- 25,013
Due to Marriott Interna-
tional, Inc.............. 2,122 1,022
Accounts payable and ac-
crued expenses........... 1,972 484
-------- --------
Total Liabilities....... 186,821 186,519
======== ========
PARTNERS' DEFICIT
General Partner
Capital contribution..... 909 909
Capital distributions.... (829) (602)
Cumulative net losses.... (101) (398)
-------- --------
(21) (91)
-------- --------
Limited Partners
Capital contributions,
net of offering costs of
$10,576................. 77,444 77,444
Investor notes receiv-
able.................... (22) (22)
Capital distributions.... (82,084) (59,584)
Cumulative net losses.... (9,982) (39,384)
-------- --------
(14,644) (21,546)
-------- --------
Total Partners' Defi-
cit.................... (14,665) (21,637)
-------- --------
$172,156 $164,882
======== ========
</TABLE>
See Notes to financial statements.
F-179
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Rentals
Hotel............................................ $24,016 $23,433 $19,851
Airline equipment (Note 6)....................... -- 1,248 2,837
Hotel revenues
Rooms............................................ 3,620 -- --
Food and beverage................................ 3,330 -- --
Other............................................ 2,403 -- --
------- ------- -------
Total hotel revenues............................ 9,353 -- --
------- ------- -------
33,369 24,681 22,688
------- ------- -------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms........................................... 801 -- --
Food and beverage............................... 2,646 -- --
Other departmental costs and deductions......... 3,296 -- --
------- ------- -------
Total property-level costs and expenses....... 6,743 -- --
------- ------- -------
Depreciation...................................... 7,182 7,732 7,823
Property taxes.................................... 1,958 1,965 1,219
Partnership administration and other.............. 445 474 353
Base management fee............................... 281 -- --
Insurance and other............................... 256 -- --
Incentive management fee.......................... 123 -- --
------- ------- -------
16,988 10,171 9,395
------- ------- -------
OPERATING PROFIT.................................... 16,381 14,510 13,293
Interest expense.................................. (14,827) (15,501) (13,371)
Interest income and other......................... 607 1,100 1,663
------- ------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM................ 2,161 109 1,585
------- ------- -------
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental.......... 27,538 -- --
------- ------- -------
NET INCOME.......................................... $29,699 $ 109 $ 1,585
------- ------- -------
ALLOCATION OF NET INCOME
General Partner................................... $ 297 $ 1 $ 16
Limited Partners.................................. 29,402 108 1,569
------- ------- -------
$29,699 $ 109 $ 1,585
------- ------- -------
NET INCOME PER LIMITED PARTNER UNIT (900 Units)..... $32,669 $ 120 $ 1,743
======= ======= =======
</TABLE>
See Notes to financial statements.
F-180
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $ (42) $(16,671) $(16,713)
Net income........................................ 16 1,569 1,585
Capital distributions............................. (51) (5,020) (5,071)
----- -------- --------
Balance, December 31, 1995.......................... (77) (20,122) (20,199)
Net income........................................ 1 108 109
Capital distributions............................. (15) (1,532) (1,547)
----- -------- --------
Balance, December 31, 1996.......................... (91) (21,546) (21,637)
Net income........................................ 297 29,402 29,699
Capital distributions............................. (227) (22,500) (22,727)
----- -------- --------
Balance, December 31, 1997.......................... $ (21) $(14,644) $(14,665)
===== ======== ========
</TABLE>
See Notes to financial statements.
F-181
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 29,699 $ 109 $ 1,585
Extraordinary item............................ (27,538) -- --
--------- --------- -------
Income before extraordinary item.............. 2,161 109 1,585
Noncash items:
Depreciation................................. 7,182 7,732 7,823
Amortization of deferred financing costs as
interest expense............................ 807 104 135
Loss (gain) on dispositions of property and
equipment................................... 163 (1,248) (1,972)
Changes in operating accounts:
Due to/from Marriott International, Inc. and
affiliates.................................. 640 2,287 (2,241)
Due from airline equipment lessee............ -- -- 1,357
Accounts payable and accrued interest........ 1,488 (1,967) 37
--------- --------- -------
Cash provided by operations................. 12,441 7,017 6,724
--------- --------- -------
INVESTING ACTIVITIES
Additions to property and equipment........... (3,318) (9,989) (3,979)
Change in property improvement fund, net...... (544) 4,384 (2,035)
Proceeds from sales of airline equipment...... -- 2,509 3,964
--------- --------- -------
Cash used in investing activities........... (3,862) (3,096) (2,050)
--------- --------- -------
FINANCING ACTIVITIES
Proceeds from mortgage loan................... 182,727 160,000 --
Repayment of mortgage debt.................... (160,000) (168,239) --
Capital distributions to partners............. (22,727) (1,547) (5,071)
Change in restricted cash..................... (10,236) -- --
Additional rental paid by hotel lessee........ 2,525 3,165 3,672
Payment of refinancing costs.................. (1,170) (2,658) --
Repayment of note payable to Marriott Interna-
tional, Inc.................................. (900) (800) --
Advances from Marriott International, Inc..... -- 1,700 --
--------- --------- -------
Cash used in financing activities........... (9,781) (8,379) (1,399)
--------- --------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.......................................... (1,202) (4,458) 3,275
CASH AND CASH EQUIVALENTS at beginning of year.. 5,755 10,213 6,938
--------- --------- -------
CASH AND CASH EQUIVALENTS at end of year........ $ 4,553 $ 5,755 $10,213
========= ========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Cash paid for mortgage interest and other..... $ 12,959 $ 17,372 $13,237
========= ========= =======
</TABLE>
See Notes to financial statements.
F-182
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own Marriott's Desert Springs
Resort and Spa and the land on which the 884-room hotel and a golf course are
located (the "Hotel") and airline equipment. The sole general partner of the
Partnership, with a 1% interest, is Marriott Desert Springs Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The Hotel was leased to Marriott Hotel Services, Inc. (the
"Tenant"), a wholly-owned subsidiary of Marriott International, along with a
second golf course leased by the Partnership from Marriott Desert Springs
Development Corporation, also a wholly-owned subsidiary of Marriott
International. The airline equipment was leased to TransWorld Airlines, Inc.
("TWA") pursuant to the terms of an operating lease through April 20, 1995. On
April 20, 1995, the Partnership entered into a new sales-type lease agreement
which was due to expire on June 24, 1996. On April 24, 1996, TWA exercised its
early termination option under the airline equipment lease and paid the rent
due on that date of $847,000 along with the termination value of $780,000 plus
the $1 purchase option (see Note 6).
The Partnership was formed on February 26, 1987, and operations commenced on
April 24, 1987 (the "Unit Offering Closing Date"). Between March 20, 1987, and
the Unit Offering Closing Date, 900 limited partnership interests (the
"Units") were subscribed pursuant to a private placement offering. The
offering price per Unit was $100,000; $25,000 payable at subscription with the
balance due in three annual installments through June 15, 1990, or, as an
alternative, $87,715 in cash at closing as full payment of the subscription
price. Of the total 900 Units, 740.5 were purchased on the installment basis
and 159.5 Units were paid in full. The General Partner contributed $909,100 in
cash for its 1% general partnership interest.
In connection with the mortgage debt refinancing in 1997 (see Note 5), the
General Partner received unrevoked consents of limited partners approving
certain amendments to the partnership agreement. The amendments, among other
things, allowed the formation of certain subsidiaries of the Partnership
including DS Hotel LLC and Marriott DSM LLC. The Partnership contributed the
Hotel and its related assets to Marriott DSM LLC, which in turn contributed
them to DS Hotel LLC, a bankruptcy remote subsidiary. Marriott DSM LLC, a
bankruptcy remote subsidiary of the Partnership owns 100% interest in DS Hotel
LLC. The Partnership owns 100% interest in Marriott DSM LLC. In addition,
effective November 25, 1997, the Hotel is managed by the Tenant (the
"Manager").
Partnership Allocations and Distributions
Under the partnership agreement, Partnership allocations, for Federal income
tax purposes, and distributions are generally made as follows:
a. Cash available for distribution will generally be distributed (i) first,
1% to the General Partner and 99% to the limited partners until the General
Partner and the limited partners (collectively, the "Partners") have received
cumulative distributions of sale or refinancing proceeds ("Capital Receipts")
equal to $45,454,545; and (ii) thereafter, 10% to the General Partner and 90%
to the limited partners.
b. Refinancing proceeds and proceeds from the sale or other disposition of
less than substantially all of the assets of the Partnership, not retained by
the Partnership, will be distributed (i) first, 1% to the General Partner and
99% to the limited partners, until the Partners have received cumulative
distributions of Capital Receipts equal to $90,909,100; and (ii) thereafter,
10% to the General Partner and 90% to the limited partners.
Proceeds from the sale or other disposition of all or substantially all of
the assets of the Partnership or from the sale or other disposition of all or
substantially all of the Hotel will be distributed to the Partners pro rata in
accordance with their capital account balances as defined in the partnership
agreement.
F-183
<PAGE>
c. Net profits will be allocated as follows: (i) first, through and
including the year ended December 31, 1990, 99% to the General Partner and 1%
to the limited partners; (ii) next, through and including the year ending
December 31, 1992, 70% to the General Partner and 30% to the limited partners;
and (iii) thereafter, 10% to the General Partner and 90% to the limited
partners.
d. Net losses will be allocated 100% to the General Partner through December
31, 1990, and thereafter, 70% to the General Partner and 30% to the limited
partners, subject to certain limitations, as specified in the partnership
agreement, regarding allocations to the limited partners.
e. The deduction for interest on the Purchase Note, as defined, which
cumulatively will not exceed $12,285 per Unit will be allocated to those
limited partners owning the Units purchased on the installment basis.
f. In general, gain recognized by the Partnership will be allocated as
follows: (i) first, to all Partners whose capital accounts have negative
balances until such negative balances are brought to zero; (ii) next, to all
Partners up to the amount necessary to bring their respective capital account
balances to an amount equal to their respective invested capital, as defined;
(iii) third, in the case of gain arising from the sale or other disposition
(or from a related series of sales or dispositions) of all or substantially
all of the assets of the Partnership, (a) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of the product of 12% times the
weighted-average of the limited partners' invested capital, as defined, each
year, minus (2) the sum of cumulative distributions to the limited partners of
cash available for distribution, and (b) next, to the General Partner until it
has been allocated an amount equal to 10/90 times the amount allocated to the
limited partners in (a); and (iv) thereafter, 12% to the General Partner and
88% to the limited partners.
For financial reporting purposes, profits and losses are allocated among the
Partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Restatement of Revenues and Expenses
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The statement of operations of the Partnership as presented in the 1997
Annual Report on Form 10-K did not reflect gross hotel sales and property-
level operating expenses but reflected house profit for the period November
25, 1997 (the date the management agreement was entered into) through December
31, 1997. House profit represents gross hotel revenues less property-level
operating expenses, excluding depreciation, base and incentive management
fees, property taxes, insurance and certain other costs, which were disclosed
separately in the statement of operations. The Partnership has concluded that
EITF 97-2 should be applied to the Partnership
F-184
<PAGE>
beginning November 25, 1997, the date the Partnership entered into a new
management agreement, and accordingly the 1997 statement of operations has
been restated to reflect an increase in hotel revenues and property-level
expenses of $6.7 million for the period November 25, 1997 through December 31,
1997. The restatement had no impact on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets less an estimated residual value of 10% on the original building cost
and 20% on the airline equipment cost:
<TABLE>
<S> <C>
Building and improvements...... 50 years
Furniture and equipment........ 4 to 10 years
Airline equipment.............. 8 years
</TABLE>
All Hotel property and equipment is pledged as security for the Senior Loan
described in Note 5.
The Partnership assesses impairment of its real estate property based on
whether estimated undiscounted future cash flow from the hotel will be less
than its net book value. If the property is impaired, its basis is adjusted to
fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
Mortgage Debt (see Note 5) matured on July 27, 1996. Deferred financing costs
associated with that debt, totaling $943,000, were fully amortized at maturity
and removed from the Partnership's books. Costs associated with the Bridge
Loan totaled $2,658,000 at December 31, 1996. Total financing costs associated
with the Bridge Loan and long-term financing completed on November 25, 1997
totaled $3,828,000. At December 31, 1997 and 1996, accumulated amortization of
deferred financing costs totaled $828,000 and $21,000, respectively.
Restricted Cash Reserves
In conjunction with the refinancing of the mortgage debt, the Partnership
was required to establish cash reserves which are held by an agent of the
lender including:
. $6.2 million debt service reserve
. $1.5 million reserve for capital expenditures
. $2.0 million reserve for payment of fees to the Tenant/Manager
In addition, the Partnership is required to establish with the lender a
separate escrow account for payments of insurance premiums and real estate
taxes for the Hotel if the credit rating of Marriott International is
downgraded by Standard and Poor's Rating Services. The Manager is a wholly-
owned subsidiary of Marriott International. In March 1997, Marriott
International acquired the Renaissance Hotel Group N.V., adding greater
geographic diversity and growth potential to its lodging portfolio. The
assumption of additional debt associated with this transaction resulted in a
single downgrade of Marriott International's long-term senior unsecured debt
effective April, 1997. Therefore, the Partnership was required to establish a
reserve account for insurance and real estate tax. As of December 31, 1997,
$581,000 remains available to pay insurance and real estate taxes. The escrow
reserve is included in restricted cash and the resulting tax and insurance
liability is included in accounts payable and accrued liabilities in the
accompanying balance sheet.
The reserves were established from the Partnership's restricted cash related
to the Bridge Loan in addition to Partnership operating cash.
Additional Rental
Under the terms of the Hotel operating lease (see Note 7), the Tenant paid
Additional Rental to the Partnership which was subject to possible repayment
under defined conditions; therefore, Additional Rental had
F-185
<PAGE>
been recorded as a liability in the financial statements. At the termination
of the Operating Lease, all Additional Rental was forgiven and is recorded as
an Extraordinary Gain in the financial statements.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
less than three months at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual
partners. Significant differences exist between the net loss/net income for
financial reporting purposes and the net loss/net income reported in the
Partnership's tax return. These differences are due primarily to the use for
income tax purposes of accelerated depreciation methods, shorter depreciable
lives for the assets and differences in the timing of recognition of rental
income. As a result of these differences, the excess of the tax basis in net
Partnership liabilities and the net liabilities reported in the accompanying
financial statements at December 31, 1997 and 1996 was $55.7 million and $26.0
million, respectively.
New Statements of Financial Accounting Standards
The Partnership adopted SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" during 1996.
Adoption of SFAS No. 121 did not have any effect on the Partnership's
financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and land improvements............................... $ 13,690 $ 13,690
Building and improvements................................ 155,497 155,570
Furniture and equipment.................................. 44,090 47,800
-------- --------
213,277 217,060
Less accumulated depreciation............................ (61,876) (61,619)
-------- --------
$151,401 $155,441
======== ========
</TABLE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. Fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt............. $103,000 $103,000 $160,000 $160,000
Note payable.............. 20,000 20,000 -- --
Due to Host Marriott and
affiliates............... 59,727 59,727 -- --
Note Payable to Marriott
International............ -- -- 900 900
Additional rental paid by
Hotel lessee............. -- -- 25,013 --
</TABLE>
The estimated fair value of mortgage debt and other long term obligations is
based on the expected future debt service payments discounted at estimated
market rates. Additional rental paid by the Hotel lessee was valued
F-186
<PAGE>
based on the expected future payments from operating cash flow discounted at a
risk-adjusted rate. As further explained in Note 7, upon closing of the
permanent financing, Marriott International agreed to waive all claims to
Additional Rental that had accrued prior to the consummation of the loan.
Consequently, the estimated fair value of Additional Rental paid by the Hotel
lessee is zero.
NOTE 5. DEBT
In 1996, Partnership debt consisted of a $168.2 million nonrecourse mortgage
loan (the "Mortgage Debt") which matured on July 27, 1996. The Mortgage Debt
bore interest at a fixed rate of 7.76% and required no amortization of
principal prior to maturity. Upon maturity, the Mortgage Debt went into
default as the Partnership was unable to secure replacement financing or
negotiate a forbearance agreement with the lender. Pursuant to the loan
documents, the Mortgage Debt began to accrue interest at the Default Rate, as
defined, of 10.75% which was 2.5 percentage points above the Lender's
Corporate Base Rate, as defined, from the maturity date through December 23,
1996. The Mortgage Debt was refinanced on December 23, 1996.
As of December 31, 1996, Partnership debt consisted of a $160 million
nonrecourse mortgage loan (the "Bridge Loan"). The Bridge Loan was originated
by Goldman, Sachs & Co. ("Goldman Sachs") and the lender was GMAC Commercial
Mortgage Corporation providing an interim $160 million mortgage loan bearing
interest at LIBOR plus 2.75 percentage points which matured on October 31,
1997. Pursuant to the terms of the Bridge Loan, all excess cash from Hotel
operations, if any, was held in a debt service reserve for future debt service
or to reduce the outstanding principal balance upon maturity. Through November
25, 1997, the weighted average interest rate on the Bridge Loan was 8.4%.
On September 26, 1997, the General Partner received unrevoked consents
approving a new loan structure and certain amendments to the Partnership
Agreement which were necessary to refinancing negotiations of the Bridge Loan.
An extension agreement was signed with the current lender on October 30, 1997,
extending the maturity date of the Bridge Loan from October 31, 1997 to
December 31, 1997, without penalty.
On November 25, 1997, the Partnership secured long-term financing for its
$160 million Bridge Loan. The new financing consists of three tranches: 1) a
$103 million senior loan, 2) a $20 million loan and 3) a $59.7 million junior
loan. The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of
the Partnership, DS Hotel LLC, which owns the Hotel and related assets. The
Senior Loan matures in December, 2022 and is secured by a first mortgage lien
on the Hotel. The loan bears interest at a fixed rate of 7.8% and requires
monthly payments of interest and principal with amortization over its twenty-
five year term.
The second tranche of debt consists of a $20 million loan (the "Mezzanine
Loan") from Goldman Sachs Mortgage Company ("GSMC") to a newly formed
bankruptcy remote subsidiary of the Partnership, Marriott DSM LLC, which
secures the loan. The Mezzanine Loan consists of a fully amortizing $20
million loan bearing interest at 10.365% for a twelve and one-half year term
maturing in December, 2010.
The third tranche of debt consists of a junior loan, (the "HM Junior Loan")
to the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary
of the General Partner. The HM Junior Loan has a term of thirty years and
requires no principal amortization for the first twelve and one-half years
with a seventeen and one-half year amortization schedule thereafter. If
remaining cash flow is insufficient to pay interest on the HM Junior Loan,
interest is deferred and will accrue and compound and be payable from future
cash flow. The HM Junior Loan also entitles MDSM to receive 30% of any excess
cash flow, as defined, available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan.
On the Closing Date, the Partnership was required to establish certain
reserves which are discussed in Note 2.
The Partnership utilized $1.2 million in 1997 from the refinancing reserve
to pay costs associated with the financing including lender or subsidiary
fees, property appraisals, environmental studies and legal fees.
F-187
<PAGE>
The required principal payments of the Senior Loan, Mezzanine Loan and the
HM Junior Loan at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 2,186
1999............................................................. 2,389
2000............................................................. 2,581
2001............................................................. 2,850
2002............................................................. 3,116
Thereafter....................................................... 169,605
--------
$182,727
========
</TABLE>
Debt to Marriott International
On April 30, 1996, the Partnership entered into a short-term loan with
Marriott International in the amount of $1,700,000 to fund a portion of the
Hotel's rooms refurbishment project. The loan matured on June 13, 1997,
bearing interest at 8.5% and was repaid from the property improvement fund as
contributions were made during the year. The loan was fully repaid on March
28, 1997.
NOTE 6. AIRLINE EQUIPMENT LEASE
The Partnership leased airline equipment to TWA under the terms of an
operating lease which expired in April 1995. Pursuant to the terms of the
airline equipment lease, TWA was obligated to make semi-annual payments, in
arrears, based upon specified percentages of the Partnership's cost of the
airline equipment. Rental income under the operating lease is included in
"Airline equipment income" in the statement of operations and was $852,000 in
1995.
On April 20, 1995, the Partnership reached an agreement with TWA whereby TWA
was obligated to pay renewal rents under a 15-month lease agreement. The
renewal rents consisted of quarterly payments of $780,000 plus 17% interest
paid in arrears, all of which totaled $6.5 million. At the end of the lease
term, TWA had the option to purchase the equipment for one dollar ($1). The
Partnership classified the new lease as a sales-type lease and recorded a
receivable for the future lease payments due from TWA, along with a deferred
gain on the transaction. The deferred gain was recognized as income as lease
payments were received on the installment method as a component of the line
item "Airline Equipment Income" in the statement of operations. Deferred gain
amortization was $1,248,000 in 1996 and $1,985,000 in 1995. On April 24, 1996,
TWA exercised its early termination option under the airline equipment lease
and paid the rent due on that date of $847,000 along with the termination
value of $780,000 plus the $1 purchase option.
NOTE 7. OPERATING LEASE
The Partnership leased the Hotel to the Tenant pursuant to an agreement
which commenced on April 24, 1987, with an initial term of 25 years (the
"Operating Lease") with renewal options for five successive periods of 10
years each.
Annual Rental was equal to the greater of Basic Rental or Owner's Priority,
as described below:
1. Basic Rental equals 85% of Operating Profit, as defined, until
December 31, 1993, and 80% thereafter.
2. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel ("Expansion Debt
Service") or (ii) Debt Service, as defined. If there is a new mortgage (in
an amount which exceeds the outstanding balance of the existing mortgage by
at least $45,455,000), Owner's Priority will equal the greater of (i) $20
million plus Expansion Debt Service, (ii) Debt Service or (iii) the lesser
of Debt Service on the new mortgage or $24 million plus Expansion Debt
Service. In no event will Owner's Priority for any year exceed Operating
Profit.
F-188
<PAGE>
3. Additional Rental equals the cumulative amount by which Owner's
Priority exceeds Basic Rental plus $268,000 and is recorded as a liability
in the accompanying financial statements. If in any year Basic Rental
exceeds Owner's Priority, Annual Rental will be reduced to equal Basic
Rental minus the lower of (i) Additional Rental then outstanding or (ii)
25% of the amount by which Basic Rental exceeds Owner's Priority.
Pursuant to an agreement reached with Marriott International, for fiscal
year 1997 the $20 million Owner's Priority was increased to $20.5 million.
Marriott International was entitled only to the next $2 million of Operating
Profit. Any additional Operating Profit in excess of $22.5 million was
remitted entirely to the Partnership. In connection with the long-term
financing, Marriott International agreed to waive any and all claims to
Additional Rental that accrued prior to the consummation of the loan. The
Partnership recorded an extraordinary gain of $27.5 million in 1997 to
recognize the gain which resulted from the forgiveness of these fees.
Rental income for 1997 included Basic Rental of $17,608,000 and Additional
Rental of $4,402,000. Operating Profit in 1997 totaled $23,698,000. In
accordance with an agreement reached with Marriott International, the
Partnership was entitled to receive Owner's Priority of $20,500,000 and
Marriott International was entitled to the next $2,000,000 with the remaining
$1,198,000 to the Partnership.
In addition to the Annual Rental, the Tenant was required to pay property
taxes, make annual contributions equal to a percentage of Hotel sales to a
property improvement fund (4.5% through 1997 and 5.5% thereafter) and pay
rental on the second golf course.
Pursuant to the terms of the Hotel purchase agreement, the Tenant and its
affiliates may utilize a portion of the land adjacent to the Hotel for
development of residences and timeshare condominiums. Purchasers of the
residences have the opportunity to use certain Hotel facilities and services
for a fee. Purchasers of the timeshare condominiums also have the ability to
use the Hotel's facilities but such use is subject to the same fees charged to
Hotel guests.
During 1995, the Hotel's main swimming pool was expanded at a cost of
approximately $2.1 million. The project was funded partially by proceeds
received from Marriott Vacation Club International ("MVCI"), a wholly-owned
indirect subsidiary of Marriott International, pursuant to an agreement
between the Partnership and MVCI for the development of additional timeshare
units on land adjacent to the Hotel. As part of this agreement, the Hotel's
spa was also expanded during 1994. Pursuant to the terms of the agreement,
MVCI contributed a total of $1.3 million towards the pool expansion and the
spa expansion projects; the remaining costs were funded by Partnership cash
reserves. Funding by MVCI in 1995 was $692,000, and was included in "Other
Income" in the statement of operations.
NOTE 8. MANAGEMENT AGREEMENT
On November 25, 1997, in connection with the refinancing, the General
Partner also negotiated with the Tenant to convert the Operating Lease to a
management agreement (the "Management Agreement"). The Tenant would become
manager of the Hotel (the "Manager"). The initial term of the Management
Agreement continues through 2022 with four successive renewal options of ten
years each. The Manager is paid a base management fee equal to 3% of gross
hotel sales.
Beginning in fiscal year 1998, the Management Agreement provides that no
incentive fee will be paid to the Manager with respect to the first $21.5
million of Operating Profit (the "Owner's Priority"). Thereafter the Manager
will receive the next $1.8 million of Operating Profit as incentive management
fee and any operating profit in excess of $23.3 million will be divided 75% to
the Partnership and 25% to the Manager. Any such payments will be made
annually after completion of the audit of the Partnership's books.
F-189
<PAGE>
The Management Agreement provides that the owner may terminate the
Management Agreement if, in any two of three consecutive fiscal years,
Operating Profit is less than $15 million. The Manager may, however, prevent
termination by paying the owner such amounts as are necessary to achieve the
performance standards.
Pursuant to the Management Agreement, the Manager is required to furnish the
Hotel with certain services ("Chain Services") which are generally provided on
a central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations 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 full-service hotels managed, owned or leased
by the Manager or its subsidiaries. In addition, the Hotels also participate
in the Manager's Marriott Rewards Program. The cost of this program is charged
to all hotels in the Manager's full-service hotel system based upon the
Marriott Rewards sales at each hotel. The total amount of Chain Services and
Marriott Rewards costs charged to the Partnership from November 25 through
December 31, 1997 were $169,000.
The Management Agreements provide for the establishment of a property
improvement fund for the Hotel to cover the cost of certain non-routine
repairs and maintenance to the Hotel which are normally capitalized and the
cost of replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund are 4.5% in 1997
and 5.5% thereafter. Contributions to the property improvement fund from
November 25 through December 31, 1997 were $421,000.
NOTE 9. HOTEL OPERATING RESULTS
The following is a summary of Hotel Operating Profit, as defined in the
Hotel lease agreement, for the three years ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
REVENUES
Rooms.............................................. $ 39,825 $37,031 $33,495
Food and beverage.................................. 40,366 38,431 33,453
Other.............................................. 23,130 22,437 18,450
-------- ------- -------
103,321 97,899 85,398
-------- ------- -------
EXPENSES
Departmental direct costs
Rooms............................................. 8,933 8,545 7,715
Food and beverage................................. 27,642 26,623 23,335
Other operating expenses........................... 43,048 41,686 35,987
-------- ------- -------
79,623 76,854 67,037
-------- ------- -------
OPERATING PROFIT.................................... $ 23,698 $21,045 $18,361
======== ======= =======
</TABLE>
F-190
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $150,679 $151,401
Due from Marriott Hotel Services, Inc................. 2,185 1,368
Property improvement fund............................. 2,954 1,598
Deferred financing, net of accumulated amortization... 2,971 3,000
Restricted cash reserves.............................. 9,191 10,236
Cash and cash equivalents............................. 13,644 4,553
-------- --------
$181,624 $172,156
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt....................................... $102,318 $103,000
Note payable........................................ 19,599 20,000
Note payable to Host Marriott Corporation and
affiliates......................................... 59,727 59,727
Due to Marriott Hotel Services, Inc................. 1,963 2,122
Accounts payable and accrued expenses............... 4,757 1,972
-------- --------
Total Liabilities................................. 188,364 186,821
-------- --------
PARTNERS' CAPITAL (DEFICIT)
General Partner..................................... 58 (21)
Limited Partners.................................... (6,798) (14,644)
-------- --------
Total Partners' Deficit........................... (6,740) (14,665)
-------- --------
$181,624 $172,156
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-191
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
----------------
1998 1997
------- -------
<S> <C> <C>
REVENUES (Note 3)
Hotel revenues
Rooms.................................................... $25,394 --
Food and beverage........................................ 24,737 --
Other.................................................... 14,920 --
------- -------
Total hotel revenues................................... 65,051 --
Hotel rentals.............................................. -- 12,488
------- -------
65,051 12,488
------- -------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms.................................................... 5,127 4,534
Food and beverage........................................ 15,624 14,366
Other hotel operating expenses........................... 17,009 15,765
------- -------
Total hotel property-level costs and expenses.......... 37,760 34,665
Depreciation............................................... 3,314 3,568
Base management fees....................................... 1,952 --
Incentive management fees.................................. 1,841 --
Property taxes and other................................... 1,639 1,164
------- -------
46,506 39,397
------- -------
OPERATING PROFIT............................................. 18,545 7,756
Interest expense (including first two quarters 1998 amount
related to Host Marriott debt of $3,937).................. (8,803) (6,770)
Interest income and other.................................. 454 213
------- -------
NET INCOME................................................... $10,196 $ 1,199
======= =======
ALLOCATION OF NET INCOME
General Partner............................................ $ 102 $ 12
Limited Partners........................................... 10,094 1,187
------- -------
$10,196 $ 1,199
======= =======
NET INCOME PER LIMITED PARTNER UNIT (900 Units).............. $11,216 $ 1,319
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-192
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $10,196 $ 1,199
Noncash items.............................................. 3,429 4,006
Change in operating accounts............................... 1,256 9,657
------- --------
Cash provided by operating activities.................... 14,881 14,862
------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net................... (2,592) (1,318)
Changes in property improvement fund....................... (1,356) (469)
------- --------
Cash used in investing activities........................ (3,948) (1,787)
------- --------
FINANCING ACTIVITIES
Capital distribution to partners........................... (2,271) --
Change in restricted cash reserves......................... 1,598 (10,931)
Repayment of mortgage debt................................. (682) --
Repayment of note payable.................................. (401) (900)
Payment of refinancing costs............................... (86) (90)
------- --------
Cash used in financing activities........................ (1,842) (11,921)
------- --------
INCREASE IN CASH AND CASH EQUIVALENTS........................ 9,091 1,154
CASH AND CASH EQUIVALENTS at beginning of period............. 4,553 5,755
------- --------
CASH AND CASH EQUIVALENTS at end of period................... $13,644 $ 6,909
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.................. $ 5,866 $ 6,169
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-193
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by Desert Springs Marriott Limited Partnership and subsidiaries (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted from
the accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998 and the results of operations
and cash flows for the first two quarters 1998 and 1997. Interim results are
not necessarily indicative of fiscal year performance because of seasonal and
short-term variations (see Note 3).
For financial reporting purposes, net income of the Partnership is allocated
99% to the limited partners and 1% to Marriott Desert Springs Corporation (the
"General Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income for Federal income tax
purposes. These differences are due primarily to the use, for income tax
purposes, of accelerated depreciation methods, shorter depreciable lives, no
estimated salvage values for the assets and differences in the timing of the
recognition of rental income.
2. In connection with the mortgage debt refinancing in November 1997 (see
Note 3), the General Partner received unrevoked consents of limited partners
approving certain amendments to the partnership agreement. The amendments,
among other things, allowed the formation of certain subsidiaries of the
Partnership including Marriott DSM LLC and DS Hotel LLC. The Partnership
contributed the Hotel and its related assets to Marriott DSM LLC, which in
turn contributed them to DS Hotel LLC, a bankruptcy remote subsidiary.
Marriott DSM LLC, a bankruptcy remote subsidiary of the Partnership, owns 100%
interest in DS Hotel LLC. The Partnership owns 100% interest in Marriott DSM
LLC.
3. On November 25, 1997, the Partnership completed a refinancing of its
mortgage debt. In connection with the refinancing, the Partnership converted
its operating lease with Marriott Hotel Services, Inc. ("MHS") to a management
agreement (the "Conversion"). Prior to the Conversion, the Partnership
recognized estimated annual hotel rental income on a straight-line basis
throughout the year. The profits from the Marriott's Desert Springs Resort and
Spa (the "Hotel") are seasonal and first and second quarter results are
generally higher than the last two quarters of the year. Lease payments in
excess of the income recognized by the Partnership were deferred and, to the
extent not subject to possible future repayment to the Hotel tenant, were
recognized as income during the remainder of the year. Pursuant to the terms
of the Operating Lease, Annual Rental, as defined, was equal to the greater of
Basic Rental (80% of Operating Profit, as defined) and Owner's Priority, as
defined. Additionally, the Hotel tenant was required to pay property taxes,
make contributions equal to a percentage of Hotel sales to a property
improvement fund (4.5% in 1997 and 5.5% thereafter) and pay rental on the
second golf course.
Subsequent to the Conversion, the Partnership records revenues which
represent gross sales generated by the Partnership's hotel. Hotel property-
level costs and expenses reflect all property-level costs and expenses.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management
F-194
<PAGE>
Arrangements." EITF 97-2 addresses the circumstances in which a management
entity may include the revenues and expenses of a managed entity in its
financial statements.
The statement of operations of the Partnership presented in the first two
quarters 1998 on Form 10-Q did not reflect gross hotel sales and property-
level operating expenses but reflected house profit which represents gross
hotel revenues less property-level operating expenses, excluding base and
incentive management fees, property taxes, insurance and certain other costs,
which were disclosed separately in the statement of operations. The
Partnership has concluded that EITF 97-2 should be applied to the Partnership
beginning November 25, 1997, the date the Partnership entered into a new
management agreement, and accordingly the first two quarters 1998 statement of
operations has been restated to reflect an increase in hotel revenues and
property-level expenses of $37.8 million. The restatement had no impact on
operating profit or net income.
The statements of operations for the first and second quarter of 1998
included in the Partnership Form 10-Q filings did not reflect hotel sales and
property-level expenses. These financial statements have been amended to
conform to the presentation of sales and expenses in the financial statements
included herein.
4. Pursuant to the terms of the management agreement, MHS earns an incentive
management fee based on Operating Profit as defined. For fiscal year 1998, the
Partnership is entitled to the first $21.5 million of Operating Profit (the
"Owners Priority"). Thereafter, MHS will receive the next $1.8 million of
Operating Profit as an incentive management fee and any operating profit in
excess of $23.3 million will be divided 75% to the Partnership and 25% to MHS.
Any such payments will be made annually after completion of the audit of the
Partnership's financial statements. Pursuant to the terms of the management
agreement, contributions to the property improvement fund in 1998 are 5.5% of
gross Hotel sales, a one percentage point increase over the prior year level.
5. Host Marriott Corporation ("Host Marriott"), the parent of the General
Partner of the Partnership, announced on April 17, 1998, that its Board of
Directors has authorized the company to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership") and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Partnership, are expected to be given an opportunity to receive,
on a tax-deferred basis, Operating Partnership units in the new Operating
Partnership in exchange for their current partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
the Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission on June 2, 1998. Limited partners will be
able to vote on the Partnership's participation in the merger later this year
through a consent solicitation.
F-195
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the Hanover financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with Hanover's audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- --------- -------- --------- --------- --------- ---------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(5)............. $ 3,446 $ 3,070 $ 6,853 $ 5,296 $ 4,487 $ 3,727 $ 3,435
Operating profit........ 2,044 2,304 4,400 3,624 2,752 2,345 434
Income (loss) before
extraordinary item(1).. 199 665 663 940 (219) (1,206) (3,224)
Net income (loss)....... 199 665 5,757 940 (219) (1,206) (3,224)
Distributions:
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:(2)
Net income (loss)...... 2,250 7,524 65,107 10,631 (2,476) (13,643) (36,464)
Distributions.......... -- -- -- -- -- -- --
Cash provided by (used
in) operating
activities............. 889 1,557 2,167 1,918 2,561 331 (327)
Cash used in investing
activities............. (2,204) (528) (1,058) (830) (1,241) (715) (427)
Cash provided by (used
in) financing
activities............. (211) (910) (1,714) (272) -- (31) 690
Increase (decrease) in
cash and cash
equivalents............ (1,526) 119 (605) 816 1,320 (415) (64)
Ratio of earnings to
fixed
charges(unaudited)(3).. 1.11x 1.39x 1.17x 1.33x -- -- --
Deficiency of earnings
to fixed
charges(unaudited)(3).. -- -- -- -- 219 1,206 3,224
Total assets at book
value.................. 33,108 34,012 32,883 33,533 32,652 31,559 32,353
Cash and cash
equivalents............ 426 2,672 1,952 2,557 1,741 421 836
Total debt(4)........... 40,153 40,022 40,364 40,527 40,527 40,527 40,596
Total liabilities....... 41,429 47,628 41,403 47,810 47,869 46,557 46,145
Partner's deficit:
Limited partners....... (7,979) (13,005) (8,168) (13,637) (14,530) (14,322) (13,176)
General partner........ (342) (607) (352) (640) (687) (676) (616)
Book value per
Partnership
Unit(unaudited)(2)..... (94,988) (154,821) (97,238) (162,345) (172,976) (170,500) (156,857)
Exchange value per
Partnership
Unit(unaudited)(2)..... 123,202 -- -- -- -- -- --
</TABLE>
- --------
(1) During 1997, the Partnership recorded on extraordinary gain on the
forgiveness of additional rental recorded in conjunction with the
refinancing of the Partnership's mortgage debt.
(2) A Partnership Unit represents a $100,000 original investment in Hanover.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges in 1995, 1994 and 1993 is largely
the result of depreciation and amortization of $1,178,000, $1,136,000 and
$2,213,000, respectively.
(4) Total debt includes amounts due to Host Marriott and affiliates, for the
Subordinated Loan of $7,015,000 and $7,077,000 as of June 19, 1998 and
December 31, 1997, respectively, and the Working Capital Loan and Debt
Service Guarantees of $127,000 and $3,400,000, respectively for June 19,
1998, June 20, 1997 and December 31, 1997--1994 and $89,000 and
$3,469,000, respectively as of December 31, 1993.
(5) On August 18, 1997, the Partnership converted its Operating Lease with
Marriott Hotel Services, Inc. to a management agreement.
F-196
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
On August 18, 1997, the Partnership completed a refinancing of its Mortgage
Debt. In addition, the Partnership converted the Operating Lease with MHS to
the Management Agreement (the "Conversion") on August 18, 1997. Prior to the
Conversion, the Partnership recorded revenue based on the rental income to be
received from MHS. Annual rental during the term of the Operating Lease was
equal to the greater of: (i) Minimum Rental of $100,000; or (ii) Basic Rental
equal to 80% of Operating Profit, as defined, reduced to 75% of Operating
Profit after the Partnership received $4,421,000 of cumulative capital
receipts; or (iii) Adjusted Rental equal to Debt Service plus the greater of:
(a) a preferred return equal to $840,000 or (b) 50% of the amount by which
Operating Profit exceeded Debt Service. In no event was Adjusted Rental to
exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rental existed. In addition to the Annual Rental, MHS
was required to pay real estate taxes.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real estate
taxes, insurance and certain other costs, which are disclosed separately in
the statement of operations. Revenues are recorded based on house profit of
the Hotel because the Partnership has delegated substantially all of the
operating decisions related to the generation of house profit from the Hotel
to MHS. As a result, Hotel revenues reported for the first two quarters 1998
are not comparable with Hotel rental reported for the first two quarters 1997.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues: For the first two quarters 1998, hotel revenues decreased
$586,000, or 15%, to $3.4 million when compared to the first two quarters
1997. The decrease in hotel revenues is primarily due to decreases in food and
beverage sales. Although the average occupancy decreased ten percentage points
to 71% for the first two quarters 1998 when compared to the first two quarters
1997, rooms sales remained constant at $6.0 million due to the average daily
rate increase of $19, or 15%, to $143. The decline in average occupancy for
the first two quarters 1998 is a result of an overall decline in the Hanover
market and rooms being temporarily out of inventory during the rooms
refurbishment that occurred during January through March 1998.
REVPAR, or revenue per available room, remained constant at $102 for the
first two quarters 1998 and 1997. REVPAR represents the combination of average
daily room rate charged and the average daily occupancy achieved and is a
commonly used indicator of hotel performance (although it is not a measure of
revenue under generally accepted accounting principles).
As a result of the decline in average occupancy, food and beverage sales
decreased $661,000, or 16%, to $3.5 million for the first two quarters 1998
when compared to the same period in 1997. For the remainder of the year,
operations are expected to improve as a result of the new rooms product and
expected increases in market occupancy and demand.
Operating Costs and Expenses: The Partnership's operating costs and expenses
increased $636,000, or 83%, to $1.4 million for the first two quarters 1998
when compared to the same period in 1997 due primarily to the Conversion. Of
the $636,000 increase, $467,000 relates to base and incentive management fees
and $36,000 relates to insurance costs. The Partnership is responsible for
these fees and costs under the Management Agreement but not under the
Operating Lease. On a comparative basis, base management fees for first two
quarters 1998 decreased $21,000, or 7%, to $296,000 when compared to the same
period in 1997. Subsequent to
F-197
<PAGE>
the Conversion, MHS receives an incentive management fee once Owner's Priority
has been met (see "Material Contracts" included in Item 1, "Business"). For
the first two quarters 1998, MHS received $171,000 in incentive management
fees. In addition, real estate taxes increased $50,000, or 27%, to $236,000
for the first two quarters 1998, when compared to the same period in 1997 due
to a re-assessment of the property in 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit decreased $260,000, or 11%, to
$2.0 million for the first two quarters 1998 when compared to the same period
in 1997.
Interest Expense. Interest expense increased $146,000, or 9%, to $1.9
million for the first two quarters 1998, when compared to the same period in
1997 due to refinancing the Partnership's mortgage debt at a higher fixed
interest rate. The weighted average interest rate on the Partnership's debt,
which includes the Subordinated Loan, for the first two quarters 1998 and
1997, was 9.6% and 7.5%, respectively.
Net Income. Net income for the first two quarters 1998 and 1997 was $199,000
and $665,000, respectively, as a result of the items discussed above.
1997 Compared to 1996
Revenues: Total revenues increased by $1.6 million, or 29%, to $6.9 million
in 1997 when compared to 1996, and hotel rental income decreased by $1.2
million, or 24%, to $4.0 million in 1997 when compared to 1996 due to the
Conversion. For the period January 1, 1997 to August 17, 1997, the Partnership
received hotel rental income in accordance with the Operating Lease. For the
period August 18, 1997 to December 31, 1997 under the Management Agreement,
Hotel revenues represent hotel sales less direct hotel operating costs and
expenses. Under the Operating Lease, the hotel rental income was straight-
lined over the year as required by generally accepted accounting principles.
On a comparative basis, house profit increased $1.1 million, or 16%, to $8.0
million in 1997 when compared to 1996. The increase in house profit is
primarily due to an increase in REVPAR. REVPAR for 1997 increased $10, or 11%,
to $100 compared to 1996, primarily due to the increase in average room rate
of $10, or 9%, to $124 and a two percentage point increase in the average
occupancy to 81%.
During 1997, the Hotel increased its rates several times. The result was the
average transient and group rates increased 10% to $134 and 12% to $95,
respectively. As of December 31, 1997, the corporate rate, excluding
discounts, was approximately $195 representing a 37% increase from 1996. Due
to growth in the group segment, food and beverage sales also increased due to
a 16% increase in catering and audio visual sales in comparison to 1996.
As a result of the REVPAR increase, hotel sales increased $1.7 million, or
8%, to $22.5 million in 1997 when compared to 1996. Due to the continued high
average occupancy, the Partnership expects future increases in REVPAR to be
driven by room rate increases, rather than changes in occupancy. However,
there can be no assurance that REVPAR will continue to increase in the future.
Operating Costs and Expenses: The Partnership's operating costs and expenses
increased $781,000, or 47%, to $2.5 million in 1997 when compared to 1996
primarily due to the Conversion. Of the $781,000 increase, $331,000 relates to
base and incentive management fees and $131,000 relates to insurance costs.
The Partnership is responsible for these fees and costs under the Management
Agreement but not under the Operating Lease. On a comparative basis, base
management fees for 1997 increased $52,000, or 8%, due to increased hotel
sales. The Hotel's real estate taxes in 1997 increased $102,000 from 1996 due
to a re-assessment of the property during 1997. In addition, Partnership
administration increased due to administrative costs associated with the
refinancing in August 1997.
Operating Profit: As a result of changes in revenues and operating costs and
expenses discussed above, operating profit increased $776,000, or 21%, to $4.4
million in 1997 when compared to 1996.
F-198
<PAGE>
Interest Expense: Interest expense increased $1.1 million, or 40%, to $3.9
million due to refinancing the Partnership's mortgage debt, which includes the
Subordinated Loan. The weighted average interest rate on the Partnership's
debt for 1997 and 1996 was 7.9% and 6.4%, respectively.
Income Before Extraordinary Items: Income before extraordinary items
decreased $277,000 to $663,000, or 10% of revenues, in 1997, from $940,000, or
18% of revenues, in 1996.
Extraordinary Items: The Partnership recognized an extraordinary gain in
1997 of $5.1 million representing the forgiveness of Additional Rental by MHS.
Net Income: Net income increased by $4.8 million in 1997 to $5.8 million
when compared to 1996 as a result of the items discussed above.
1996 Compared to 1995
Revenues: Revenue increased $809,000, or 18%, to $5.3 million in 1996 when
compared to 1995. The Partnership's rental income was impacted by improved
lodging results. The increase was driven primarily by growth in REVPAR. REVPAR
for 1996 increased $9, or 11%, to $90 compared to 1995, primarily due to the
increase in combined average room rate of $5, or 5%, to $114 and a five
percentage point increase in the average occupancy to 79%. As a result of the
REVPAR increase, hotel sales increased $2.4 million, or 13%, to $20.7 million
in 1996 when compared to 1995. Under the Operating Lease, the hotel rental
income was straight-lined over the year as required by generally accepted
accounting principles.
Operating Costs and Expenses: The Partnership's operating costs and expenses
decreased $63,000, or 4%, to $1.7 million in 1996 when compared to 1995,
primarily due to a decrease in Partnership administration.
Operating Profit: As a result of changes in revenues and operating costs and
expenses discussed above, operating profit increased $872,000, or 32%, to $3.6
million in 1996 when compared to 1995.
Interest Expense: Interest expense decreased $225,000, or 7%, to $2.8
million due to lower interest rates on the Partnership's mortgage debt. The
weighted average interest rate on the mortgage debt for 1996 and 1995 was 6.4%
and 7.2%, respectively.
Net Income (Loss): For 1996, the Partnership had net income of $940,000
compared to a net loss of $219,000 in 1995 as a result of the items discussed
above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions and Host Marriott. As a
result of the successful refinancing of the Partnership's mortgage debt, the
General Partner believes that the Partnership will have sufficient capital
resources and liquidity to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from Hotel operations.
Cash provided by operations for the first two quarters 1998 and 1997 was
$889,000 and $1.6 million, respectively. Cash provided by operations was lower
for the first two quarters 1998 primarily due to a decrease in the Hotel's
food and beverage sales due to a decrease in occupancy as a result of the
rooms refurbishment discussed above.
Cash provided by operations was $2.2 million, $1.9 million and $2.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The
decrease in cash from operations in 1996 from 1995 was primarily due to
repaying MHS $285,000 for Additional Rental earned in 1995. There was no
Additional Rental due MHS at December 31, 1996.
F-199
<PAGE>
The Partnership's cash investing activities consist primarily of
contributions to the property improvement fund and capital expenditures for
improvements to the Hotel. Cash used in investing activities was $2.2 million
and $528,000 for the first two quarters 1998 and 1997, respectively. The
increase in cash used in investing activities is due to payments for the rooms
refurbishment in 1998. Contributions, including interest income, to the
property improvement fund were $484,000 and $493,000 for the first two
quarters 1998 and 1997, respectively. Capital expenditures were $2.3 million
and $156,000 for the same periods, respectively.
Cash used in investing activities was $1.1 million, $830,000 and $1.2
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Under the Operating Lease and Management Agreement, the Partnership is
required to make annual contributions to the property improvement fund which
provides funding for capital expenditures and replacement of furniture,
fixtures and equipment. Contributions to the fund equaled 4% of gross hotel
sales, net of interest income, in 1996 and 1995. In 1997, the contribution
increased to 5%, net of interest income. The General Partner believes that
cash contributions from the Hotel's property improvement fund will provide
adequate funds in the short and long-term to meet the Hotel's capital needs.
Capital expenditures were $1.4 million, $527,000 and $1.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
capital expenditures in 1997 from 1996 is due to a $1.0 million payment in
December 1997 for the rooms refurbishment.
The Partnership's financing activities consist of repayments of debt and
payment of financing costs. Cash used in financing activities was $211,000 and
$910,000 for the first two quarters 1998 and 1997, respectively.
Cash used in financing activities was $1.7 million and $272,000 in 1997 and
1996, respectively. No cash was provided by or used in financing activities in
1995. The Partnership's $37.0 million Mortgage Debt required interest only
payments during the years 1996 and 1995. In 1997, the Partnership refinanced
the Mortgage Debt with the New Mortgage Debt of $29.9 million. In addition,
Host Marriott funded the $10 million Subordinated Loan to the Partnership
which was used to make a $10 million principal payment on the Mortgage Debt.
During 1997, the Partnership amortized $115,000 and $2.9 million of principal
on the New Mortgage Debt and Subordinated Loan, respectively. In addition, the
Partnership made a $1.4 million payment on debt service guarantees provided by
the General Partner in prior years.
DEBT
In April 1997, Host Marriott funded a fully-amortizing $10 million
subordinated loan to the Partnership (the "Subordinated Loan") that bears
interest at a fixed rate of 14.5% over a 15-year term with required monthly
payments. The Subordinated Loan matures June 1, 2012.
In August 1997, the General Partner refinanced all of the Partnership's
outstanding mortgage debt. The total amount of the mortgage debt decreased
from $37.0 million to $29.9 million due to the use of the proceeds from the
Subordinated Loan to repay mortgage debt principal. The new non-recourse loan
with an independent financial institution matures August 18, 2004, requires
principal amortization on a 25-year term and bears interest at a fixed rate of
8.58%.
Pursuant to the Subordinated Loan, any proceeds in excess of the $27 million
for the New Mortgage Debt were to be used to repay the Subordinated Loan.
Therefore, the Partnership repaid principal of $2.9 million on the
Subordinated Loan at refinancing.
PROPERTY IMPROVEMENT FUND
The Management Agreement and Operating Lease require annual contributions to
a property improvement fund to ensure that the physical condition and product
quality of the Hotel is maintained. Contributions to this fund are based on a
percentage of annual total Hotel sales, net of interest income earned on the
fund. Prior to 1997, the contribution rate was 4%, net of interest income and
the current contribution is 5% of gross Hotel sales, net of interest income.
The General Partner believes that the 5% contribution requirement is
consistent with industry standards. However, in accordance with the Management
Agreement, contributions to the property improvement fund may be increased or
decreased by MHS if the current contribution of 5% of gross Hotel sales,
F-200
<PAGE>
net of interest income, is either insufficient or excessive to make the
replacements, renewals and repairs to maintain the Hotel in accordance with
MHS's standards for a full-service Marriott hotel. Of the total $2.3 million
of net additions to property and equipment during the first two quarters 1998,
$1.7 million was owner funded. The balance in the fund totaled $185,000 as of
June 19, 1998 and $287,000 as of December 31, 1997.
The General Partner believes that cash contributions from the Hotel's
property improvement fund will provide adequate funds in the short and long
term to meet the Hotel's capital needs.
INFLATION
The rate of inflation has been relatively low in the past four years. MHS is
generally able to pass through increased costs to customers through higher
room rates and prices. In 1997, average rates of the Hotel exceeded
inflationary costs. On August 18, 1997, the Partnership refinanced its
mortgage debt and fixed its interest costs, thereby eliminating the
Partnership's exposure to the impact of inflation on future interest costs.
SEASONALITY
Demand, and thus occupancy, is affected by normally recurring seasonal
patterns. Demand is higher in the spring and summer months (March through
October) than during the remainder of the year.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHS, the
Manager of its property, to obtain financial information. The General Partner
believes that MHS has 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.
F-201
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF HANOVER MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Hanover Marriott Limited
Partnership (a Delaware limited partnership, the "Partnership") as of December
31, 1997 and 1996 and the related statements of operations, changes in
partners' capital (deficit) and cash flows for the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the General Partner's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Marriott Limited
Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
February 18, 1998
F-202
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Hotel rental..................................... $ 3,950 $ 5,177 $ 4,377
Hotel revenues................................... 2,785 -- --
Other............................................ 118 119 110
------- ------- -------
6,853 5,296 4,487
------- ------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................... 1,239 1,215 1,178
Real estate taxes................................ 483 381 371
Partnership administration....................... 269 76 186
Base management fee (see Note 6)................. 252 -- --
Insurance and other.............................. 131 -- --
Incentive management fee (see Note 6)............ 79 -- --
------- ------- -------
2,453 1,672 1,735
------- ------- -------
OPERATING PROFIT................................... 4,400 3,624 2,752
Interest expense................................. (3,934) (2,811) (3,036)
Interest income.................................. 197 127 65
------- ------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........ 663 940 (219)
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental......... 5,094 -- --
------- ------- -------
NET INCOME (LOSS).................................. $ 5,757 $ 940 $ (219)
======= ======= =======
ALLOCATION OF NET INCOME (LOSS)
General Partner.................................. $ 288 $ 47 $ (11)
Limited Partners................................. 5,469 893 (208)
------- ------- -------
$ 5,757 $ 940 $ (219)
======= ======= =======
NET INCOME (LOSS) PER LIMITED PARTNER UNIT (84
Units)............................................ $65,107 $10,631 $(2,476)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-203
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $ 29,984 $ 29,850
Due from Marriott Hotel Services, Inc..................... 204 254
Property improvement fund................................. 287 645
Deferred financing costs, net of accumulated amortiza-
tion..................................................... 456 227
Cash and cash equivalents................................. 1,952 2,557
-------- --------
$ 32,883 $ 33,533
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt............................................. $ 29,760 $ 37,000
Due to Marriott Hotel Services, Inc. for Additional Rent-
al....................................................... -- 5,094
Subordinated loan from Host Marriott Corporation.......... 7,077 --
Notes payable and related interest due to the General
Partner.................................................. 4,317 5,367
Deferred revenue.......................................... 169 287
Accounts payable and accrued expenses..................... 80 62
-------- --------
Total Liabilities..................................... 41,403 47,810
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution, net of offering costs of $21...... 421 421
Cumulative net loss..................................... (773) (1,061)
-------- --------
(352) (640)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $1,122.. 7,147 7,147
Cumulative net loss..................................... (14,693) (20,162)
Capital distributions................................... (622) (622)
-------- --------
(8,168) (13,637)
-------- --------
Total Partners' Capital (Deficit)..................... (8,520) (14,277)
-------- --------
$ 32,883 $ 33,533
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-204
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994......................... $(676) $(14,322) $(14,998)
Net loss......................................... (11) (208) (219)
----- -------- --------
Balance, December 31, 1995......................... (687) (14,530) (15,217)
Net income....................................... 47 893 940
----- -------- --------
Balance, December 31, 1996......................... (640) (13,637) (14,277)
Net income....................................... 288 5,469 5,757
----- -------- --------
Balance, December 31, 1997......................... $(352) $ (8,168) $ (8,520)
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ 5,757 $ 940 $ (219)
Extraordinary item................................. (5,094) -- --
-------- ------ -------
Net income (loss) before extraordinary item........ 663 940 (219)
Noncash items:
Depreciation and amortization.................... 1,239 1,215 1,178
Interest on notes payable due to General Part-
ner............................................. -- 329 346
Amortization of deferred financing costs as in-
terest.......................................... 272 75 35
Loss on disposition of property and equipment.... 43 -- 98
Changes in operating accounts:
Due to Marriott Hotel Services, Inc. for Addi-
tional Rental................................... -- -- 285
Due from (to) Marriott Hotel Services, Inc....... 50 (530) 434
Deferred revenue................................. (118) (119) 406
Accounts payable and accrued expenses............ 18 8 (2)
-------- ------ -------
Cash provided by operating activities.......... 2,167 1,918 2,561
-------- ------ -------
INVESTING ACTIVITIES
Additions to property and equipment, net........... (1,427) (527) (1,046)
Change in property improvement fund................ 369 (303) (195)
-------- ------ -------
Cash used in investing activities.............. (1,058) (830) (1,241)
-------- ------ -------
FINANCING ACTIVITIES
Repayment of mortgage debt......................... (37,115) -- --
Proceeds from first mortgage loan.................. 29,875 -- --
Proceeds from subordinated loan from Host Marriott
Corporation....................................... 10,000 -- --
Repayment of subordinated loan from Host Marriott
Corporation....................................... (2,923) -- --
Repayment of notes payable and related interest due
to General Partner................................ (1,050) -- --
Payment of financing costs ........................ (501) (272) --
-------- ------ -------
Cash used in financing activities.............. (1,714) (272) --
-------- ------ -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (605) 816 1,320
CASH AND CASH EQUIVALENTS at beginning of year..... 2,557 1,741 421
-------- ------ -------
CASH AND CASH EQUIVALENTS at end of year........... $ 1,952 $2,557 $ 1,741
======== ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.......... $ 4,727 $2,418 $ 2,666
======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Hanover Marriott Limited Partnership (the "Partnership") is a Delaware
limited partnership formed on October 8, 1986 to acquire and own the 353-room
Hanover Marriott Hotel and the land on which it is located (the "Hotel"). The
sole general partner of the Partnership, with a 5% interest, is Marriott
Hanover Hotel Corporation (the "General Partner"), a Delaware Corporation and
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott"),
formerly Marriott Corporation. The Hotel, which opened on July 30, 1986, was
leased by the Partnership to Marriott Hotel Services, Inc. ("MHS"), a wholly-
owned subsidiary of Marriott International, Inc. ("MII"), under a long-term
operating lease (the "Operating Lease"). Effective August 18, 1997, the
Operating Lease was converted to a long-term management agreement with MHS
(the "Management Agreement") (see Note 6).
On November 24, 1986 (the "Closing Date"), 84 limited partnership interests
(the "Units"), representing a 95% interest in the Partnership, were sold at
$100,000 per Unit pursuant to a private placement. Each limited partner paid
$15,560 at subscription with the balance due in four annual installments
through March 15, 1990, or, as an alternative, $87,600 in cash at closing as
full payment of the subscription price. The limited partners paid $2,063,460
in cash on the Closing Date. Seventy-three and one-half Units were purchased
on the installment basis. The General Partner contributed $442,000 in cash for
its 5% general partnership interest.
On April 2, 1997, Hanover Hotel Acquisition Corporation (the "Purchaser"), a
wholly-owned subsidiary of Host Marriott, completed a tender offer for limited
partnership Units in the Partnership. The Purchaser acquired 40 units for an
aggregate consideration of $1.6 million or $40,000 per Unit. Combined with its
prior ownership position, Host Marriott now indirectly owns through
affiliates, over 50% of the Partnership. Additionally, in a Partnership vote
held in conjunction with the tender offer, the limited partners approved all
of the proposed amendments to the Amended and Restated Partnership Agreement
that were conditions to the tender offer. The most significant amendments (i)
revised the provisions limiting the voting rights of the General Partner and
its affiliates to permit the General Partner and its affiliates (including the
Purchaser) to have full voting rights with respect to all Units currently held
by the General Partner or acquired by its affiliates except on matters where
the General Partner or its affiliates have an actual economic interest other
than as a limited partner or General Partner (an "Interested Transaction"),
(ii) modified the voting provisions with respect to Interested Transactions to
permit action to be taken, if approved, by limited partners holding a majority
of the outstanding Units, with all Units held by the General Partner and its
affiliates being voted in the same manner as a majority of the Units actually
voted by limited partners other than the General Partner and its affiliates
and (iii) eliminated limited partner consent requirements relating to sale
transactions with third parties and vested the sole authority with respect to
such transactions to the General Partner. As a result of the approval of the
proposed amendments, the Amended and Restated Partnership Agreement was
amended and restated effective April 3, 1997 (the "Second Amended and Restated
Partnership Agreement").
Partnership Allocations and Distributions
Pursuant to the terms of the Second Amended and Restated Partnership
Agreement, Partnership allocations and distributions are generally made as
follows:
a. The Partnership generally allocates cash available for distribution
(after a 10% priority return to the limited partners on their invested
capital) and net profits as follows: (i) 5% to the General Partner and 95%
to the limited partners until cumulative distributions of sale or
refinancing proceeds ("Capital Receipts") equal to 50% of the partners'
capital contributions have been distributed; (ii) next, 15% to the General
F-207
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Partner and 85% to the limited partners until cumulative distributions of
Capital Receipts equal to the full amount of the partners' capital
contributions have been distributed; and (iii) thereafter, 35% to the
General Partner and 65% to the limited partners.
b. Net losses were allocated 100% to the limited partners in 1986.
Thereafter, net losses are allocated 100% to the General Partner.
c. Capital Receipts (other than from the sale of substantially all of the
Partnership assets) not retained by the Partnership will be distributed (i)
first, 5% to the General Partner and 95% to the limited partners until the
partners have received cumulative distributions of Capital Receipts equal
to their capital contributions and (ii) thereafter, 35% to the General
Partner and 65% to the limited partners.
Upon the sale of substantially all of the Partnership assets, gains and
sales proceeds will be allocated and (to the extent available) distributed
based on specific provisions of the partnership agreement in order to first
provide the limited partners with an annual 12% cumulative return on their
invested capital, to the extent not previously distributed.
For financial reporting purposes, profits and losses are allocated based on
the Partner's stated ownership interest in the Partnership.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Hotel revenues since August 18, 1997 (see Note 1) represent house profit of
the Partnership's Hotel since the Partnership has delegated substantially all
of the operating decisions related to the generation of house profit of the
Hotel to MHS. House profit reflects Hotel operating results which flow to the
Partnership as property owner and represents Hotel sales less property-level
expenses, excluding depreciation and amortization, base and incentive
management fees, real estate taxes, insurance and certain other costs, which
are disclosed separately in the accompanying statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $14.5 million, $13.8 million and $12.5 million for the year
ended December 31, 1997, 1996 and 1995, respectively and will have no impact
on operating profit or net income.
F-208
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Building and improvements........................................ 40 years
Furniture and equipment.......................................... 7 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 5.
The Partnership assesses impairment of the Hotel based on whether estimated
undiscounted future cash flows from the Hotel will be less than its net book
value. If the Hotel is impaired, its basis is adjusted to fair market value.
Deferred Financing Costs
Prior to 1997, deferred financing costs of $520,000 were incurred in
connection with obtaining and extending the Mortgage Debt (see Note 5) which
were fully amortized and written-off when the refinancing of such debt
occurred in 1997. Amortization expense on these deferred financing costs for
the years ended December 31, 1997 and 1996 totaled $247,000 and $75,000,
respectively. In connection with the refinancing of the Mortgage Debt, the
Partnership paid $481,000 of refinancing costs in 1997 and is amortizing the
costs over the related terms of the debt (see Note 5). At December 31, 1997
and 1996, accumulated amortization was $25,000 and $293,000, respectively.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported on the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives of the assets, and
different treatments of additional rental. As a result of these differences,
the excess of the net Partnership liabilities reported in the accompanying
consolidated financial statements over the tax basis in the net Partnership
liabilities was $18,557,000 and $18,314,000, respectively as of December 31,
1997 and 1996.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
NOTE 3. REVENUES
On August 18, 1997, the Partnership completed a refinancing of its Mortgage
Debt. In connection with the refinancing, the Partnership converted the
Operating Lease with MHS to the Management Agreement (the "Conversion"). Prior
to the Conversion, the Partnership recorded revenue based on the rental income
to be received from MHS.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses,
F-209
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
excluding depreciation and amortization, base and incentive management fees,
real estate taxes, insurance and certain other costs, which are disclosed
separately in the statement of operations. Revenues are recorded based on
house profit of the Hotel because the Partnership has delegated substantially
all of the operating decisions related to the generation of house profit from
the Hotel to MHS.
The following is a summary of Hotel revenues, as defined in the Management
Agreement, for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $12,826 $11,710 $10,308
Food and beverage................................. 8,933 8,246 7,288
Other............................................. 691 767 764
------- ------- -------
22,450 20,723 18,360
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................... 2,904 2,631 2,374
Food and beverage............................... 6,267 5,964 5,356
Other hotel operating expenses.................... 5,288 5,214 4,739
------- ------- -------
14,459 13,809 12,469
------- ------- -------
HOTEL REVENUES...................................... $ 7,991 $ 6,914 $ 5,891
======= ======= =======
</TABLE>
Hotel revenues under the Management Agreement effective August 18, 1997
consist of Hotel operating results for the period August 18, 1997 to December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
------
<S> <C>
HOTEL SALES
Rooms.............................................................. $4,796
Food and beverage.................................................. 3,392
Other.............................................................. 226
------
8,414
------
HOTEL EXPENSES
Departmental direct costs
Rooms.............................................................. 1,130
Food and beverage.................................................. 2,534
Other hotel operating expenses....................................... 1,965
------
5,629
------
HOTEL REVENUES....................................................... $2,785
======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 3,219 $ 3,203
Building and improvements................................ 32,386 32,433
Furniture and equipment.................................. 10,770 9,879
-------- --------
46,375 45,515
Accumulated depreciation................................. (16,391) (15,665)
-------- --------
$ 29,984 $ 29,850
======== ========
</TABLE>
F-210
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. DEBT
The Partnership originally entered into a loan agreement on November 24,
1986 (the "Original Loan") with a bank that provided $36.5 million to finance
the acquisition of the Hotel. On October 26, 1989, the Partnership refinanced
the Original Loan with a $37 million nonrecourse first mortgage loan (the
"Mortgage Debt") which matured on October 16, 1996. The Mortgage Debt bore
interest at a floating rate from October 27, 1994, through October 28, 1996
equal to 70 basis points over either (i) the London Interbank Offer Rate
("LIBOR") or (ii) an adjusted certificate of deposit rate. On October 28,
1996, the Partnership's $37 million Mortgage Debt matured without replacement
financing in place. However, the Partnership secured an extension of the
Mortgage Debt until October 24, 1997 provided that the Partnership would make
a $10 million principal paydown on the Mortgage Debt by April 30, 1997. During
the extension period the debt bore interest at LIBOR plus 2.0 percentage
points and required quarterly principal amortization equal to all excess cash
flow as defined in the extension agreement.
On April 30, 1997, in connection with the tender offer for limited
partnership units (see Note 1), Host Marriott funded a fully-amortizing $10
million subordinated loan to the Partnership (the "Subordinated Loan") that
bears interest at a fixed rate of 14.5% over a 15-year term with required
monthly payments. The Partnership used the proceeds of the Subordinated Loan
to make the required principal payment under the mortgage loan extension
agreement. If cash flow is insufficient to service the Subordinated Loan, the
unpaid portion will be added to principal and interest will accrue.
On August 18, 1997, the Partnership refinanced its Mortgage Debt with a then
outstanding balance of $25.9 million with new mortgage debt ("New Mortgage
Debt") of $29.9 million. The New Mortgage Debt bears interest at a fixed rate
of 8.58% over its seven year term with required principal amortization based
on a 25-year schedule. Pursuant to the Subordinated Loan, any proceeds from
the New Mortgage Debt in excess of $27 million were to be used to repay the
Subordinated Loan. Therefore, on August 18, 1997, $2.9 million was repaid on
the Subordinated Loan. Pursuant to the limited partnership agreement, the
remaining proceeds and cash held at the Partnership for refinancing were used
to pay refinancing costs (see Note 2) and to repay debt service guarantee
advances made by the General Partner in prior years. For 1997 and 1996, the
weighted-average interest rate on the Partnership's mortgage debt was 7.9% and
6.4%, respectively.
The New Mortgage Debt is secured by the Hotel and substantially all other
assets of the Partnership, including furniture and equipment and the
Partnership's rights under the assignment of the rents and leases (the
"Collateral"). The Subordinated Loan is also secured by the Collateral but is
subordinate to the New Mortgage Debt. Host Marriott and the General Partner
also provided additional security on the Original Loan and the Mortgage Debt
in the form of debt service guarantees in the aggregate amount of $7,200,000
(the "Guarantees"). On October 27, 1994 Host Marriott and the General Partner
were released from their obligations to advance funds. As of December 31, 1997
and 1996, $3,400,000 remains outstanding under the Guarantees. All advances
made under the Guarantees accrue interest at one percent over the prime rate
as announced by Bankers Trust Company. Pursuant to the limited partnership
agreement, $1,382,000 was paid on the Guarantees from loan refinancing
proceeds. Accrued interest payable on the Guarantees as of December 31, 1997
and 1996, totaled $714,000 and $1,775,000, respectively. The weighted-average
interest rate on these advances was 9.3% for 1997 and 1996.
Prior to 1996, the General Partner advanced $127,000 to the Partnership as a
working capital advance which accrues interest at one percent over the prime
rate as announced by Bankers Trust Company. As of December 31, 1997 and 1996,
$203,000 and $192,000, including accrued interest, was outstanding on the
working capital advance, respectively, and is included in notes payable and
related interest due to the General Partner in the accompanying financial
statements.
F-211
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition, the General Partner has provided a foreclosure guarantee to the
lender of the New Mortgage Debt in the amount of $10 million. Pursuant to the
terms of the foreclosure guarantee, amounts would be payable only upon a
foreclosure of the Hotel and only to the extent that the gross proceeds from a
foreclosure sale are less than $10 million.
NOTE 6. OPERATING LEASE AGREEMENT/MANAGEMENT AGREEMENT
The Partnership, through an assignment of a lease from Host Marriott on
November 24, 1986, acquired all rights to a 25-year operating lease with five
10-year renewal options to lease the Hotel to MHS. Effective August 18, 1997,
this agreement was converted to a long-term management agreement with MHS.
Operating Lease Agreement
Annual Rental during the term of the Operating Lease was equal to the
greater of:
(i) Minimum Rental of $100,000; or
(ii) Basic Rental equal to 80% of Operating Profit, as defined, reduced
to 75% of Operating Profit after the Partnership has received $4,421,000 of
cumulative Capital Receipts; or
(iii) Adjusted Rental equal to debt service on the mortgage debt plus
Partnership administration costs (collectively referred to as "Debt
Service") plus the greater of: (a) a preferred return equal to $840,000 or
(b) 50% of the amount by which Operating Profit exceeds Debt Service. In no
event will Adjusted Rental exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rentals existed.
For financial reporting purposes, Additional Rental was not recognized as
revenue but was deferred and recorded as a liability on the balance sheet. As
a result of the conversion of the Operating Lease to a management agreement,
MHS forgave $5.1 million of Additional Rental, which was recorded as a
liability in the Partnership's financial statements. The Partnership recorded
an extraordinary gain related to this forgiveness.
For 1997 and 1996, Basic Rental of $3,031,000 and $3,993,000, respectively
was remitted to the Partnership by MHS. In accordance with the Operating
Lease, MHS was entitled to $758,000 and $998,000 of Operating Profit for the
period from January 1, 1997 to August 17, 1997 and the year ended December 31,
1996, respectively. In addition to the Annual Rental, MHS was required to pay
real estate taxes and make annual contributions equal to 4% of sales net of
interest to the property improvement fund on behalf of the Partnership. In
accordance with the Operating Lease, annual contributions to the property
improvement fund increased to 5% of sales net of interest at the beginning of
1997.
Management Agreement
Effective August 18, 1997, in conjunction with the refinancing of the
Partnership's Mortgage Debt (see Note 5), the Operating Lease was converted to
a long-term management agreement with MHS. The Management Agreement has an
initial term expiring on December 31, 2011. Thereafter, the term is renewed
automatically for each of five successive 10-year periods. Pursuant to the
terms of the Management Agreement, MHS receives a base management fee equal to
3% of gross revenues. The Partnership is entitled to the first $4,650,000 of
operating profit generated by the Hotel each fiscal year ("Owner's Priority").
Owner's Priority is increased by 10% of any Additional Invested Capital, as
defined in the Management Agreement. In addition to a base
F-212
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
management fee, MHS will be paid an incentive management fee of the next
$400,000 from operating profit, as defined. Any cash remaining after the
payment of the Owner's Priority and the incentive management fee will be
allocated 75% to the Partnership and 25% to MHS. The Partnership may terminate
the Management Agreement if in any two of three consecutive fiscal years there
is an operating loss. MHS may, however, prevent termination by paying to the
Partnership such amounts equal to the operating losses during such two fiscal
years.
Pursuant to the terms of the Management Agreement, MHS is required to
furnish the Hotel with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in MII's full service
hotel system. Chain Services include central training, advertising and
promotion, a national reservation system 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 full service hotels managed, owned or leased by MII or its
subsidiaries. In addition, MHS is required to furnish the Hotel with certain
other services ("Central Office Services") such as executive supervision,
planning and policy making, corporate finance, in-house legal services,
research and development, and technical and operational expertise. The Hotel
also participates in MII's Marriott's Reward Program ("MRP"). The cost of this
program is charged to all hotels in MII's full service hotel system based upon
the MRP sales at each hotel. The total amount of Chain and Central Office
Services and MRP costs charged to the Partnership under the Management
Agreement was $186,000 for the period August 18, 1997 to December 31, 1997.
The Management Agreement and Operating Lease provide for the establishment
of a property improvement fund for the Hotel which provides for the
replacement of furniture, fixtures and equipment. Contributions to the
property improvement fund are based on a percentage of gross hotel sales, net
of interest income. Prior to 1997, contributions equaled 4% of hotel sales,
net of interest income. Beginning in 1997 and thereafter, contributions are
equal to 5% of hotel sales, net of interest income. Contributions to the
property improvement fund for 1997 were $1.1 million.
Under the Management Agreement, MHS received base and incentive management
fees of $252,000 and $79,000, respectively, for the period August 18, 1997
through December 31, 1997.
NOTE 7. OFFICE SPACE RENTAL AGREEMENT
On January 28, 1995, the Partnership entered into an agreement with Marriott
Vacation Club International ("MVCI"), formerly known as Marriott Ownership
Resorts, Inc., a wholly-owned subsidiary of MII. Under the terms of the five
year lease with MVCI expiring in January 2000, MVCI funded the renovation of a
portion of the Hotel's lounge into a junior ballroom (for use by the Hotel)
and a MVCI sales office. The total cost of the renovations was $516,000. The
lease with MVCI stipulates that $200,000 of those costs will be treated as
rent concessions. Therefore, the Partnership will begin receiving rental
payments of $18,123 in 1998, $55,600 in 1999 and $4,277 in 2000. In the event
MVCI chooses to exercise its right to terminate the lease agreement prior to
the end of the five year term, any prepayment of rent by MVCI is non-
refundable.
In accordance with generally accepted accounting principles, the Partnership
deferred the total rent due under the lease and is amortizing the deferred
revenue on a straight-line basis over the lease term. For the years ended
December 31, 1997, 1996 and 1995, the Partnership recognized $118,000,
$119,000 and $110,000 of rent under the lease which is included in other
revenues in the Statement of Operations. In addition, deferred revenue related
to the lease totaled $169,000, $287,000 and $406,000 for the years ended
December 31, 1997, 1996 and 1995.
F-213
<PAGE>
NOTE 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt............. $ 29,760 $ 29,760 $ 37,000 $ 37,000
Subordinated loan......... 7,077 7,077 -- --
Notes payable and related
interest due to General
Partner.................. 4,317 4,200 5,367 3,500
Additional Rental......... -- -- 6,099 2,000
</TABLE>
The estimated fair value of the mortgage debt is based on the expected
future debt service payments discounted at estimated market rates. Additional
rental paid by the Hotel lessee was valued based on the expected future
payments from operating cash flow discounted at a risk-adjusted rate. As
further explained in Note 6, upon the closing of the debt refinancing on
August 18, 1997, MHS agreed to waive all claims to Additional Rental that had
accrued prior to the conversion to a management agreement. Consequently, the
estimated fair value of Additional Rental paid by the Hotel lessee is zero.
F-214
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $31,718 $29,984
Due from Marriott Hotel Services, Inc................. 355 204
Other assets.......................................... 609 743
Cash and cash equivalents............................. 426 1,952
------- -------
$33,108 $32,883
======= =======
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $29,611 $29,760
Subordinated loan from Host Marriott Corporation.... 7,015 7,077
Notes payable and related interest due to the Gen-
eral Partner....................................... 4,473 4,317
Accounts payable and accrued expenses............... 216 80
Deferred revenue.................................... 114 169
------- -------
Total Liabilities................................. 41,429 41,403
------- -------
PARTNERS' DEFICIT
General Partner..................................... (342) (352)
Limited Partners.................................... (7,979) (8,168)
------- -------
Total Partners' Deficit........................... (8,321) (8,520)
------- -------
$33,108 $32,883
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
F-215
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
--------------
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotel revenues................................................ $3,391 $ --
Hotel rental.................................................. -- 3,015
Other......................................................... 55 55
------ ------
3,446 3,070
------ ------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................. 572 561
Base management fee........................................... 296 --
Incentive management fee...................................... 171 --
Real estate taxes............................................. 236 186
Insurance and other........................................... 127 19
------ ------
1,402 766
------ ------
OPERATING PROFIT................................................ 2,044 2,304
Interest expense.............................................. (1,863) (1,717)
Interest income............................................... 18 78
------ ------
NET INCOME...................................................... $ 199 $ 665
====== ======
ALLOCATION OF NET INCOME
General Partner............................................... $ 10 $ 33
Limited Partners.............................................. 189 632
------ ------
$ 199 $ 665
====== ======
NET INCOME PER LIMITED PARTNER UNIT (84 Units).................. $2,250 $7,524
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
F-216
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------ -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $ 199 $ 665
Noncash items................................................ 703 796
Changes in operating accounts................................ (13) 96
------ -------
Cash provided by operating activities...................... 889 1,557
------ -------
INVESTING ACTIVITIES
Additions to property and equipment, net..................... (2,306) (156)
Change in property improvement fund.......................... 102 (372)
------ -------
Cash used in investing activities.......................... (2,204) (528)
------ -------
FINANCING ACTIVITIES
Proceeds from subordinated loan.............................. -- 10,000
Repayments on mortgage debt.................................. (148) (10,505)
Repayments on subordinated loan.............................. (63) --
Payment of financing costs................................... -- (405)
------ -------
Cash used in financing activities.......................... (211) (910)
------ -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............... (1,526) 119
CASH AND CASH EQUIVALENTS at beginning of period............... 1,952 2,557
------ -------
CASH AND CASH EQUIVALENTS at end of period..................... $ 426 $ 2,676
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest.............................. $1,488 $ 1,182
====== =======
</TABLE>
See Notes to Condensed Financial Statements.
F-217
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Hanover Marriott Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included elsewhere in the Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
95% to the Limited Partners and 5% to Marriott Hanover Hotel Corporation (the
"General Partner"). Net losses are allocated 100% to the General Partner.
Significant differences exist between the net income for financial reporting
purposes and the net income (loss) for Federal income tax purposes. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives, no estimated
salvage values for the assets and differences in the timing of the recognition
of rental income.
2. On August 18, 1997, the Partnership completed a refinancing of its
mortgage debt. In addition to the refinancing, the Partnership converted the
Operating Lease with MHS to the Management Agreement (the "Conversion"). Prior
to the Conversion, the Partnership recorded revenue based on the rental income
to be received from MHS.
Annual rental during the term of the Operating Lease was equal to the
greater of: (i) Minimum Rental of $100,000; or (ii) Basic Rental equal to 80%
of Operating Profit, as defined, reduced to 75% of Operating Profit after the
Partnership received $4,421,000 of cumulative Capital Receipts, as defined in
the Operating Lease; or (iii) Adjusted Rental equal to debt service on the
mortgage debt plus Partnership administration costs (collectively referred to
as "Debt Service") plus the greater of: (a) a preferred return equal to
$840,000 or (b) 50% of the amount by which Operating Profit exceeded Debt
Service. In no event was Adjusted Rental to exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rentals existed. In addition to the Annual Rental, MHS
was required to pay real estate taxes.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real estate
taxes, insurance and certain other costs, which are disclosed separately in
the statement of operations. Revenues are recorded based on house profit of
the Hotel because the Partnership has delegated substantially all of the
operating decisions related to the generation of house profit from the Hotel
to MHS.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to
F-218
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements." EITF 97-2 addresses the circumstances in
which a management entity may include the revenues and expenses of a managed
entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that is
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $6.5 million and $6.6 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
The following is a summary of Hotel revenues, as defined in the Management
Agreement (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-------------
1998 1997
------ ------
<S> <C> <C>
HOTEL SALES
Rooms....................................................... $6,047 $6,047
Food and beverage........................................... 3,520 4,181
Other....................................................... 310 355
------ ------
9,877 10,583
------ ------
HOTEL EXPENSES
Departmental direct costs
Rooms..................................................... 1,413 1,308
Food and beverage......................................... 2,641 2,807
Other hotel operating expenses............................ 2,432 2,491
------ ------
6,486 6,606
------ ------
HOTEL REVENUES................................................ $3,391 $3,977
====== ======
</TABLE>
3. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), parent
company of the General Partner of the Partnership, announced that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including Hanover Marriott Limited Partnership, are expected to be given an
opportunity to receive, on a tax-deferred basis, Operating Partnership units
in the Operating Partnership in exchange for their current limited partnership
interests. The Operating Partnership units would be redeemable by the limited
partner for freely traded Host Marriott shares (or the cash equivalent
thereof) at any time after one year from the closing of the merger. In
connection with the REIT conversion, on June 2, 1998, the Operating
Partnership filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
F-219
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the MHP financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed consolidated
financial statements for the First Two Quarters 1998 and First Two Quarters
1997. The following data should be read in conjunction with MHP's financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT(1))
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $47,968 $45,873 $75,211 $71,834 $66,998 $58,474 $61,347
Operating profit........ 30,115 28,733 42,095 42,185 36,053 28,677 23,338
Income before
extraordinary item(2).. 17,818 15,343 19,477 18,449 13,150 7,311 14,748
Net income.............. 17,818 15,343 16,416 18,449 13,150 7,311 14,748
Distributions:
General partner........ 15 14 78 50 21 -- --
Limited partners....... 1,500 1,500 7,706 4,964 2,084 -- --
------- ------- ------- ------- ------- ------- -------
Total.................. 1,515 1,514 7,784 5,014 2,105 -- --
Per Partnership Unit(1):
Net income (loss)...... 17,640 15,190 16,252 18,265 13,018 7,238 14,600
Distributions.......... 1,500 1,500 7,700 4,970 2,084 -- --
Cash provided by
operating activities... 26,062 25,633 31,758 27,632 25,755 20,884 8,857
Cash used in investing
activities............. (5,417) (5,071) (12,840) (8,911) (6,922) (8,241) (3,174)
Cash used in financing
activities............. (2,972) (7,417) (9,831) (20,664) (18,026) (11,956) (14,225)
Increase (decrease) in
cash and cash
equivalents............ 17,673 13,145 9,087 (1,943) 807 687 (8,542)
Ratio of earnings to
fixed charges(3)
(unaudited)............ 2.89x 2.51x 2.00x 1.92x 1.63x 1.32x --
Deficiency of earnings
to fixed charges(3)
(unaudited)............ -- -- -- -- -- -- 4,590
Total assets at book
value.................. 278,264 256,645 261,109 249,441 251,217 254,058 257,620
Cash and cash
equivalents............ 28,367 14,752 10,694 1,607 3,550 2,743 2,056
Total debt(4)........... 240,809 230,727 240,748 235,146 248,659 260,843 271,879
Total liabilities....... 242,113 231,654 241,261 238,272 253,483 267,369 278,242
Partner's capital
(deficit):
Limited partners....... 35,681 24,632 19,541 10,948 (2,353) (13,287) (20,525)
General partner........ 470 359 307 221 87 (24) (97)
Book value per
Partnership Unit
(unaudited)(1)......... 35,681 24,632 19,541 10,948 (2,353) (13,287) (20,525)
Exchange value per
Partnership Unit
(unaudited)(1)......... 141,074 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP.
(2) In 1997, the Partnership recognized a $3.1 million extraordinary loss
resulting from the prepayment penalty related to the early extinguishment
of the mortgage debt on the Orlando Hotel and the write-off of related
deferred financing costs.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges in 1993 was largely the result of
depreciation and amortization of $14,601,000.
(4) Total debt includes amounts due to Host Marriott of $2,295,000,
$2,294,000, $6,420,000, $9,149,000 and $13,635,000 as of June 20, 1997,
December 31, 1996, 1995, 1994 and 1993, respectively.
F-220
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The chart below summarizes REVPAR, or revenue per available room, the first
two quarters for 1998 and 1997:
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------
1998 1997 % INCREASE
---- ---- ----------
<S> <C> <C> <C>
Orlando World Center................................. $139 $136 2%
Harbor Beach......................................... $177 $170 4%
Combined Average..................................... $150 $146 3%
</TABLE>
Total consolidated Partnership revenues for the first two quarters 1998,
increased 5% when compared to the comparable period in 1997. Operating results
for the first two quarters 1998 were strong for both the Orlando Hotel and the
Harbor Beach Hotel (the "Hotels"). REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. On a combined basis, for
the first two quarters 1998, REVPAR increased 3% primarily due to increases in
average room rate. For the first two quarters 1998, the combined average room
rate increased 5% over the comparable period in 1997 to $177 while the
combined average occupancy decreased two percentage points to 85%.
Hotel revenues. For the first two quarters 1998, revenues reported by the
Orlando Hotel increased 7% over the same period of 1997. The strong
performance for the first two quarters 1998 was a result of a 2% increase in
REVPAR to $139. This increase was attributed to a 4% increase in average room
rate to $162 offset by a one percentage point decrease in occupancy to 86%.
The hotel achieved its increase in average room rate as a result of rate
increases across all segments and the hotel's ability to restrict discounted
transient room rates. The decrease in occupancy was primarily due to a
decrease in group roomnights.
Rental income. Rental income for the first two quarters from the Harbor
Beach Hotel remained stable over 1997.
For the first two quarters 1998, REVPAR increased 4% to $177 when compared
to the same period in 1997. This increase was due to a 10% increase in average
room rate to $215 offset by a five percentage point decrease in occupancy to
82%. The improvement in REVPAR was primarily a result of a 16% increase in the
group rate.
Operating costs and expenses. The Partnership's operating costs and expenses
decreased 4% to $17.1 million for the first two quarters 1998 when compared to
the same period in 1997. The principal component of this category is discussed
below:
Depreciation and amortization. Depreciation and amortization for the first
two quarters 1998 increased approximately $0.3 million, or 7% as compared to
1997. The increase is primarily due to the completion of the rooms renovation
project at the Orlando Hotel during fourth quarter 1997.
Operating profit. As a result of changes in revenues and expenses discussed
above, operating profit increased by $1.4 million to $30.1 million over the
same period in 1997.
Interest expense. Interest expense for the first two quarters 1998 decreased
7% as compared to the same period in 1997 due to the refinancing of the
Orlando Hotel's mortgage debt at a lower interest rate in 1997.
Minority interest. Based upon its 50.5% ownership interest, the Partnership
controls the Harbor Beach Partnership and, as a result, the condensed
consolidated financial statements of the Partnership include the accounts of
the Harbor Beach Partnership. Minority interest represents the net income from
the Harbor Beach
F-221
<PAGE>
Partnership allocable to the co-general partner. Minority interest in income
decreased from $3.8 million for the first two quarters 1997 to $3.6 million
for the first two quarters 1998 primarily due to a slight decrease in net
income from the Harbor Beach Partnership due to an increase in depreciation
expense.
Net income. For the first two quarters 1998, net income increased $2.5
million to $17.8 million over the same period in 1997. This increase was
primarily due to increases in hotel revenues and rental income and the
decrease in interest expense, as discussed above.
1997 Compared to 1996
Hotel Revenues. Hotel revenues increased approximately $3.1 million, or 6%,
over 1996 as a result of continued growth in corporate group business. REVPAR
at the Orlando Hotel increased 11% over 1996 to $118. This higher rate
resulted from increased demand generated by Disney's 25th Anniversary
celebration and an increase in group roomnights from the association and
international markets. Average occupancy increased by two percentage points to
80%. As a result of the increase in REVPAR, room sales at the Orlando World
Center increased $5.0 million, or 8%, over 1996. Food and beverage sales in
1997 increased $3.6 million, or 7.5%, over 1996 primarily due to an 11%
increase in banquet sales. Food and beverage profit increased $1.1 million, or
6%, over 1996 due to the increase in sales combined with continued emphasis on
cost containment. In 1998, the Orlando World Center expects demand will remain
strong and as a result, 1998 hotel revenues are expected to increase.
Direct operating costs and expenses increased $4.9 million, or 7%, over 1996
due to an increase in certain variable costs related to the increase in room
sales and higher food and beverage costs due to the creation of a special
events department at the Orlando World Center.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $326,000, or 2%, when compared to 1996 as a result of the
Hotel's ability to restrict discounted rates and achieve a higher transient
room rate. The Harbor Beach Hotel experienced an increase in corporate group
demand of almost 5,000 roomnights. REVPAR increased 6% over 1996 due to a 6%
increase in the average room rate to $173. As a result of the increase in
REVPAR, room sales and profit increased 4.5% and 4%, or $1.4 million and $1.1
million, respectively, over 1996.
Indirect hotel operating costs and expenses. Indirect hotel operating costs
and expenses increased by $3.5 million, or 13%, from $29.6 million in 1996 to
$33.1 million in 1997. The principal components of this category are discussed
below.
Depreciation and amortization. Depreciation and amortization increased 9%
from $9.7 million in 1996 to $10.6 million in 1997 primarily due to the
addition of furniture and equipment at the Harbor Beach Hotel in 1996.
Incentive management fees. In accordance with the Orlando World Center
Management Agreement, incentive management fees increased by $1.8 million, or
24%, over 1996 as a result of improved operating results at the Orlando World
Center. Cash flow from operations of the Orlando World Center Hotel was
sufficient to pay all incentive management fees earned by the Manager in 1997
and 1996. Additional incentive management fees of $1.4 million were also
earned by the Manager for the first time in 1997.
Base management fees. In accordance with the Orlando World Center Hotel
Management Agreement, base management fees increased 7%, from $3.6 million in
1996 to $3.8 million in 1997, due to improved total sales at the Orlando World
Center Hotel.
Operating Profit. Operating profit remained stable at $42.1 million due to
the increases in depreciation and amortization and incentive management fees,
as discussed above.
F-222
<PAGE>
Interest expense. Interest expense decreased 6% from $5.1 million in 1996 to
$4.7 million in 1997 primarily due to principal payments on the Orlando
Mortgage Debt prior to refinancing of $7.0 million and repayment of the entire
Orlando Ballroom Loan in 1997.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the
accounts of the Harbor Beach Partnership are consolidated in the consolidated
financial statements of the Partnership. Minority interest in income
represents the net income from the Harbor Beach Partnership allocable to the
other general partner in that Partnership. Minority interest in income
decreased 3% in 1997 primarily due to an increase in depreciation expense
partially offset by an increase in rental income from the Harbor Beach Hotel,
as discussed above.
Net income. Net income for 1997 decreased $2.0 million, or 11%, over 1996
primarily due to the $3.1 million extraordinary loss resulting from the
prepayment penalty related to the early extinguishment of the mortgage debt on
the Orlando Hotel and the write-off of deferred financing costs related to
that debt. This loss was partially offset by higher hotel revenues in 1997.
1996 Compared to 1995
Hotel Revenues. Hotel revenues increased approximately $3.3 million, or 7%,
over 1995 as a result of continued growth in corporate group and transient
business. REVPAR at the Orlando World Center increased 2% over 1995 to $106.
This increase was a result of the Hotel's ability to restrict discounted rates
and achieve a higher average room rate. The average room rate increased 4%
from 1995 to $137. This increase was slightly offset by a 1.1 percentage point
decrease in average occupancy to 78%. The first half of a rooms renovation
project was completed during 1996, thus decreasing the availability of rooms
for sale. As a result of the increase in REVPAR, room sales at the Orlando
World Center increased $2.4 million, or 4%, over 1995. Food and beverage sales
in 1996 increased $2.1 million, or 5%, over 1995 primarily due to a 6%
increase in banquet sales. Food and beverage profit increased $1.0 million, or
6%, over 1995 due to the increase in revenues combined with continued emphasis
on cost containment.
Direct hotel operating costs and expenses increased $2.7 million, or 4%,
over 1995 due to an increase in certain variable costs related to the increase
in room sales. The ratio of operating costs to room sales declined in 1996 to
58.0% as compared to 1995 at 58.7%.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $1.6 million, or 8%, when compared to 1995 due to increased
transient demand especially in the leisure segment, the highest average room
rate category. The Harbor Beach Hotel experienced record call volume during
prime season and a significant increase in international travelers. REVPAR
increased 7% over 1995 due to a 5% increase in the average room rate to $164
combined with an increase in average occupancy of 1.9 percentage points to
82%. Despite a 3% decline in group roomnights, transient roomnights increased
13% over 1995. As a result of the increase in REVPAR, room sales and profit
increased 9% and 10%, or $2.6 million and $2.3 million, respectively, over
1995.
Indirect hotel operating costs and expenses. Indirect hotel operating costs
and expenses decreased by $1.3 million, or 4%, from $30.9 million in 1995 to
$29.6 million in 1996. The principal components of this category are discussed
below.
Depreciation and amortization. Depreciation and amortization decreased by
$2.0 million, or 17%, when compared to 1995 due to a portion of the Hotels'
furniture and fixtures becoming fully depreciated in 1995.
Incentive management fees. In accordance with the Orlando World Center
Management Agreement, incentive management fees increased by $0.5 million, or
7%, over 1995 as a result of improved operating results at the Orlando World
Center. Cash flow from operations of the Orlando World Center was sufficient
to pay all incentive management fees earned by the Manager in 1996 and 1995.
F-223
<PAGE>
Base management fees. In accordance with the Orlando World Center Management
Agreement, base management fees increased 5%, from $3.4 million in 1995 to
$3.6 million in 1996, due to improved total sales at the Orlando World Center.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased by $6.1 million to
$42.2 million, or 59% of revenues, for 1996, from $36.1 million or 54% of
revenues for 1995.
Interest expense. Interest expense increased 1% from $21.9 million in 1995
to $22.0 million in 1996, primarily due to the Orlando Mortgage Debt loan
modification and extension in October 1995. The Orlando Mortgage Debt interest
rate was increased from 7% to 8% in October 1995. The interest rate increase
was offset slightly by principal payments on the Orlando Mortgage Debt of $7.5
million in 1996.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the
accounts of the Harbor Beach Partnership are consolidated in the consolidated
financial statements of the Partnership. Minority interest in income
represents the net income from the Harbor Beach Partnership allocable to the
other general partner in that Partnership. Minority interest in income
increased from $1.7 million in 1995 to $2.6 million in 1996, primarily due to
the increase in rental income from the Harbor Beach Hotel, as discussed above.
Net income. Net income for 1996 increased $5.3 million, or 40%, over 1995
primarily due to higher Hotel revenues and rental income, offset by increased
incentive and base management fees and an increase in minority interest in
income.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions, Host Marriott Corporation
("Host Marriott") and its affiliates or Marriott International, Inc. (the
"Manager") and its affiliates. The general partner believes that the
Partnership will have sufficient capital resources and liquidity to continue
to conduct its business in the ordinary course.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to fund the property improvement funds of the Hotels, to pay
required principal amortization of the mortgage debt and other debt incurred
to fund costs of capital improvements at the Hotels, financing costs and cash
distributions to the partners.
Total consolidated cash provided by operations for the first two quarters
1998 and 1997, was $26.1 million and $25.6 million, respectively. The increase
was primarily due to an increase in hotel revenues and rental income when
compared to the same period in 1997. Total consolidated cash provided by
operations was $31.8 million, $27.6 million and $25.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
For the first two quarters 1998 and 1997, cash used in investing activities
was $5.4 million and $5.1 million, respectively, consisting primarily of an
increase in additions to property and equipment. This is primarily due to the
commencement of the Orlando Hotel expansion project in May 1998. Cash used in
investing activities was $12.8 million, $8.9 million and $6.9 million for the
years ended December 31, 1997, 1996, and 1995, respectively. The Partnership's
investing activities consist primarily of contributions to the property
improvement fund of the Hotels of $9.1 million, $8.7 million and $7.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
For the first two quarters 1998 and 1997, cash used in financing activities
was $3.0 million and $7.4 million, respectively. The decrease in cash used in
financing activities was primarily the result of a decrease in principal
F-224
<PAGE>
repayments on the mortgage debt and the receipt of construction loan advances.
During the first two quarters 1998, the Partnership distributed $1.5 million
to its partners ($1,500 per limited partner unit). This distribution
represented $540 per limited partner unit from 1997 operations and $960 per
limited partner unit related to first quarter 1998 operations. In addition, on
August 4, 1998, the Partnership distributed $8,080,808 ($8,000 per limited
partner unit) from 1998 operations. Cash used in financing activities was $9.8
million, $20.7 million and $18.0 million for the years ended December 31,
1997, 1996 and 1995 respectively. Principal repayments made on the mortgage
debt of the Hotels totaled $8.5 million, $8.9 million and $9.0 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Payment of
financing costs related to the mortgage debt of the Partnership Hotels totaled
$2.0 million, $40,000 and $2.3 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash distributed to the partners was $7.8
million, $5.0 million and $2.1 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash distributions paid to minority interest were
$2.0 million, $2.1 million and $1.5 million for the years ended December 31,
1997, 1996 and 1995, respectively.
Pursuant to the refinancing of the Orlando Mortgage Debt, the Partnership
received proceeds of $152.0 million. Of the proceeds, $139.3 million was used
to repay the outstanding principal balance on the Orlando Mortgage Debt and
accrued interest, $2.0 million was used to pay related refinancing costs and
$1.9 million was used to pay prepayment penalties. The remaining $8.8 million
is held by the Partnership as working capital.
During 1997, Marriott International Capital Corporation ("MICC"), a wholly-
owned subsidiary of Marriott International, advanced $3.5 million to the
Orlando World Center to provide financing for the rooms and suites
refurbishment. Principal repayments to Host Marriott related to the Orlando
Ballroom Loan and the Orlando Rooms Renovation Loan totaled $2.3 million, $4.1
million and $2.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Principal repayments to MICC related to the Harbor Beach Rooms
Renovation Loan totaled $0.6 million, $0.5 million and $0.5 million for each
of the years ended December 31, 1997, 1996 and 1995.
The General Partner believes that cash from operations will provide adequate
funds for the operational needs of the Partnership and the Harbor Beach
Partnership for the foreseeable future. The interest rates on the refinanced
Orlando Mortgage Debt and the Harbor Beach Mortgage Debt are fixed at 7.48%
and 9.13%, respectively. The Harbor Beach Mortgage Debt matures in the year
2000, at which time the loan-to-value ratios and debt service coverage of the
Harbor Beach Hotel is expected to enhance the Harbor Beach Partnership's
ability to secure replacement financing.
Property Improvement Funds
The Orlando World Center Management Agreement and the Harbor Beach Hotel
Operating Lease provide for the establishment of a property improvement fund
for each Hotel. Pursuant to these agreements, contributions to the funds are
equal to a percentage of total sales of each Hotel and are used to provide for
the funding of routine capital expenditures and the replacement of furniture,
fixtures and equipment. Upon maturity of the Orlando World Center Mortgage
Debt on June 16, 1995, contributions to the Orlando World Center fund
increased from 4% to 5% of total sales. Total contributions to the Orlando
World Center fund were $6.4 million, $6.0 million and $5.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Total capital
expenditures at the Orlando World Center were $7.9 million, $8.1 million and
$4.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, principal and interest paid to MICC on the Orlando
Rooms Renovation Loan totaled $100,000 in 1997. The balance of the Orlando
World Center fund was $2.9 million as of December 31, 1997.
Contributions to the Harbor Beach Hotel's property improvement fund are
equal to 5% of total hotel sales. Total contributions to the Harbor Beach
Hotel fund were $2.7 million, $2.7 million and $2.6 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Total capital
expenditures at the Harbor Beach Hotel were $2.5 million, $1.6 million and
$1.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance of the Harbor Beach Hotel fund was $3.2 million as
of December 31, 1997.
F-225
<PAGE>
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its properties to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
F-226
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Hotel Properties Limited Partnership (a Delaware limited partnership) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1995 financial statements
of Lauderdale Beach Association, which statements reflect total assets and
total revenues of 25 percent and 29 percent in 1995, respectively, of the
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for that entity, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Marriott Hotel Properties Limited
Partnership and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
March 11, 1998
F-227
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $222,216 $222,491
Minority interest......................................... 10,042 10,641
Due from Marriott International, Inc. and affiliates...... 7,912 9,114
Property improvement funds................................ 6,056 3,542
Deferred financing costs, net............................. 2,130 1,787
Loan deposit.............................................. 1,800 --
Prepaid ground rent....................................... 259 259
Cash and cash equivalents................................. 10,694 1,607
-------- --------
$261,109 $249,441
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage debt............................................. $235,946 $230,959
Notes payable and amounts due to Marriott International,
Inc. and affiliates...................................... 4,987 4,106
Accounts payable and accrued interest..................... 196 802
Note payable and amounts due to Host Marriott Corpora-
tion..................................................... 132 2,405
-------- --------
Total Liabilities................................... 241,261 238,272
-------- --------
PARTNERS' CAPITAL
General Partner
Capital contribution.................................... 1,010 1,010
Capital distributions................................... (590) (512)
Cumulative net losses................................... (113) (277)
-------- --------
307 221
-------- --------
Limited Partners
Capital contributions, net of offering costs of
$10,978................................................ 89,022 89,022
Investor notes receivable............................... -- (47)
Capital distributions................................... (58,324) (50,618)
Cumulative net losses................................... (11,157) (27,409)
-------- --------
19,541 10,948
-------- --------
Total Partners' Capital............................. 19,848 11,169
-------- --------
$261,109 $249,441
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-228
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)................................. $ 53,574 $ 50,523 $ 47,251
Rental income (Note 8)......................... 21,637 21,311 19,747
-------- -------- --------
75,211 71,834 66,998
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................. 10,601 9,693 11,739
Incentive management fees to Marriott Interna-
tional and affiliates......................... 9,308 7,518 7,047
Base management fees to Marriott International
and affiliates................................ 3,846 3,609 3,431
Property taxes................................. 3,336 3,059 3,104
Ground rent, insurance and other............... 6,025 5,770 5,624
-------- -------- --------
33,116 29,649 30,945
-------- -------- --------
Operating Profit................................. 42,095 42,185 36,053
Interest expense (including interest paid to re-
lated parties of $0.3 million, $0.7 million and
$1.0 million in 1997, 1996 and 1995, respective-
ly)............................................. (20,842) (22,007) (21,864)
Interest income.................................. 803 919 679
-------- -------- --------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY
ITEM............................................ 22,056 21,097 14,868
MINORITY INTEREST IN INCOME...................... (2,579) (2,648) (1,718)
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM................. 19,477 18,449 13,150
EXTRAORDINARY ITEM:
Loss on extinguishment of debt................. (3,061) -- --
-------- -------- --------
NET INCOME....................................... $ 16,416 $ 18,449 $ 13,150
======== ======== ========
ALLOCATION OF NET INCOME
General Partner................................ $ 164 $ 184 $ 132
Limited Partners............................... 16,252 18,265 13,018
-------- -------- --------
$ 16,416 $ 18,449 $ 13,150
======== ======== ========
INCOME BEFORE EXTRAORDINARY ITEM PER LIMITED
PARTNER UNIT (1,000 Units)...................... $ 19,282 $ 18,265 $ 13,018
======== ======== ========
NET INCOME PER LIMITED PARTNER UNIT (1,000
Units).......................................... $ 16,252 $ 18,265 $ 13,018
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-229
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994......................... $(24) $(13,287) $(13,311)
Net income....................................... 132 13,018 13,150
Capital distributions............................ (21) (2,084) (2,105)
---- -------- --------
Balance, December 31, 1995......................... 87 (2,353) (2,266)
Net income....................................... 184 18,265 18,449
Capital distributions............................ (50) (4,964) (5,014)
---- -------- --------
Balance, December 31, 1996......................... 221 10,948 11,169
Net income....................................... 164 16,252 16,416
Investor note payments........................... -- 47 47
Capital distributions............................ (78) (7,706) (7,784)
---- -------- --------
Balance, December 31, 1997......................... $307 $ 19,541 $ 19,848
==== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-230
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 16,416 $ 18,449 $ 13,150
Extraordinary item............................ 3,061 -- --
--------- -------- --------
Income before extraordinary item.............. 19,477 18,449 13,150
Noncash items:
Depreciation and amortization............... 10,601 9,693 11,739
Minority interest in income................. 2,579 2,648 1,718
Amortization of deferred financing costs as
interest................................... 519 519 1,041
Loss on disposal of property and equipment.. -- 6 48
Changes in operating accounts:
Payment of deferred incentive management
fees....................................... (2,046) (1,474) (1,972)
Due from Marriott International, Inc. ...... 1,202 (1,964) (360)
Accounts payable and accrued interest....... (595) (292) 325
Due to Host Marriott Corporation............ 21 47 62
Prepaid ground rent and other receivables... -- -- 4
--------- -------- --------
Cash provided by operating activities..... 31,758 27,632 25,755
--------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment........... (10,326) (9,732) (6,123)
Changes in property improvement funds......... (2,514) 821 (1,748)
Withdrawal from capital reserve escrow........ -- -- 949
--------- -------- --------
Cash used in investing activities......... (12,840) (8,911) (6,922)
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from mortgage debt................... 152,000 -- --
Repayments of mortgage debt and capital lease
obligations.................................. (147,013) (8,901) (8,970)
Capital distributions to partners............. (7,777) (5,007) (2,105)
Proceeds from (repayments of) notes payable to
Marriott International, Inc. ................ 2,909 (486) (485)
Repayments to Host Marriott Corporation....... (2,294) (4,126) (2,727)
Payment of financing costs.................... (2,004) (40) (2,254)
Capital distributions to minority interest.... (1,980) (2,104) (1,485)
Payment of prepayment penalty................. (1,919) -- --
Payment of loan deposit....................... (1,800) -- --
Collection of investor notes receivable....... 47 -- --
--------- -------- --------
Cash used in financing activities......... (9,831) (20,664) (18,026)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 9,087 (1,943) 807
CASH AND CASH EQUIVALENTS at beginning of year.. 1,607 3,550 2,743
--------- -------- --------
CASH AND CASH EQUIVALENTS at end of year........ $ 10,694 $ 1,607 $ 3,550
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Cash paid for mortgage and other interest..... $ 20,894 $ 21,390 $ 20,893
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-231
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed on August 22, 1984, to acquire,
construct, own and operate the 1,503-room Marriott Orlando World Center Hotel
(the "Orlando World Center"). The Orlando World Center is managed as part of
the Marriott Hotels, Resorts and Suites full-service hotel system by Marriott
International, Inc. (the "Manager" or "Marriott International").
Between November 1, 1985 and November 27, 1985 (the "Closing Date"), 1,000
limited partnership interests (the "Units"), representing a 99% interest in
the Partnership, were sold in a private placement. The limited partners paid
$10,000,000 in cash on the Closing Date with the remainder due in five annual
installments through May 15, 1990. The limited partners' obligations to make
the installment payments were evidenced by promissory notes totaling
$45,350,000 payable to the Partnership and secured by the Units. The general
partner is Hotel Properties Management, Inc. (the "General Partner"), a
wholly-owned subsidiary of Host Marriott Corporation, with a 1% general
partnership interest.
On the Closing Date, the Partnership purchased from affiliates of Host
Marriott (i) a 99% limited partnership interest in the Warner Center Marriott
Hotel Limited Partnership (the "Warner Center Partnership"), which owned the
473-room Warner Center Marriott Hotel (the "Warner Center Hotel") in Los
Angeles, California and (ii) a 49% general partnership interest in, and a loan
receivable of $3,680,000 from, Lauderdale Beach Association (the "Harbor Beach
Partnership"), a general partnership that owns Marriott's 624-room Harbor
Beach Resort (the "Harbor Beach Hotel") in Ft. Lauderdale, Florida. As a
result of certain transactions, the Partnership now owns a 50.5% interest in
the Harbor Beach Partnership. The Harbor Beach Hotel is leased to Marriott
Hotel Services, Inc. (the "Operating Tenant"), a wholly-owned subsidiary of
Marriott International. On November 17, 1993, the lender foreclosed on the
Warner Center Hotel. The foreclosure was followed by the dissolution of the
Warner Center Partnership.
On January 14, 1997, MHP Acquisition Corporation (the "Company"), a wholly-
owned subsidiary of Host Marriott, completed a tender offer for limited
partnership units in the Partnership. The Company purchased 463.75 units for
an aggregate consideration of $37.1 million or $80,000 per unit. Additionally,
in a Partnership vote held in conjunction with the tender offer, the limited
partners approved all of the proposed amendments to the partnership agreement
that were conditions to the tender offer. Subsequent to the tender offer, the
Company purchased an additional 8 units on March 29, 1997 and one unit on June
21, 1997. Combined with its prior ownership position, Host Marriott now
indirectly owns, through affiliates, 48.84% of the Partnership.
Partnership Allocations and Distributions
The Partnership generally allocates net profits and losses, cash available
for distribution and tax credits as follows: (i) first, 1% to the General
Partner and 99% to the limited partners until cumulative distributions of sale
and refinancing proceeds ("Capital Receipts") equal to 50% of capital
contributions have been distributed; (ii) next, 15% to the General Partner and
85% to the limited partners until cumulative distributions of Capital Receipts
equal to all capital contributions have been distributed; and (iii)
thereafter, 30% to the General Partner and 70% to the limited partners.
Capital Receipts not retained by the Partnership will generally be
distributed (i) first, 1% to the General Partner and 99% to the limited
partners until the General Partner and the limited partners (collectively the
"Partners") have received cumulative distributions of Capital Receipts equal
to their capital contributions; and (ii) thereafter, 30% to the General
Partner and 70% to the limited partners.
F-232
<PAGE>
Gains are generally allocated (i) first, to Partners with negative capital
accounts, (ii) next, in amounts necessary to bring each Partner's capital
account balance equal to their invested capital, defined as the excess of
paid-in capital contributions over cumulative distributions of Capital
Receipts, and (iii) thereafter, 30% to the General Partner and 70% to the
limited partners.
Upon the sale of substantially all of the assets, gains and sales proceeds
will be distributed based on a specific allocation, as stated in the
partnership agreement, in order to provide the limited partners (if proceeds
are sufficient) a 15% cumulative return, as defined, to the extent not
previously received from cash distributions.
For financial reporting purposes, net losses of the Partnership are
allocated 1% to the General Partner and 99% to the limited partners.
The Harbor Beach Partnership generally allocates profits and losses, cash
distributions, gains and losses, and Capital Receipts in the ratio of
ownership interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the management agreement discussed in Note 8, the
Partnership is required to provide the Manager with working capital and
supplies to meet the operating needs of the Orlando World Center. The Manager
converts cash advanced by the Partnership into other forms of working capital
consisting primarily of operating cash, inventories, and trade receivables and
payables which are maintained and controlled by the Manager. Upon the
termination of the management agreement, the Manager is required to convert
working capital and supplies into cash and return it to the Partnership. As a
result of these conditions, the individual components of working capital and
supplies controlled by the Manager are not reflected in the accompanying
consolidated balance sheet. As of December 31, 1997 and 1996, $4,707,000 has
been advanced to the Manager for working capital and supplies which is
included in "Due from Marriott International, Inc." on the accompanying
consolidated balance sheet. The supplies advanced to the Manager are recorded
at their estimated net realizable value. As of December 31, 1997 and 1996,
accumulated amortization related to the revaluation of these supplies totaled
$762,000.
Revenues and Expenses
Hotel Revenues represents house profit from the Orlando World Center since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Orlando World Center to the
Manager. House profit reflects hotel operating results which flow to the
Partnership as property owner and represents gross hotel sales less property-
level expenses, excluding depreciation and amortization, base and incentive
management fees, real and personal property taxes, ground and equipment rent,
insurance and certain other costs, which are disclosed separately in the
consolidated statement of operations (see Note 3).
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to
F-233
<PAGE>
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements." EITF 97-2 addresses the circumstances in
which a management entity may include the revenues and expenses of a managed
entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $74.6 million, $70.0 million and $67.1 million for the year
ended December 31, 1997, 1996 and 1995, respectively, and will have no impact
on operating profit or net income.
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 1997,
1996 and 1995 include the accounts of the Partnership and the Harbor Beach
Partnership (collectively the "Partnerships"). The 49.5% general partnership
interest in the Harbor Beach Partnership owned by an unrelated party is
reported as minority interest. All significant intercompany balances and
transactions have been eliminated.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the following estimated
useful lives of the assets, less a 10% estimated residual value on the
original building cost and land improvements related to the Orlando World
Center:
<TABLE>
<S> <C>
Land improvements............................................. 40 to 50 years
Building and improvements..................................... 40 to 50 years
Leasehold improvements........................................ 40 years
Furniture and equipment....................................... 3 to 10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership and the Harbor Beach Partnership assess the impairment of
their real estate properties based on whether estimated future undiscounted
cash flow from such properties on an individual hotel basis will be less than
their net book value. If a property is impaired, its basis is adjusted to fair
market value.
Deferred Financing Costs
Prior to 1997, deferred financing costs consisted of costs incurred in
connection with the October 31, 1995 refinancing of the Orlando Mortgage Debt,
described in Note 6. Deferred financing costs associated with this refinancing
totaled $2,316,000. On December 31, 1997, the Partnership refinanced the
Orlando Mortgage Debt and incurred financing costs of $2,004,000. The deferred
financing costs are amortized over the period of the debt using the straight-
line method which approximates the effective interest rate method. The net
deferred financing costs associated with the 1995 refinancing of $1,142,000
were amortized on December 31, 1997 and are reflected as part of the
extraordinary loss on the consolidated statement of operations. Deferred
financing costs associated with the restructuring of the Harbor Beach Mortgage
Debt (see Note 6) amounted to $350,000. Accumulated amortization of deferred
financing costs was $224,000 and $879,000 at December 31, 1997 and 1996,
respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
F-234
<PAGE>
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives of the assets,
differences in the timing of the recognition of base and incentive management
fee expense and the expensing of certain costs incurred during construction
which have been capitalized in the accompanying financial statements. As a
result of these differences, the excess of the tax basis in net Partnership
liabilities over the net liabilities reported in the accompanying financial
statements amounted to $109,961,000 and $100,739,000 as of December 31, 1997
and 1996, respectively.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 has not had an
effect on the consolidated financial statements.
NOTE 3. HOTEL REVENUES
Hotel Revenues consist of hotel operating results for the Orlando World
Center for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $64,277 $59,289 $56,881
Food and beverage................................. 51,424 47,852 45,708
Other............................................. 12,517 13,157 11,762
------- ------- -------
128,218 120,298 114,351
------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................... 12,801 12,201 11,665
Food and beverage............................... 32,391 29,968 28,784
Other hotel operating expenses.................... 29,452 27,606 26,651
------- ------- -------
74,644 69,775 67,100
------- ------- -------
HOTEL REVENUES...................................... $53,574 $50,523 $47,251
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and improvements.................................. $ 31,074 $ 31,074
Building and improvements.............................. 152,560 152,361
Leasehold improvements................................. 82,871 80,841
Furniture and equipment................................ 77,943 69,846
--------- ---------
344,448 334,122
Less accumulated depreciation.......................... (122,232) (111,631)
--------- ---------
$ 222,216 $ 222,491
========= =========
</TABLE>
F-235
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage debt............ $ 235,946 $ 237,725 $ 230,959 $ 233,468
Note payable due to Host
Marriott Corporation.... -- -- 2,294 2,294
Incentive management fees
payable to Marriott In-
ternational, Inc. ...... -- -- 2,046 2,046
Notes payable due to
Marriott International,
Inc. ................... 4,802 4,748 1,893 1,847
</TABLE>
The estimated fair value of mortgage debt is based on the expected future
debt service payments discounted at estimated market rates. Notes payable due
to Host Marriott Corporation and Marriott International, Inc. and incentive
management fees payable to Marriott International, Inc. are valued based on
the expected future payments from operating cash flow discounted at risk-
adjusted rates.
NOTE 6. DEBT
The Partnerships have entered into various long-term loan agreements to
provide nonrecourse mortgage financing for the Hotels. Combined mortgage debt
maturities, at December 31, 1997 are (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 2,965
1999................................................................ 3,346
2000................................................................ 82,049
2001................................................................ 1,748
2002................................................................ 1,884
Thereafter.......................................................... 143,954
--------
$235,946
========
</TABLE>
Orlando Mortgage
On January 12, 1993 (the "Closing Date"), the General Partner refinanced the
Orlando World Center mortgage debt (the "Orlando Mortgage Debt"). On the
Closing Date, the Partnership paid $29.3 million to the lender which was
applied as follows: $12.0 million to the outstanding principal balance, $13.5
million to interest due through the Closing Date and $3.8 million to financing
costs. The Orlando Mortgage Debt carried a fixed rate of interest of 6.705%
and required semi-annual principal amortization totaling $22 million through
its maturity on June 16, 1995 (the "Maturity Date").
On the Maturity Date, the lender granted the Partnership a forbearance on
the loan extending it from June 16, 1995 through October 31, 1995. The
Partnership paid interest monthly in arrears at a floating rate equal to the
applicable Federal Funds rate plus 225 basis points. During the forbearance
period, the weighted average interest rate was 7.94%. On October 31, 1995, the
Partnership successfully completed a modification and extension of the Orlando
Mortgage Debt. The mortgage debt carried a fixed rate of interest of 8.44% and
required semi-annual amortization of principal. The loan was due to mature on
June 16, 2000 with unamortized principal of $127.0 million due at that time.
No debt service guarantee was provided. As of December 31, 1997 and December
31, 1996, the outstanding principal balance was $138,479,000 and $145,479,000,
respectively. The outstanding principal balance was repaid on December 31,
1997 with proceeds from the refinancing discussed below.
F-236
<PAGE>
On October 31, 1997, the General Partner executed a commitment letter with
two new lenders to refinance the Orlando World Center's mortgage debt. The new
loan provides a total borrowing capacity of $240 million.
On December 31, 1997, the Partnership completed the refinancing of the
mortgage debt. The new lenders provided $152 million to pay the outstanding
balance on the existing mortgage and accrued interest of $139.3 million,
related financing costs of $2.0 million, a prepayment penalty of $1.9 million
that has been reflected as part of the extraordinary loss on the accompanying
consolidated statement of operations and the remaining $8.8 million is part of
the Partnership's working capital. The loan requires monthly payments of
interest at a fixed rate of 7.48% and principal based on a 30-year
amortization schedule. The loan matures on January 1, 2008.
The remaining balance of $88 million is available for the construction costs
associated with a 500-room expansion at the Orlando World Center. In
connection with the executed commitment letter, the Partnership advanced $2.4
million to the lender as a good faith deposit. Upon completion of the $152
million portion of the loan, the lender returned $600,000 of this deposit. The
remaining $1.8 million will be returned to the Partnership upon completion of
construction. The General Partner is currently working with the lender to
finalize the documents related to this construction loan.
The refinanced mortgage debt is secured by the Orlando World Center, the
land on which the Orlando World Center and golf course are located and an
assignment of certain operating agreements.
Harbor Beach Mortgage
The original Harbor Beach loan agreement provided $86.6 million for
construction of the Harbor Beach Hotel. On June 30, 1986, this debt was
refinanced with a major insurance company. The $92 million replacement loan
(the "Harbor Beach Mortgage Debt") bore interest at a fixed rate of 9.375% and
required payments of interest only through July 1988 and monthly payments of
principal and interest in the amount of $765,000 thereafter until maturity on
July 1, 1993. Upon maturity, the lender granted the Harbor Beach Partnership a
forbearance of the loan for a fee of $165,000. Under the forbearance
agreement, the Harbor Beach Partnership continued to pay the lender through
March 29, 1994, payments of principal and interest in accordance with the
terms of the Harbor Beach Mortgage Debt.
On March 29, 1994 (the "Closing Date"), the Harbor Beach Partnership
completed the restructuring of the Harbor Beach Mortgage Debt. The
restructured mortgage debt carries a fixed rate of interest of 9.125% (the
"Contract Interest Rate") and is payable monthly in arrears. Interest only at
the Contract Interest Rate was due and payable for the first twelve payments
through and including April 1, 1995. For the period from the Closing Date
through April 1, 1995, the difference between the interest only payment and
$772,600 (the "Payment Amount") was contributed to an escrow account with the
lender to fund capital improvements at the Harbor Beach Hotel. The Payment
Amount represents the amount necessary to amortize the outstanding principal
balance, as of the Closing Date, over a 22-year effective amortization period.
The loan matures on May 1, 2000. The restructured mortgage debt is
collateralized by all property and assets of the Harbor Beach Hotel. No debt
service guarantee was provided. As of December 31, 1997 and 1996, the
outstanding principal balance was $83,946,000 and $85,480,000, respectively.
Orlando Ballroom Loan
During 1990, Host Marriott agreed to provide interim financing of up to $14
million to fund the construction of a new ballroom and exhibition hall at the
Orlando World Center. Construction was completed in February 1990. On December
31, 1990, the interim financing was converted to a permanent loan from Host
Marriott with $13.2 million advanced. Interest only, at the Bankers Trust
Company prime rate, was payable from the Partnership's cash flow after debt
service. On June 16, 1992, in conjunction with the refinancing of the Orlando
Mortgage Debt, the Orlando ballroom loan was converted from a term loan to a
revolving line of credit with a floating interest rate equal to the Bankers
Trust Company prime rate. As of December 31, 1996, the outstanding principal
balance was $2,294,000. The remaining outstanding principal balance was paid
in full on June 24, 1997.
F-237
<PAGE>
The weighted average effective interest rate for the period from January 1,
1997 through June 24, 1997 and for the years ended December 31, 1996 and 1995
was 8.4%, 8.3% and 8.8%, respectively (rate as of June 24, 1997 and December
31, 1996 was 8.5% and 8.3%, respectively).
Orlando Rooms Renovation Loan
During 1997, the Partnership entered into a loan agreement (the "Orlando
Rooms Renovation Loan") with Marriott International Capital Corporation
("MICC"), a wholly-owned subsidiary of Marriott International, in conjunction
with a rooms and suites refurbishment at the Orlando World Center. The loan
provided financing of $3.5 million. The loan requires payments of principal
and interest to be paid from the Orlando World Center property improvement
fund. This unsecured loan carries a fixed interest rate of 9% and matures on
June 16, 1999. The outstanding principal balance was $3,472,000 on December
31, 1997.
Harbor Beach Rooms Renovation Loan
On July 21, 1994, the Harbor Beach Partnership entered into a loan agreement
with MICC in conjunction with a rooms and suites refurbishment at the Harbor
Beach Hotel. The loan provided financing of up to $2.8 million, plus accrued
interest through December 31, 1994, to fund costs in excess of funds available
in the Harbor Beach Partnership's property improvement fund. This unsecured
loan carries a fixed rate of interest of 8%. Accrued interest totaling $64,000
was rolled into the principal balance at December 31, 1994. Payments of
principal and interest based upon a five-year amortization period commenced in
January 1995. Under the terms of the loan, the debt service payments are
included as a deduction in determining the fees paid to the Operating Tenant,
as described in Note 8. As of December 31, 1997 and 1996, the outstanding
principal balance was $1,330,000 and $1,893,000, respectively. Interest earned
by MICC was $128,000, $171,000 and $211,000 in 1997, 1996 and 1995,
respectively.
NOTE 7. LEASES
The Harbor Beach Partnership, through an assignment of a lease on January
15, 1982, acquired all rights to a 99-year lease with a 25-year renewal option
for the land on which the Harbor Beach Hotel is located. On April 28, 1993,
the lessor sold its rights under the lease to an unrelated party. A provision
under the sale of the lease provided for the early refund to the Harbor Beach
Partnership of the remaining $1,250,000 balance of an initial $2,500,000
security deposit paid to the lessor and a $500,000 payment to facilitate the
modification of the lease.
Lease payments are made quarterly in advance in accordance with a lease year
that operates from December 1 through November 30. The annual rental is
$1,560,000 for lease years 1995 through 1999. After lease year 1999, annual
rentals for each succeeding five-year period increase by an amount equal to
10% of the previous annual rental.
Minimum annual rentals during the term of the ground lease are (in
thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998............................................................... $ 1,560
1999............................................................... 1,573
2000............................................................... 1,716
2001............................................................... 1,716
2002............................................................... 1,716
Thereafter......................................................... 311,043
--------
Total Minimum Lease Payments....................................... $319,324
========
</TABLE>
F-238
<PAGE>
NOTE 8. MANAGEMENT AND OPERATING LEASE AGREEMENTS
The Partnership has entered into a long-term management agreement with the
Manager, and the Harbor Beach Partnership has entered into a long-term
operating lease with the Operating Tenant. The Hotels are operated as part of
the Marriott Hotels, Resorts and Suites full-service hotel system. Significant
provisions under the agreements are as follows:
Orlando World Center. The management agreement provides for an initial term
of 25 years, commencing with the opening of the Orlando World Center (March
24, 1986), and five 10-year renewals at the Manager's option. The Manager is
paid a base management fee of 3% of gross hotel sales and is also entitled to
an incentive management fee equal to 20% of operating profit, as defined, and
an additional incentive management fee equal to 30% of the following amount:
(i) 80% of operating profit in each fiscal year less (ii) the greater of (a)
$25,000,000 or (b) debt service plus $7,000,000. Payment of the incentive
management fee is subordinate to debt service and retention of specified
amounts of operating profit by the Partnership. Unpaid incentive management
fees are deferred without interest and are payable from future operating cash
flow, as defined, but are due upon termination of the management agreement
only if the termination is the result of a default by the Partnership. Unpaid
incentive management fees as of December 31, 1996 were $2,046,000 which were
paid in 1997. Therefore, there were no unpaid incentive management fees as of
December 31, 1997. In addition, based on higher cash flow from the Orlando
Hotel, the Manager earned additional incentive management fees in 1997 which
were paid during the year.
Under the management agreement, the Manager is required to furnish the
Orlando World Center with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott full-service 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 full-service
hotels managed, owned or leased by Marriott International or its subsidiaries.
In addition, the Hotel participates in Marriott International's Marriott
Rewards Program ("MRP"). This program was formerly known as the Honored Guest
Awards Program ("HGA"). The cost of this program is charged to all hotels in
the Marriott hotel system based upon the MRP sales at each hotel. The total
amount of Chain Services and MRP costs allocated to the Orlando World Center
was $3,149,000, $3,588,000, and $3,336,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Harbor Beach Hotel. The operating lease provides for an initial 36-year term
commencing with the opening of the Harbor Beach Hotel (October 29, 1984), with
options to renew for six successive 10-year periods based on certain defined
conditions. The annual rental paid to the Harbor Beach Partnership includes
the following:
. basic rental: annual rental payable under the land lease and insurance
costs
. percentage rental: determined by multiplying the applicable percentage
set annually by the Harbor Beach Partnership by revenues
. performance rental: first $9,720,000 of operating profit of the Harbor
Beach Hotel, as defined
. additional performance rental: 50% of operating profit of the Harbor
Beach Hotel, as defined, in excess of $9,720,000
. contingent rental: up to 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000 if the aggregate annual
rental is otherwise insufficient to cover debt service.
Pursuant to the terms of the Harbor Beach rooms renovation loan (see Note
6), the annual performance rental is adjusted upward by the annual debt
service required under the loan. For the five-year period beginning with 1995
and ending in 1999, annual performance rental is increased by $696,557 to
$10,416,557. Subsequent to year-end 1999, performance rental will return to
$9,720,000.
F-239
<PAGE>
Percentage rental is intended to cover the cost of utilities, repairs and
maintenance, and the required contribution to the property improvement fund
(5% of sales) and is therefore adjusted annually in order to equal the actual
applicable costs. Any payments of contingent rental reduce future payments of
additional performance rental (subject to limitations) in subsequent years. No
contingent rental has been accrued as of December 31, 1997 and 1996.
Rental income under the Harbor Beach Partnership operating lease for the
three years ended December 31, 1997 was (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic Rental........................................ $ 1,712 $ 1,694 $ 1,616
Percentage Rental................................... 6,284 6,240 5,921
Performance Rental.................................. 10,417 10,417 10,417
Additional Performance Rental....................... 3,224 2,960 1,793
------- ------- -------
$21,637 $21,311 $19,747
======= ======= =======
</TABLE>
Cost and accumulated depreciation of the rental property were $103,110,000
and $41,299,000 at December 31, 1997, and $100,647,000 and $37,279,000,
respectively, at December 31, 1996.
Property Improvement Funds
The management agreement and the operating lease provide for the
establishment of a property improvement fund for each of the Hotels.
Contributions to the property improvement funds are equal to five percent of
gross sales of each hotel. Contributions to the fund for the Orlando World
Center totaled $6,411,000 and $6,015,000 for the years ended December 31, 1997
and 1996, respectively. Contributions to the fund for the Harbor Beach Hotel
totaled $2,730,000 and $2,729,000 for the years ended December 31, 1997 and
1996, respectively.
NOTE 9. COMPARATIVE LEASED HOTEL OPERATING RESULTS
The Harbor Beach Hotel is a leased property whose income to the Partnership
is included in the consolidated statement of operations as rental income. The
following is a comparative summary of hotel operating results for the Harbor
Beach Hotel for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $32,322 $30,939 $28,384
Food and beverage................................. 20,668 20,764 19,366
Other............................................. 5,089 5,016 4,857
------- ------- -------
58,079 56,719 52,607
------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................... 5,882 5,566 5,332
Food and beverage............................... 12,937 12,664 12,140
Other hotel operating expenses.................... 22,395 22,151 21,219
------- ------- -------
41,214 40,381 38,691
------- ------- -------
HOTEL REVENUES...................................... $16,865 $16,338 $13,916
======= ======= =======
</TABLE>
F-240
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $220,939 $222,216
Due from Marriott International, Inc. and affiliates.. 9,012 7,912
Minority interest..................................... 7,924 10,042
Other assets.......................................... 12,022 10,245
Cash and cash equivalents............................. 28,367 10,694
-------- --------
$278,264 $261,109
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt....................................... $237,183 $235,946
Notes payable and amounts due to Marriott Interna-
tional, Inc. and affiliates........................ 3,780 4,987
Accounts payable and accrued interest............... 1,129 196
Amounts due to Host Marriott Corporation............ 21 132
-------- --------
Total Liabilities................................. 242,113 241,261
-------- --------
PARTNERS' CAPITAL
General Partner..................................... 470 307
Limited Partners.................................... 35,681 19,541
-------- --------
Total Partners' Capital........................... 36,151 19,848
-------- --------
$278,264 $261,109
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-241
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Hotel................................................... $ 32,957 $ 30,867
Rental income........................................... 15,011 15,006
--------- ---------
47,968 45,873
--------- ---------
OPERATING COSTS AND EXPENSES
Incentive management fees............................... 6,328 6,187
Depreciation and amortization........................... 4,892 4,561
Base management fees.................................... 2,095 2,024
Ground rent, property taxes and other................... 4,538 4,368
--------- ---------
17,853 17,140
--------- ---------
OPERATING PROFIT.......................................... 30,115 28,733
Interest expense........................................ (9,199) (9,893)
Other revenue........................................... 505 285
--------- ---------
INCOME BEFORE MINORITY INTEREST........................... 21,421 19,125
MINORITY INTEREST IN INCOME............................... (3,603) (3,782)
--------- ---------
NET INCOME................................................ $ 17,818 $ 15,343
========= =========
ALLOCATION OF NET INCOME
General Partner......................................... $ 178 $ 153
Limited Partners........................................ 17,640 15,190
--------- ---------
$ 17,818 $ 15,343
========= =========
NET INCOME PER LIMITED PARTNER UNIT (1,000 Units)......... $ 17,640 $ 15,190
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-242
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 17,818 $ 15,343
Noncash items.......................................... 8,614 8,582
Changes in operating accounts.......................... (370) 1,708
--------- ---------
Cash provided by operating activities................ 26,062 25,633
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment.................... (3,615) (1,481)
Changes in property improvement funds.................. (1,802) (3,590)
--------- ---------
Cash used in investing activities.................... (5,417) (5,071)
--------- ---------
FINANCING ACTIVITIES
Construction loan advances............................. 2,492 --
Principal repayments of mortgage debt.................. (1,255) (4,122)
Capital distributions to partners...................... (1,515) (1,514)
Capital distributions to minority interest............. (1,485) (1,485)
Repayments to Marriott International, Inc. and affili-
ates.................................................. (1,175) (296)
Payment of financing costs............................. (34) --
--------- ---------
Cash used in financing activities.................... (2,972) (7,417)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................... 17,673 13,145
CASH AND CASH EQUIVALENTS at beginning of period......... 10,694 1,607
--------- ---------
CASH AND CASH EQUIVALENTS at end of period............... $ 28,367 $ 14,752
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.............. $ 8,112 $ 9,660
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-243
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Hotel Properties Limited Partnership (the "Partnership")
without audit. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the Partnership's
financial statements and notes thereto included in the Partnership's Form 10-K
for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998, the results of operations and
cash flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
The Partnership owns Marriott's Orlando World Center (the "Orlando Hotel")
and a 50.5% interest in a partnership owning Marriott's Harbor Beach Resort
(the "Harbor Beach Partnership"), whose financial statements are consolidated
herein. The remaining 49.5% general partnership interest in the Harbor Beach
Partnership is reported as minority interest. All significant intercompany
balances and transactions have been eliminated.
For financial reporting purposes, net income and net losses of the
Partnership are allocated 99% to the limited partners and 1% to the general
partner. Significant differences exist between the net income and net losses
for financial reporting purposes and the net income and net losses reported
for Federal income tax purposes. These differences are due primarily to the
use, for income tax purposes, of accelerated depreciation methods, shorter
depreciable lives of the assets, differences in the timing of the recognition
of management fee expense and the deduction of certain costs incurred during
construction which have been capitalized in the accompanying condensed
consolidated financial statements.
2. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
3. Hotel revenues represent house profit from the Orlando Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Orlando Hotel to Marriott
International, Inc. (the "Manager"). House profit reflects hotel operating
results which flow to the Partnership as property owner and represents gross
hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, property taxes and certain
other costs, which are disclosed separately in the condensed consolidated
statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
F-244
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $36.9 million and $36.6 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
Hotel revenues consist of hotel operating results for the Orlando Hotel for
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- -------
<S> <C> <C>
HOTEL SALES
Rooms..................................................... $35,167 $34,365
Food and beverage......................................... 28,201 26,476
Other..................................................... 6,480 6,614
------- -------
69,848 67,455
------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................................... 6,392 6,477
Food and beverage....................................... 16,820 16,025
Other hotel operating expenses............................ 13,679 14,086
------- -------
36,891 36,588
------- -------
HOTEL REVENUES.............................................. $32,957 $30,867
======= =======
</TABLE>
4. Rental income under the Harbor Beach Partnership operating lease for the
first two quarters was (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- -------
<S> <C> <C>
Basic rental................................................ $ 806 $ 771
Percentage rental........................................... 3,279 3,513
Performance rental.......................................... 10,417 10,417
Additional performance rental............................... 509 305
------- -------
RENTAL INCOME............................................... $15,011 $15,006
======= =======
</TABLE>
5. On April 15, 1998, the Partnership successfully completed the financing
for the expansion of the Orlando World Center (the "Construction Loan"). The
lender is obligated to provide up to $88 million to fund costs related to the
construction of a 500-room tower, new parking garage, expansion of the
existing JW's Steakhouse restaurant, redesign of the existing golf course and
construction of 15,000 square feet of additional meeting space. During the
construction period, the Partnership is required to make monthly payments of
principal and interest at the fixed interest rate of 7.48% with such interest
payments funded by the Construction Loan. Principal payments will be funded by
hotel operations. Upon completion of the expansion, the Partnership will be
required to pay principal and interest at the fixed interest rate of 7.48%
amortized over the remaining term of the Construction Loan. The Construction
Loan matures on January 1, 2008. As of June 19, 1998, the Partnership has
received Construction Loan advances of $2.5 million which were used to pay
construction costs.
6. On April 17, 1998, Host Marriott, parent company of the General Partner
of the Partnership, announced that its Board of Directors authorized Host
Marriott to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999. As part
of the REIT conversion, Host
F-245
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marriott formed a new operating partnership (the "Operating Partnership"), and
limited partners in certain Host Marriott full-service hotel partnerships and
joint ventures, including the Partnership, are expected to be given an
opportunity to receive, on a tax-deferred basis, Operating Partnership units
in the new Operating Partnership in exchange for their current limited
partnership interests. The Operating Partnership units would be redeemable by
the limited partner for freely traded Host Marriott shares (or the cash
equivalent thereof) at any time after one year from the closing of the merger.
In connection with the REIT conversion, on June 2, 1998, the Operating
Partnership filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
F-246
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and the First Two Quarters 1997.
The following data should be read in conjunction with audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 37,946 $ 36,584 $ 69,014 $ 66,292 $ 64,002 $ 58,703 $ 57,003
Operating profit........ 18,894 18,609 31,782 30,280 28,579 25,929 24,581
Net income.............. 12,756 11,851 17,014 14,811 13,045 8,428 6,869
Distributions:
General partner....... 112 99 225 185 113 113 117
Limited partners...... 11,074 9,776 22,260 18,339 11,175 11,232 11,609
--------- --------- ---------- ---------- ---------- ---------- ----------
Total............... 11,186 9,875 22,485 18,524 11,288 11,345 11,726
Per Partnership Unit:(1)
Net income............ 16,952 15,748 22,609 19,682 17,336 11,200 9,128
Distributions......... 14,864 13,123 29,879 24,616 15,000 15,077 15,583
Cash provided by 14,130 17,484 29,979 28,664 27,008 20,895 22,688
operating activities...
Cash used in investing
activities............. (4,622) (3,704) (8,034) (5,722) (11,883) (7,925) (5,024)
Cash used in financing
activities............. (11,971) (12,048) (27,954) (28,171) (11,288) (11,345) (11,695)
(Decrease) increase in
cash and cash
equivalents............ (2,463) 1,732 (6,009) (5,229) 3,837 1,625 5,969
Ratio of earnings to
fixed charges
(unaudited)(2)......... 2.19x 2.09x 1.72x 1.66x 1.50x 1.40x 1.33x
Total assets at book
value.................. 245,957 255,053 249,418 251,740 254,113 250,461 254,184
Cash and cash
equivalents............ 7,900 18,104 10,363 16,372 21,601 17,764 16,139
Total debt.............. 219,644 222,500 221,814 222,500 222,500 222,500 222,500
Total liabilities....... 233,250 236,469 238,281 235,132 233,792 231,897 232,703
Partner's capital:
Limited partners...... 12,435 18,253 10,881 16,297 19,973 18,233 21,121
General partner....... 272 331 256 311 348 331 360
Book value per
Partnership Unit
(unaudited)(1)......... 16,691 24,501 14,605 21,875 26,809 24,474 28,350
Exchange value per
Partnership Unit
(unaudited)(1)......... 237,334 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP2.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest.
F-247
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
REVPAR, or revenue per available room, represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. The following charts
summarize REVPAR and the percentage change from the prior year for each
Partnership Hotel for the first two quarters 1998 and 1997:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
-------------------------------
1998 1997
--------------- ---------------
REVPAR % CHANGE REVPAR % CHANGE
------ -------- ------ --------
<S> <C> <C> <C> <C>
San Antonio..................................... $136 8% $126 5%
New Orleans..................................... 109 -- 109 5%
San Ramon....................................... 105 15% 91 12%
Santa Clara..................................... 138 14% 121 24%
---- --- ---- ---
Combined Average................................ $123 8% $114 8%
==== === ==== ===
</TABLE>
Revenues. Partnership revenues for the first two quarters 1998 increased by
4% when compared to 1997 results. The increase in overall revenues is
primarily due to a 5% increase in total room sales. For the first two quarters
1998, REVPAR increased 8% as a result of a 11% increase in the combined
average room rate over the same period last year to approximately $153 from
$137 partially offset by a two percentage point decline in combined average
occupancy.
The MARRIOTT RIVERCENTER IN SAN ANTONIO reported a 10%, or $1.7 million,
increase in revenues for the first two quarters 1998 compared to the same
period in 1997. This increase is primarily due to a 9% increase in room
revenues to $22.8 million. Room revenues increased due to an 8% increase in
REVPAR to $136, resulting from a 7% increase in the average room rate to
approximately $154 combined with a slight increase in average occupancy. The
increase in the average room rate is primarily due to more emphasis being
placed on higher-rated transient business versus group business. Hotel
management has accomplished the increase in revenues by monitoring the number
of special corporate accounts and by replacing this business with higher-rated
transient business. The Hotel has begun a major renovation of its ballroom
which will position it to compete more effectively for banquet business in the
future.
Revenues at the NEW ORLEANS MARRIOTT HOTEL decreased 6%, or $990,000, for
first two quarters 1998 when compared to the same period in 1997. The decrease
is primarily due to a 9% decrease in food and beverage revenues and an
increase in other Hotel operating costs. For the first two quarters 1998,
average room rate increased by 6% as compared to the same period in 1997 due
to rate increases in both group and transient room rates. Average occupancy
for the first two quarters 1998 declined by five percentage points to 75%
primarily due to city wide convention group traffic being down significantly
during the first two quarters 1998. Additionally, the rooms renovation project
contributed to the shortfall by creating a lack of room availability. The
lobby and restaurant renovations have now been completed, and the rooms
renovation was completed over the July 4th weekend. In a continuing effort to
replace lost roomnights due to the major conventions rotating to other cities
in 1998, Hotel management is targeting small groups which will also enable
them to increase the average room rate.
Revenues for the first two quarters 1998 at the SAN RAMON MARRIOTT HOTEL
increased 21%, or $637,000 when compared to the same period in 1997. The
increase is due to a 19%, or $820,000, increase in room revenues. Room
revenues increased due to a significant increase in REVPAR. REVPAR increased
15% when compared to 1997 which was attributable to a 21% increase in the
average room rate to approximately $131, while average occupancy fell by four
percentage points to the low-80's. The increase in the average room rate is
F-248
<PAGE>
due to Hotel management's continued success in increasing the corporate rate.
Room margins continue to maintain a 2% premium over the same period in 1997
due to an increase in room rates and cost efficiencies. In addition, sales
promotion efforts instituted an Events Booking Center to capture more of the
group business market.
The SANTA CLARA MARRIOTT HOTEL reported a 22%, or $2.2 million, increase for
the first two quarters 1998 revenues when compared to the same period in 1997.
The increase is primarily due to a 14% increase in room revenues and a 14%
increase in food and beverage revenues. Room revenues increased due to a 19%
increase in the average room rate to approximately $172, deriving a 14%
increase in REVPAR, while average occupancy decreased four percentage points
to the low-80's. The overall increase in the average room rate is supported by
an increase in regular corporate rates. Hotel management is striving to
improve occupancy by offering special corporate rates and pursuing room
contracts with local technology companies. Food and beverage revenues
increased primarily due to heavier utilization of the catering facilities by
existing groups, the implementation of a new service charge for meeting room
rental, and effective menu pricing in the Hotel's restaurant. A major rooms
renovation is planned for the Hotel this year with work scheduled to commence
in November and conclude in early 1999.
Operating Costs and Expenses. For the first two quarters 1998, operating
costs and expenses increased by $1.1 million to $19.1 million over the same
period in 1997. Operating costs and expenses increased primarily due to
increases in depreciation expense and property taxes expense.
Operating Profit. For the first two quarters 1998, operating profit
increased $285,000 to $18.9 million primarily due to an increase in revenues
which was partially offset by the increase in operating costs and expenses
discussed above.
Interest Expense. Interest expense decreased slightly for the first two
quarters 1998 compared to the same period in 1997 due to principal
amortization of the Partnership's Mortgage Debt during the first two quarters
1998
Equity in Income of Santa Clara Partnership. For the first two quarters
1998, equity in income of the Santa Clara Partnership increased by $744,000 to
$1.9 million primarily due to improved hotel operations at the Santa Clara
Hotel combined with a slight decrease in interest expense on the Santa Clara
Mortgage Debt.
Net Income. For the first two quarters 1998, net income increased by
$905,000 to $12.8 million. This increase primarily resulted from an increase
in operating profit and in equity in income of the Santa Clara Partnership.
1997 Compared to 1996
Revenues. For 1997, Partnership revenues increased to $69.0 million in 1997
from $66.3 million in 1996 due to significant increases in revenues at the San
Antonio and San Ramon Hotels. REVPAR increased 7% as a result of an 8%
increase in the combined average room rate to $132 while the combined average
occupancy remained stable at 81%. Net income for 1997 increased 15% to $17.0
million from $14.8 million in 1996. The Partnership's equity in income of the
Santa Clara Partnership increased $1.4 million in 1997 when compared to 1996
due to improved operations at the Santa Clara Hotel.
Individual hotel operating results are discussed below:
Marriott Rivercenter in San Antonio
The Marriott Rivercenter in San Antonio reported an 8%, or $2.4 million,
increase in revenues during 1997. This increase in revenues was primarily due
to an 8% increase in REVPAR to approximately $120 coupled with a 12%, or
$789,000, increase in food and beverage revenues. REVPAR increased due to a 7%
increase in the average room rate to approximately $140 combined with a 1.2
percentage point increase in average occupancy
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<PAGE>
to the mid-80's. The increase in the average room rate was due to an increase
in the transient average rate. Because demand has remained strong in the group
business segment, Hotel management has been able to hold out for premium rates
in the transient business segment. Group roomnights increased 6%, or 12,600
roomnights, when compared to the prior year primarily due to the major
conventions rotating back into San Antonio this year. Food and beverage
revenues increased primarily due to an increase in banquet sales as a result
of a shift in customer mix to corporate business. Although faced with the
challenge of increased competition with the openings of the Adams Mark Hotel
and the Residence Inn Alamo Plaza, Hotel management is optimistic that 1998
will be another strong year for the Hotel.
Santa Clara Marriott Hotel
The Partnership's Northern California Hotels both reported significant
increases in revenues during 1997. The Santa Clara Marriott Hotel reported a
25%, or $4.4 million, increase in revenues during 1997 when compared to 1996
results. The increase in revenues is primarily due to a 23% increase in REVPAR
to $118 as the average room rate increased 24% to approximately $147 with
average occupancy remaining stable in the low-80's. The increase in the
average room rate is the result of strong transient demand throughout the
market which has allowed the Hotel to maximize room rates in both the
transient and group business segments. Transient roomnights increased by
approximately 9,000 roomnights, a 6% increase when compared to the prior year.
Hotel management is optimistic that demand in the Silicon Valley region will
remain high throughout 1998. With no new full-service competition expected in
the coming year, Hotel management will continue its strategies of maximizing
rates and effectively managing their customer mix.
San Ramon Marriott
The San Ramon Marriott reported a 12% increase in revenues, or $706,000, for
1997 when compared to 1996. This increase was due to a 14% increase in REVPAR
to $92 as the average room rate increased 15% to approximately $111 partially
offset by a slight decrease in average occupancy to the low-80's. The increase
in the average room rate was achieved primarily as a result of an increase in
the corporate rate. In 1997, 225 limited service rooms were added to the
market and another 640 are expected to be added by June 1998. However, a
number of companies are filling the existing office space in the area and the
space currently under construction is already substantially committed. Hotel
management is optimistic that 1998 will be another successful year.
New Orleans Marriott Hotel
The New Orleans Marriott Hotel reported a slight decrease in revenues in
1997 when compared to 1996 results due to a 2%, or $904,000, decrease in room
revenues which was significantly offset by a 20%, or $783,000, increase in
food and beverage revenues. REVPAR remained stable at $97 due to a 2% increase
in the average room rate to approximately $127 partially offset by a 1.3
percentage point decrease in average occupancy to the mid-70's. The increase
in the average room rate is due to growth in the group business segment. While
group roomnights were down 8,300 roomnights in 1997 when compared to 1996, the
group mix shifted to higher-rated association business. The decrease in
average occupancy is due to the lack of city-wide groups over the summer
months. This cycle generally repeats itself every three years as it is
affected by the tradition of the conventions, which meet in different cities
on an alternating basis. Food and beverage revenues increased when compared to
the prior year primarily as a result of Super Bowl XXXI taking place in New
Orleans in January 1997. This event generated significant catering and audio
visual revenues. In addition, food and beverage revenues increased due to the
shift in customer mix to association business which more heavily utilized the
catering facilities. The Hotel is currently undergoing a complete rooms
refurbishment at an approximate cost of $13.0 million which is scheduled to be
completed in July 1998.
Operating Costs and Expenses: In 1997, operating costs and expenses
increased $1.2 million to $37.2 million primarily due to an increase in ground
rent, insurance and other. In 1997, ground rent, insurance and other increased
to $1.8 million in 1997 from $893,000 in 1996 primarily due to a loss on the
retirement of assets as a significant number of assets were retired at the New
Orleans Hotel in conjunction with the refurbishment of
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<PAGE>
the guest rooms, an increase in general and administrative expenses and an
increase in ground rent expense associated with improved hotel operations. As
a percentage of revenues, operating costs and expenses represented 54% of
revenues for 1997 and 1996.
Operating Profit: In 1997, operating profit increased $1.5 million to $31.8
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 46% in 1997 and 1996.
Equity in Income of Santa Clara Partnership: In 1997, equity in income of
the Santa Clara Partnership increased to $2.0 million in 1997 from $665,000 in
1996 primarily due to improved hotel operations at the Santa Clara Hotel,
while interest expense increased only slightly from year to year on the Santa
Clara Mortgage Debt.
Net Income: In 1997, net income increased to $17.0 million in 1997 from
$14.8 million in 1996 primarily due to improved Hotel revenues and an increase
in equity in income of the Santa Clara Partnership.
1996 Compared to 1995
Revenues. For 1996, Partnership revenues increased from $64.0 million in
1995 to $66.3 million in 1996 due to a 4% increase in REVPAR. REVPAR increased
primarily due to a 5% increase in the combined average room rate to $123 while
the combined average occupancy remained stable at 81%. Net income for 1996
increased 14% to $14.8 million from $13.0 million in 1995. Interest expense
increased slightly due to refinancing expenses incurred with the extension of
the Original Mortgage Debt which are reflected as interest expense in the
accompanying statement of operations. The Partnership's equity in income of
the Santa Clara Partnership increased $546,000 in 1996 when compared to 1995
due to improved operations at the Santa Clara Hotel.
Individual hotel operating results are discussed below:
New Orleans Marriott
The New Orleans Marriott reported a 4% increase in revenues during 1996. The
increase was due to a 3% increase in REVPAR partially offset by a 3% decrease
in food and beverage revenues. REVPAR increased due to a 4% increase in
average room rate to approximately $125 while average occupancy remained
stable in the high-70's. The decline in food and beverage revenues was
primarily due to decreases in banquet sales.
Marriott Rivercenter in San Antonio
The Marriott Rivercenter in San Antonio reported a slight increase in
revenues during 1996 due to a 2% increase in REVPAR. REVPAR increased due to a
2% increase in average room rate to approximately $130 partially offset by a
1.0 percentage point decrease in average occupancy to the mid-80's.
San Ramon Marriott Hotel
Revenues at the Northern California Hotels increased significantly in 1996
when compared to 1995 results. The San Ramon Marriott Hotel reported a 15%
increase in revenues primarily due to an 11% increase in REVPAR. REVPAR
increased primarily due to an 8% increase in average room rate to
approximately $95 combined with a 1.8 percentage point increase in average
occupancy to the mid-80s.
Santa Clara Marriott Hotel
The Santa Clara Marriott Hotel reported a 19% increase in revenues in 1996.
This increase in revenues was primarily due to an 18% increase in REVPAR as
average room rate increased 14% to approximately $120 combined with a 2.8
percentage point increase in average occupancy to the low-80's.
Operating Costs and Expenses: In 1996, operating costs and expenses
increased $589,000 to $36.0 million. As a percentage of revenues, operating
costs and expenses represented 54% of revenues for 1996 and 55% for 1995.
F-251
<PAGE>
Operating Profit: In 1996, operating profit increased $1.7 million to $30.3
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 46% in 1997 and 45% in 1996.
Interest Expense: In 1996, interest expense increased to $18.3 million from
$17.8 million in 1995, primarily due to the inclusion financing costs incurred
in obtaining the extension of Original Mortgage Debt in March 1996 which were
included as interest expense in 1996.
Equity in Income of Santa Clara Partnership: In 1996, equity in income of
Santa Clara Partnership increased to $665,000 from $119,000 in 1995, primarily
due to improved hotel operations at the Santa Clara Hotel while interest
expense increased only slightly from year to year on the Santa Clara Mortgage
Debt.
Net Income: In 1996, net income increased to $14.8 million from $13.0
million in 1995, primarily due to improved Hotel revenues and an increase in
equity in income of the Santa Clara Partnership.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its operations in the ordinary course of
business.
Mortgage Debt
The Partnership is financed with mortgage debt of $222.5 million which is
nonrecourse to the Partnership and is secured by first mortgages on the
Hotels, as well as a pledge of its limited partner interest in the Santa Clara
Partnership. The mortgage debt bears interest at a fixed rate of 8.22% for an
11-year term expiring October 11, 2007. During the first loan year (October
1996 through September 1997), the mortgage debt required payments of interest
only. Subsequently, principal amortization based upon a 20-year amortization
schedule began. As a result of the required principal amortization, at the end
of the 11-year term, the mortgage debt's principal balance outstanding will
have been reduced $64.4 million. Partnership debt service was $19.2 million
for 1997 and will be $22.6 million annually thereafter until the end of the
11-year term.
The General Partner expects cash flow from the Partnership's Hotels and the
Santa Clara Hotel will be sufficient to provide for the Partnership's and the
Santa Clara Partnership's debt service.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations and
distributions from the Santa Clara Partnership. Its principal uses of cash are
to pay debt service on the Partnership's Mortgage Debt, to fund the property
improvement funds of the Hotels, to establish reserves required by the lender
and to make cash distributions to the partners. Additionally, in 1996, the
Partnership received cash from the General Partner Reserve and, in 1996 and
1997, utilized cash to pay financing costs incurred in connection with the
refinancing of the Partnership's Mortgage Debt and the Santa Clara Mortgage
Debt.
Total cash provided from operations was $30.0 million, $28.7 million and
$27.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The General Partner Reserve provided total cash of $25.7 million
for the year ended December 31, 1996. Debt service paid on the Partnership's
Mortgage Debt was $19.2 million, $17.2 million and $17.3 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Total cash provided by
operating activities was $14.1 million and $17.5 million for the first two
quarters 1998 and 1997, respectively. This decrease was due to a change in
operating accounts partially offset by an increase in net income.
Cash used in investing activities increased to $8.0 million in 1997 from
$5.7 million in 1996 primarily due to an increase in property and equipment
expenditures at the New Orleans Hotel associated with the rooms
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<PAGE>
refurbishment. Investing activities for the three years ended December 31,
1997, included the following activities. Distributions from the Santa Clara
Partnership were $2.4 million, $781,000 and $1.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Contributions to the property
improvement funds of the Hotels were $8.2 million, $6.6 million and $6.3
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Contributions to the Santa Clara Partnership property improvement fund were
$2.4 million, $2.0 million and $1.8 million for 1997, 1996 and 1995,
respectively. Cash used in investing activities increased to $4.6 million for
the first two quarters 1998 from $3.7 million for the first two quarters 1997.
Property and equipment expenditures have increased to $2.9 million as compared
to $2.8 million over the same period last year, and the net change in the
property improvement funds of the Hotels was $2.5 million and $1.9 million for
the first two quarters 1998 and 1997, respectively. Contributions to the
property improvement funds of the Hotels were $4.2 million and $4.1 million
for the first two quarters 1998 and 1997, respectively.
Cash used in financing activities decreased slightly to $28.0 million in
1997 from $28.2 million in 1996. Financing activities for the three years
ended December 31, 1997, included the following activities. The various
reserves required by the lender pursuant to the terms of the Partnership's
Mortgage Debt and the Santa Clara Mortgage Debt totaled $6.9 million and $12.8
million for the years ended December 31, 1997 and 1996, respectively. The
change in the reserve accounts includes the $6.9 million deposited into the
reserve accounts for the payment of insurance premiums and real estate taxes
as well as $854,000 of interest earned on the lender reserves reduced by $2.7
million of accrued real estates tax liabilities and $239,000 of capital
expenditure reimbursements. Cash distributed to the partners was $22.5
million, $18.5 million and $11.3 million for the years ended December 31,
1997, 1996 and 1995, respectively. Financing costs related to the refinancing
of the Partnership's Mortgage Debt and the Santa Clara Mortgage Debt totaled
$34,000 and $6.0 million for the years ended December 31, 1997 and 1996,
respectively. There were no financing costs paid in 1995. Cash used in
financing activities were $12.0 million for the first two quarters 1998 and
1997. A net increase in restricted lender reserves was partially offset by
cash utilized to make principal payments of $2.2 million on the Partnership's
Mortgage Debt. Additionally, capital distributions increased to $11.2 million
from $9.9 million for the first two quarters 1998 and 1997, respectively.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational capital needs of the Partnership. In
August 1998, the Partnership will make a cash distribution of $6,700 per
limited partner unit from second quarter 1998 operating cash flow bringing
total distributions year to date from 1998 operating cash flow to $11,700 per
limited partner unit.
The Partnership is required to maintain the Hotels and the Santa Clara Hotel
in good condition. Under each of the Partnership Hotels and the Santa Clara
Hotel management agreements, the Partnership is required to make annual
contributions to the property improvement funds which provide funding for
replacement of furniture, fixtures and equipment. The General Partner believes
the property improvement funds, as adjusted in the case of the New Orleans
Hotel, and the capital reserves established in conjunction with the
refinancing will be adequate for the future capital repairs and replacement
needs of the Hotels and the Santa Clara Hotel. As previously reported, the
escrow contribution percentage for the New Orleans Marriott Hotel increased
from 5% to 7% in late 1997 and will continue at 7% through 1998 to allow for
adequate funding of the total rooms refurbishment of its guest rooms. This
project was completed in July 1998, and during the refurbishment, the Hotel
replaced the carpeting, bedspreads, upholstery, drapes and other similar items
as well as the dressers, chairs, beds and other furniture in the guest rooms.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the Partnership. Including the
final 1997 distribution made in April 1998 of $9,864 per limited partner unit,
the Partnership distributed $26,621 per limited partner unit from 1997
operating cash flow. This represents a 26.6% annual return on invested
capital. In addition, in May 1998, the Partnership made a cash distribution of
$5,000 per limited partner unit from the First Quarter 1998 operating cash
flow. Prospectively, the Partnership expects to increase
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<PAGE>
distribution frequency from its historic bi-annual distributions if operating
results and forecasts indicate it is warranted. In addition, the General
Partner believes the property improvement funds, as adjusted in the case of
the New Orleans Hotel, and the capital reserves established in conjunction
with the refinancing will be adequate for the future capital repairs and
replacement needs of the Hotels.
INFLATION
The rate of inflation has been relatively low since the inception of the
Partnership and accordingly, has not had a significant impact on operating
results. However, the Hotels and the Santa Clara's room rates and occupancy
are inflation sensitive. The Manager is generally able to pass through
increased costs to customers through higher room rates. In 1997, the increase
in average room rates at the San Antonio, San Ramon and Santa Clara Hotels
exceeded those of direct competitors as well as the general level of
inflation. As stated above, the Mortgage Debt bears a fixed interest rate,
thereby eliminating exposure to the impact of future increases in interest
rates.
YEAR 2000 ISSUES
Over the last few years, Host Marriott, the parent company of the General
Partner, has invested in implementing new accounting systems which are Year
2000 compliant. Accordingly, the General Partner believes that future costs
associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHS, the
Manager of its properties to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
F-254
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Hotel Properties
II Limited Partnership (a Delaware limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
capital and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Hotel Properties
II Limited Partnership as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
March 18, 1998
F-255
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $ 197,512 $ 198,826
Due from Marriott Hotel Services, Inc..................... 7,063 7,447
Deferred financing and organization costs, net............ 5,663 5,932
Other assets.............................................. 8,510 10,348
Restricted cash reserves.................................. 20,307 12,815
Cash and cash equivalents................................. 10,363 16,372
--------- ---------
$ 249,418 $ 251,740
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................... $ 221,814 $ 222,500
Investment in Santa Clara Partnership................... 8,737 8,360
Due to Marriott Hotel Services, Inc..................... 3,567 2,882
Accounts payable and accrued expenses................... 4,163 1,390
--------- ---------
Total Liabilities..................................... 238,281 235,132
========= =========
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $22...... 731 731
Capital distributions................................... (1,036) (811)
Cumulative net income................................... 561 391
--------- ---------
256 311
--------- ---------
Limited Partners
Capital contribution, net of offering costs of $8,426... 64,689 64,689
Capital distributions................................... (109,378) (87,118)
Cumulative net income................................... 55,570 38,726
--------- ---------
10,881 16,297
--------- ---------
Total Partners' Capital............................... 11,137 16,608
--------- ---------
$ 249,418 $ 251,740
========= =========
</TABLE>
See Notes to financial statements.
F-256
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES (Note 3)............................... $ 69,014 $ 66,292 $ 64,002
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................. 13,087 13,456 13,364
Incentive management fees..................... 9,925 9,813 9,412
Property taxes................................ 5,712 5,208 5,526
Base management fees.......................... 4,649 4,471 4,281
Ground rent, insurance and other.............. 3,859 3,064 2,840
-------- -------- --------
37,232 36,012 35,423
-------- -------- --------
OPERATING PROFIT................................ 31,782 30,280 28,579
Interest expense.............................. (18,841) (18,305) (17,803)
Interest income............................... 2,047 2,171 2,150
-------- -------- --------
INCOME BEFORE EQUITY IN INCOME OF SANTA CLARA
PARTNERSHIP.................................... 14,988 14,146 12,926
-------- -------- --------
EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP..... 2,026 665 119
-------- -------- --------
NET INCOME...................................... $ 17,014 $ 14,811 $ 13,045
======== ======== ========
ALLOCATION OF NET INCOME
General Partner............................... $ 170 $ 148 $ 130
Limited Partners.............................. 16,844 14,663 12,915
-------- -------- --------
$ 17,014 $ 14,811 $ 13,045
======== ======== ========
NET INCOME PER LIMITED PARTNER UNIT (745
Units)......................................... $ 22,609 $ 19,682 $ 17,336
======== ======== ========
</TABLE>
See Notes to financial statements.
F-257
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $ 331 $ 18,233 $ 18,564
Capital distributions............................. (113) (11,175) (11,288)
Net income........................................ 130 12,915 13,045
----- -------- --------
Balance, December 31, 1995.......................... 348 19,973 20,321
Capital distributions............................. (185) (18,339) (18,524)
Net income........................................ 148 14,663 14,811
----- -------- --------
Balance, December 31, 1996.......................... 311 16,297 16,608
Capital distributions............................. (225) (22,260) (22,485)
Net income........................................ 170 16,844 17,014
----- -------- --------
Balance, December 31, 1997.......................... $ 256 $ 10,881 $ 11,137
===== ======== ========
</TABLE>
See Notes to financial statements.
F-258
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 17,014 $ 14,811 $ 13,045
Noncash items:
Depreciation and amortization............... 13,087 13,456 13,364
Deferred incentive management fees.......... 161 414 461
Equity in income of Santa Clara
Partnership................................ (2,026) (665) (119)
Amortization of deferred financing costs as
interest................................... 303 206 489
Loss on retirement of assets................ 473 27 10
Changes in operating accounts:
Due from Marriott Hotel Services, Inc....... 384 (172) (426)
Accounts payable and accrued expenses....... 30 957 61
Other assets................................ 29 (223) --
Due to Marriott Hotel Services, Inc......... 524 (147) 123
-------- --------- --------
Cash provided by operating activities..... 29,979 28,664 27,008
-------- --------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net...... (12,250) (8,300) (5,566)
Distributions from Santa Clara Partnership.... 2,403 781 1,370
Change in property improvement funds.......... 1,813 1,797 (1,341)
Additions to restricted cash reserve.......... -- -- (6,346)
-------- --------- --------
Cash used in investing activities......... (8,034) (5,722) (11,883)
-------- --------- --------
FINANCING ACTIVITIES
Capital distributions......................... (22,485) (18,524) (11,288)
Additions to restricted lender reserves, net.. (4,749) (12,815) --
Principal payments on mortgage debt........... (686) -- --
Payment of financing costs.................... (34) (6,025) --
Proceeds from mortgage loan................... -- 222,500 --
Repayment of mortgage debt.................... -- (213,307) --
-------- --------- --------
Cash used in financing activities......... (27,954) (28,171) (11,288)
-------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVA-
LENTS.......................................... (6,009) (5,229) 3,837
CASH AND CASH EQUIVALENTS at beginning of year.. 16,372 21,601 17,764
-------- --------- --------
CASH AND CASH EQUIVALENTS at end of year........ $ 10,363 $ 16,372 $ 21,601
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............... $ 18,541 $ 17,173 $ 17,267
======== ========= ========
</TABLE>
See Notes to financial statements.
F-259
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties II Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire and operate (i) the 1,290-
room New Orleans Marriott Hotel and underlying land in New Orleans, Louisiana
(the "New Orleans Hotel"); (ii) the 999-room Marriott Rivercenter Hotel in San
Antonio, Texas (the "San Antonio Hotel"); (iii) the 368-room Bishop Ranch
Marriott Hotel in San Ramon, California (the "San Ramon Hotel");
(collectively, the "Hotels") and (iv) a 50% limited partner interest in the
Santa Clara Marriott Hotel Limited Partnership (the "Santa Clara
Partnership"), a Delaware limited partnership, which owns the 754-room Santa
Clara Marriott Hotel in Santa Clara, California (the "Santa Clara Hotel"). The
remaining 50% interest in the Santa Clara Partnership is owned by Marriott MHP
Two Corporation (the "General Partner") with a 1% interest, and HMH
Properties, Inc., a wholly-owned indirect subsidiary of Host Marriott
Corporation ("Host Marriott") with a 49% limited partner interest.
The sole general partner of the Partnership, with a 1% interest, is MHP Two
Corporation, a wholly-owned subsidiary of Host Marriott. The General Partner
made a capital contribution of $752,525 for its 1% general partner interest.
On March 20, 1989 (the "Partnership Closing Date"), 745 limited partner
interests (the "Units"), representing a 99% interest in the Partnership, were
sold in a private placement. The offering price per Unit was $100,000, payable
in three annual installments through June 1, 1991 (the "Investor Notes"), or
as an alternative, $89,247 in cash on the Partnership Closing Date as full
payment of the subscription price. On the Partnership Closing Date, the
Partnership executed purchase agreements (the "Purchase Agreements") with Host
Marriott to acquire the Hotels and the 50% limited partner interest in the
Santa Clara Partnership for $319.5 million. Of the total purchase price,
$222.5 million was paid from proceeds of the mortgage loan (the "Original
Mortgage Debt"), $43.4 million was evidenced by a promissory note payable to
Host Marriott (the "Deferred Purchase Note"), $43.5 million was paid from a
cash distribution by the Santa Clara Partnership and the remainder from the
initial payment on the sale of the Units. The principal outstanding on the
Deferred Purchase Note was fully repaid in 1991 with the proceeds of the
Investor Notes.
The New Orleans and San Antonio Hotels and the limited partner interest in
the Santa Clara Partnership were conveyed to the Partnership on the
Partnership Closing Date and the San Ramon Hotel was conveyed to the
Partnership upon completion of its construction on May 31, 1989. The Hotels
and the Santa Clara Hotel are managed by Marriott International, Inc. under
long-term management agreements. In conjunction with the refinancing of the
Partnership's Mortgage Debt described in Note 7, Marriott International, Inc.
assigned all of its interests in the management agreements to Marriott Hotel
Services, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("Marriott International").
On June 13, 1996, MHPII Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed a tender offer for the limited
partnership Units in the Partnership. The Company purchased 377 Units for an
aggregate consideration of $56,550,000 or $150,000 per Unit. Subsequent to the
tender offer, the Company purchased an additional ten Units in the
Partnership. As a result of these transactions, the Company became the
majority limited partner in the Partnership, owning 387 Units. In 1997, the
Company acquired an additional Unit bringing its total ownership to 388 Units,
or approximately 52% of the total Units outstanding. Additionally, in a
Partnership vote held in conjunction with the tender offer, the limited
partners approved certain amendments to the Partnership Agreement that were
conditions to the tender offer. The amendments: (i) revised the provisions
limiting the voting rights of the General Partner and its affiliates to permit
the General Partner and its affiliates (including the Company) to have full
voting rights with respect to all Units currently held by the General Partner
or acquired by its affiliates except on matters where the General Partner or
its affiliates have an actual economic interest other than as a Limited
Partner or General Partner (an "Interested Transaction") and
F-260
<PAGE>
(ii) modified the voting provisions with respect to Interested Transactions to
permit action to be taken if approved by limited partners holding a majority
of the outstanding Units, with all Units held by the General Partner and its
affiliates being voted in the same manner as a majority of the Units actually
voted by limited partners other than the General Partner and its affiliates.
As a result of the approval of this and the other minor amendments, the
Partnership Agreement was amended and restated effective June 14, 1996.
Partnership Allocations and Distributions
Pursuant to the terms of the Partnership Agreement, Partnership allocations,
for Federal income tax purposes, and distributions are generally made as
follows:
a. Cash available for distribution is distributed for each fiscal year
semi-annually as follows: (i) 100% to the limited partners until the
limited partners have received with respect to such fiscal year a non-
cumulative 10% preferred distribution on their Invested Capital, as
defined; (ii) 100% to the General Partner until the General Partner has
received an amount equal to 1/99th of the amount distributed to the limited
partners; (iii) 1% to the General Partner and 99% to the limited partners
until such time as the limited partners have received the 15% Preferred
Distribution, as defined, plus $50,000 per Unit, payable only from Capital
Receipts, as defined, to the extent available after the payment of the 15%
Preferred Distribution; and (iv) thereafter, 20% to the General Partner and
80% to the limited partners.
b. Refinancing and sales proceeds ("Capital Receipts") available for
distribution to the partners will be distributed as follows: (i) 1% to the
General Partner and 99% to the limited partners until the limited partners
have received cumulative distributions from Capital Receipts equal to the
15% Preferred Distribution plus $100,000 per Unit; and (ii) 20% to the
General Partner and 80% to the limited partners.
c. Net profits generally will be allocated to the partners in proportion
to the distributions of cash available for distribution.
d. Net losses generally will be allocated 75% to the General Partner and
25% to the limited partners.
e. Gains recognized by the Partnership will be allocated in the following
order of priority: (i) to all partners up to the amount necessary to bring
the limited partners' capital account balances to an amount equal to the
limited partners' 15% Preferred Distribution plus the limited partners'
Invested Capital and to bring the General Partner's capital account balance
to an amount equal to 1/99th of the capital account balance of the limited
partners; and (ii) 20% to the General Partner and 80% to the limited
partners.
For financial reporting purposes, profits and losses are generally allocated
among the partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager.
F-261
<PAGE>
House profit reflects hotel operating results which flow to the Partnership as
property owner and represents gross hotel sales less property-level expenses,
excluding depreciation and amortization, base and incentive management fees,
property taxes, ground rent, insurance and other costs, which are disclosed
separately in the statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $85.9 million, $82.7 million and $78.7 million for the year
ended December 31, 1997, 1996 and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Land improvements.......................................... 40 years
Building and improvements.................................. 30 to 40 years
Leasehold improvements..................................... 40 years
Furniture and equipment.................................... 3 to 10 years
</TABLE>
All property and equipment is pledged as security against the Mortgage Debt
described in Note 7.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing and organization costs consist of loan fees and legal and
accounting costs incurred in connection with obtaining Partnership financing
and the formation of the Partnership. Deferred financing costs totaling
$3,280,000 were fully amortized at March 21, 1996. Additional financing costs
of $34,000 and $6,025,000 were incurred in 1997 and 1996, respectively, in
connection with the refinancing of the Partnership's mortgage loan. Financing
costs are amortized using the straight-line method, which approximates the
effective interest method, over the 20 year loan term. At December 31, 1997
and 1996, accumulated amortization of deferred financing and organization
costs totaled $396,000 and $92,000, respectively.
Restricted Cash Reserve
In 1994, a restricted cash reserve consisting of funds generated in excess
of an annual 17.5% return on partners' invested capital, as defined, was
established in an escrow account maintained by the lender. Through October of
1995, deposits were made in conjunction with the bi-annual distributions to
the limited partners. At the time the mortgage debt matured on March 21, 1996,
the Partnership applied the balance in the reserve as of December 31, 1995,
$9,193,000, to the principal balance of the mortgage loan as a condition to
the extension of the loan agreement.
On September 23, 1996, the General Partner refinanced the Partnership's
mortgage debt. On this date, the Partnership was required to establish certain
reserves which are held by an agent of the lender including:
. $7.0 million Owner Funded Capital Expenditure Reserve--The funds will be
expended for various renewals, replacements and site improvements that
are the Partnership's obligation pursuant to the
F-262
<PAGE>
management agreement. A majority of these projects were completed in
1997 utilizing escrow funds and the General Partner will be seeking
reimbursement of these funds during 1998.
. $1.1 million Capital Expenditure Reserve--The funds will be expended for
Americans with Disabilities Act of 1990 modifications and environmental
remediation projects identified during the course of the appraisals and
environmental studies undertaken in conjunction with the refinancing. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds
during 1998.
. $4.5 million Debt Service Reserve--Based upon current forecasts, it is
expected that cash from operations will be sufficient for the required
payment terms of the Mortgage Debt. However, due to seasonality of the
four hotels' operations, the timing of debt service payments and the
lender's desire for additional security, the Partnership was required to
establish a debt service reserve for both the Partnership Mortgage Debt
and the Santa Clara Partnership mortgage debt totaling two months of
debt service.
. $155,000 Ground Rent Reserve--This reserve is equal to one month of
ground rent.
These reserves were funded by using $12.2 million from the General Partner
Reserve and $634,000 from the Partnership and the Santa Clara Partnership
property improvement funds.
The loan agreement also requires that the Partnership deposit into the
Capital Expenditure Reserve $1.0 million in December of each calendar year
commencing in December 1997 until a total of $5.0 million has been deposited
to be used for air conditioning system maintenance at the New Orleans Hotel.
In addition, the loan agreement requires that should the long-term senior
unsecured debt of Marriott International be downgraded by Standard and Poors
Rating Services from an A- to a BBB+, additional reserves would need to be
established by the Partnership. In March 1997, Marriott International acquired
the Renaissance Hotel Group N.V., adding greater geographic diversity and
growth potential to its lodging portfolio. The assumption of additional debt
associated with this transaction resulted in a single downgrade of Marriott
International's long-term senior unsecured debt effective April 1, 1997.
Accordingly, at that time, the Partnership transferred $1.3 million from the
Manager's existing tax and insurance reserve account and $465,000 from
Partnership cash to the lender to establish a separate escrow account for the
payment of the next succeeding insurance premiums and real estate taxes for
the Hotels and the Santa Clara Hotel. In the future, the Partnership will make
deposits to the reserve account each period and the insurance premiums and
real estate taxes will continue to be paid by the lender until such time as
Marriott International's debt is upgraded to A-. In addition, the Partnership
was required to deposit an additional month's debt service for both the
Partnership and the Santa Clara Partnership into the Debt Service Reserve
account totaling $2.3 million. The money to fund these reserves had been set
aside by the General Partner prior to the distribution of the excess of the
General Partner reserve made to the partners in April 1997. The tax and
insurance reserves and the Debt Service Reserve are included in restricted
cash reserves and the resulting tax and insurance liability is included in
accounts payable and accrued expenses in the accompanying balance sheet.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Investment in Santa Clara Partnership
The Partnership's earnings from the Santa Clara Partnership are recorded
based on the equity method of accounting. Equity in earnings from the Santa
Clara Partnership includes 100% of the interest expense related to the debt
incurred by the Santa Clara Partnership, the proceeds of which were
distributed to the Partnership. The $28.4 million excess of the purchase price
of the Santa Clara Partnership interest over the Partnership's proportionate
share of the net book value of the assets acquired is being amortized over the
related remaining lives of those assets. Amortization is included in Equity in
Income of Santa Clara Partnership in the
F-263
<PAGE>
accompanying statement of operations. At December 31, 1997 and 1996,
accumulated amortization of the excess purchase price of the Santa Clara
Partnership investment was $11,917,000 and $11,006,000, respectively.
Pursuant to the terms of the Santa Clara partnership agreement, the
Partnership has an obligation to make capital contributions to fund certain
debt service shortfalls to the extent debt service is greater than 50% of cash
flow available before debt service (the "Debt Service Advances"). No
contributions were made in 1997 and 1996. Any outstanding Debt Service
Advances, together with accrued interest, would have been repayable prior to
certain distributions and would have been due, in any event, ten years after
the date of each advance. There have been no Debt Service Advances since
inception of the Santa Clara Partnership.
Interest Rate Swap Agreements
As of December 31, 1995, the Partnership was a party to an interest rate
swap agreement to reduce the Partnership's exposure to floating interest
rates. The Partnership accounted for the swap arrangement as a hedge of an
obligation to pay floating rates of interest and accordingly, recorded
interest expense based upon its payment obligation at a fixed rate. This
agreement terminated at the initial maturity of the Partnership's mortgage
loan on March 21, 1996.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets
and differences in the timing of recognition of incentive management fee
expense. As a result of these differences, the deficit of the net assets
reported in the accompanying financial statements over the tax basis in net
Partnership assets is $85.9 million and $87.9 million as of December 31, 1997
and 1996, respectively. Following the Company's acquisition of limited partner
interests in the Partnership in 1996, the Partnership underwent a termination
and constructive liquidation for tax purposes. All partners were then deemed
to recontribute their assets to a newly reconstituted partnership. Upon
recontribution the Partnership recorded the fixed assets at their fair market
value for tax reporting purposes, as represented by the Company's purchase
price for limited partner units resulting in a significant change in the 1996
tax basis when compared to the prior year.
Statement of Financial Accounting Standards
In the First Quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior year's financial statements
to conform to the 1997 presentation.
F-264
<PAGE>
NOTE 3. REVENUES
Partnership revenues consist of the Hotels' operating results for the three
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................ $101,603 $98,436 $93,292
Food and beverage................................ 44,877 42,427 42,198
Other............................................ 8,483 8,171 7,215
-------- ------- -------
154,963 149,034 142,705
======== ======= =======
HOTEL EXPENSES
Departmental direct costs
Rooms.......................................... 19,676 18,878 18,416
Food and beverage.............................. 31,439 30,496 28,975
Other hotel operating expenses................. 34,834 33,368 31,312
-------- ------- -------
85,949 82,742 78,703
-------- ------- -------
REVENUES........................................... $ 69,014 $66,292 $64,002
======== ======= =======
</TABLE>
NOTE 4. PROPERTY AND IMPROVEMENTS
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 17,091 $ 17,091
Building and improvements................................ 107,826 105,382
Leasehold improvements................................... 118,978 111,197
Furniture and equipment.................................. 51,848 61,206
-------- --------
295,743 294,876
Less accumulated depreciation............................ (98,231) (96,050)
-------- --------
$197,512 $198,826
======== ========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage debt............................ $221,814 $230,700 $222,500 $222,500
Incentive management fees due to Marriott
Hotel
Services, Inc........................... 2,739 800 2,578 170
</TABLE>
The 1996 and 1997 estimated fair value of the mortgage debt obligation is
based on the expected future debt service payments discounted at risk adjusted
rates. Incentive management fees due are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
F-265
<PAGE>
NOTE 6. SANTA CLARA PARTNERSHIP
Summarized financial information for the Santa Clara Partnership consists of
the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
BALANCE SHEET
Property and equipment..................................... $28,688 $30,144
Due from Marriott International, Inc....................... 2,059 2,170
Property improvement fund.................................. 2,619 1,230
Cash and cash equivalents.................................. 3,177 1,933
------- -------
Total Assets........................................... $36,543 $35,477
======= =======
Mortgage debt.............................................. $43,366 $43,500
Due to Marriott International, Inc......................... 970 749
Accounts payable and accrued expenses...................... 482 522
Partners' Deficit.......................................... (8,275) (9,294)
------- -------
Total Liabilities and Partners' Deficit................ $36,543 $35,477
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES................................... $ 21,709 $ 17,347 $ 14,516
OPERATING COSTS AND EXPENSES
Depreciation and amortization............ 3,013 2,927 2,765
Interest................................. 3,625 3,318 3,063
Incentive management fees................ 3,401 2,652 2,175
Base management fees..................... 1,420 1,224 1,079
Property taxes........................... 470 499 508
Ground rent, insurance and other......... 281 264 201
---------- ---------- ----------
12,210 10,884 9,791
---------- ---------- ----------
NET INCOME................................. $ 9,499 $ 6,463 $ 4,725
========== ========== ==========
</TABLE>
NOTE 7. MORTGAGE DEBT
As of December 31, 1995, the Partnership's debt consisted of a $222.5
million mortgage loan (the "Original Mortgage Debt"). The Original Mortgage
Debt was nonrecourse to the Partnership and was secured by a first mortgage on
each of the Hotels including the grant of a security interest in the
Partnership's furniture, fixtures and equipment, contracts and other
intangibles and an assignment of the Partnership's rights under the Management
and Purchase Agreements.
At the option of the Partnership, the Original Mortgage Debt loan agreement
provided for interest rate options which were tied to a Eurodollar rate, an
adjusted CD rate or the fluctuating corporate base rate. For Eurodollar or CD
elections, the Partnership paid the applicable rate plus an increment equal to
0.9 percentage points. In April 1992, the Partnership entered into an interest
rate swap agreement for the entire loan amount with the primary lender to
effectively fix the interest rate on the Original Mortgage Debt at 7.8% per
annum from May 1992 through loan maturity. The Partnership's obligations under
the swap agreement were secured by a pledge of collateral by the General
Partner. The weighted average interest rate on the Original Mortgage Debt for
the year ended December 31, 1995 was 7.8%. The interest rate swap agreement
expired on March 21, 1996.
F-266
<PAGE>
On March 21, 1996, the Original Mortgage Debt and the Santa Clara mortgage
debt matured, at which time the lender granted the Partnership an extension of
the two loans for an additional six months until replacement financing could
be finalized with another lender. Under the terms of the extension, interest
accrued at the London interbank offered rate ("LIBOR") plus 1.875 percentage
points for the first three months and accrued at LIBOR plus 2.25 percentage
points for the second three months. No principal amortization was required
during the extension period. However, under the terms of the extension, the
Partnership applied the $9.2 million accumulated in the primary lender reserve
account to pay down the principal balance of the Original Mortgage Debt to
$213.3 million and deposited $19.1 million into the primary lender reserve
account. The primary lender reserve account was established in 1994 to provide
funds for a principal paydown on the Original Mortgage Debt at maturity. The
$19.1 million deposit represented the balance ($16.8 million) from the
unrestricted reserve account included in cash in the accompanying balance
sheet as of December 31, 1995, previously established by the General Partner
in 1992 (the "General Partner Reserve") and cash flow from the Partnership for
the first two accounting periods of 1996 ($2.3 million). During the extension
period, the Partnership also was required to deposit into the primary lender
reserve account all cash flow from the Hotels plus all of the Partnership's
cash flow from the Santa Clara Partnership, net of (i) $500,000 per accounting
period, (ii) debt service and (iii) current incentive management fees paid.
The $500,000 per accounting period was deposited into a separate expense
reserve account which was used by the Partnership to fund administrative
expenses and refinancing costs, any owner funded capital expenditures, as well
as the Partnership's share of any such costs incurred by the Santa Clara
Partnership during the six month extension period.
On September 23, 1996 (the "Closing Date"), the General Partner refinanced
the Partnership's Original Mortgage Debt, as well as the $43.5 million
mortgage debt of the Santa Clara Partnership. A total of $266.0 million was
borrowed from a new third party lender, $222.5 million of which is recorded on
the Partnership's financial statements (the "Mortgage Debt"). The
Partnership's Mortgage Debt is nonrecourse to the Partnership and is secured
by first mortgages on the Hotels, as well as a pledge of its limited partner
interest in the Santa Clara Partnership. The two loans are cross-defaulted.
The debt bears interest at a fixed rate of 8.22% for an 11-year term expiring
October 11, 2007, requires payments of interest only during the first loan
year (October 1996 through September 1997). Subsequently, principal
amortization based upon a 20-year amortization schedule beginning with the
second loan year. The mortgage debt balance was $221.8 million as of December
31, 1997. The weighted average interest rate on the Mortgage Debt for the
years ended December 31, 1997 and 1996 was 8.2% and 7.7%, respectively. On the
Closing Date, the Partnership was required to establish certain reserves. In
addition, a new reserve was established in 1997 and additional amounts were
deposited into the existing reserves. All reserves are discussed in Note 2.
The required principal payments of the Mortgage Debt at December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 4,379
1999................................................................ 4,759
2000................................................................ 5,119
2001................................................................ 5,614
2002................................................................ 6,100
Thereafter.......................................................... 195,843
--------
$221,814
========
</TABLE>
NOTE 8. LAND LEASES
The San Antonio and San Ramon Hotels are located on sites with ground leases
from unrelated third parties. The initial lease terms expire in 2013 and 2014,
respectively. To facilitate the refinancing, the Partnership exercised its
option to extend the land leases of both properties for an additional twenty-
year period. Therefore, the current terms of the San Antonio and San Ramon
land leases expire in 2033 and 2034, respectively. The Partnership is
obligated to pay annual rent equal to the greater of a minimum rent or a
percentage rent and has the option to extend the terms for up to three
successive ten-year terms each. Ground rent on the San Antonio
F-267
<PAGE>
Hotel is equal to the greater of $700,000 or 3.5% of annual gross room sales.
Ground rent on the San Ramon Hotel is equal to the greater of $350,000 or 3%
of annual gross sales for the first five years, after which minimum rent was
adjusted upward every five years, beginning in 1989, to an amount equal to 75%
of the average rent paid during the three years immediately preceding the
applicable five-year period. No such adjustment was necessary at that time.
Ground rent expense for the San Antonio and San Ramon Hotels totaled
$2,122,000, $1,982,000 and $1,879,000, for the years ended December 31, 1997,
1996 and 1995, respectively.
Future minimum annual rental commitments for all land leases entered into by
the Partnership, as described above, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR LAND LEASES
----------- -----------
<S> <C>
1998............................................................. $ 1,050
1999............................................................. 1,050
2000............................................................. 1,050
2001............................................................. 1,050
2002............................................................. 1,050
Thereafter....................................................... 32,900
-------
Total Minimum Lease Payments................................... $38,150
=======
</TABLE>
NOTE 9. MANAGEMENT AGREEMENTS
The Partnership entered into long-term hotel management agreements (the
"Management Agreements") with the Manager to manage the Hotels as part of the
Marriott International, Inc. full service hotel system. The Management
Agreement for each Hotel has an initial term expiring on December 31, 2008. To
facilitate the refinancing, the Manager exercised its option to renew the
Management Agreements for each Hotel for an additional 10-year term.
Therefore, the current terms of the Management Agreements for each Hotel
expire on December 31, 2018. This, as well as the assignment of the Management
Agreements described in Note 1, and other minor changes were documented in an
amendment to each of the Management Agreements. The Manager has the option to
renew the Management Agreements for up to three additional 10-year terms. The
Manager also manages the Santa Clara Hotel on behalf of the Santa Clara
Partnership. The Manager is paid a base management fee equal to 3% of gross
hotel sales. Base management fees paid in 1997, 1996 and 1995 were $4,649,000,
$4,471,000 and $4,281,000, respectively.
In addition, the Manager is entitled to an incentive management fee equal to
20% of each Hotel's Operating Profit, as defined. The incentive management fee
with respect to each Hotel is payable only out of 55% of each Hotel's
Operating Profit after the Partnership's payment or retention for such fiscal
year of the following: (i) the Ground Rent, if any, with respect to such
Hotel; (ii) the Qualifying Debt Service, as defined, with respect to such
Hotel; (iii) such Hotel's Pro-Rata Share of Total Mortgage Debt Service
Shortfall, as defined, if any, with respect to all Hotels; and (iv) the
Partnership's non-cumulative 10% Priority Return on the Adjusted Contributed
Capital, as defined, with respect to such Hotel.
Unpaid incentive management fees are accrued without interest and are paid
from cash flow available for incentive management fees following payment of
any then current incentive management fees. Incentive management fees earned
for the years ended December 31, 1997, 1996 and 1995 were $9,925,000,
$9,813,000 and $9,412,000, respectively. Deferred incentive management fees
for the years ended December 31, 1997 and 1996 were $2,739,000 and $2,578,000,
respectively, and are included in Due to Marriott Hotel Services, Inc. in the
accompanying balance sheet.
Pursuant to the Management Agreements, the Manager is required to furnish
the Hotels with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in the Manager's full-
service hotel system. Chain Services include central training, advertising and
promotion, a national reservations system, computerized payroll and accounting
services and such additional services as needed which
F-268
<PAGE>
may be more efficiently performed on a centralized basis. Costs and expenses
incurred in providing such services are allocated among all domestic full-
service hotels managed, owned or leased by the Manager or its subsidiaries. In
addition, the Hotels also participate in the Manager's Marriott Rewards
Program ("MRP"). This program succeeded the Manager's Honored Guest Awards
Program. The cost of this program is charged to all hotels in the Manager's
hotel system based upon the MRP sales at each hotel. The total amount of Chain
Services and MRP costs charged to the Partnership for the years ended December
31, 1997, 1996 and 1995 were $5,593,000, $5,433,000 and $5,151,000,
respectively, and are included in Revenues (as defined in Note 3) in the
accompanying statement of operations.
The Management Agreements provide for the establishment of a property
improvement fund for each Hotel to cover the cost of certain non-routine
repairs and maintenance to the Hotels which are normally capitalized and the
cost of replacements and renewals to the Hotels' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund for the San
Antonio Hotel are 4% in 1991 through 1998 and 5% thereafter. Contributions to
the property improvement fund for the San Ramon Hotel are 4% in 1994 through
1998 and 5% thereafter. Contributions to the property improvement fund for the
New Orleans Hotel are 5% each year; however, the contribution percentage was
increased to 7% for 1997 and 1998. Commencing with fiscal year 2003, the
Manager shall have the right, but not the obligation, to increase the amount
it transfers into the fund to any amount greater than 5% but not exceeding 6%
of gross sales. Total contributions to the property improvement fund for the
years ended December 31, 1997, 1996 and 1995 were $8,193,000, $6,622,000 and
$6,342,000, respectively.
Pursuant to the terms of the Management Agreements, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotels. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of any of the
Management Agreements, the working capital and supplies of the related Hotel
will be returned to the Partnership. The individual components of working
capital and supplies controlled by the Manager are not reflected in the
Partnership's balance sheet. As of December 31, 1997 and 1996, $6,633,000 has
been advanced to the Manager for working capital and supplies which is
included in Due from Marriott Hotel Services, Inc. in the accompanying balance
sheet. The supplies advanced to the Manager are recorded at their estimated
net realizable value.
Each of the Management Agreements also provides that the Partnership may
terminate any of the Management Agreements and remove the Manager if, during
any three consecutive fiscal years after fiscal year 1992, with respect to any
Hotel, the sum of the operating profit before real and personal property
taxes, fails to equal or exceed 8% of the sum of the original cost of the
Hotel plus certain additional hotel investments by the Partnership. The
Manager may, however, prevent termination by paying to the Partnership such
amounts as are necessary to achieve the above performance standards.
F-269
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net............................ $194,173 $197,512
Due from Marriott Hotel Services, Inc.................. 10,208 7,063
Other assets........................................... 11,031 8,510
Deferred financing costs, net.......................... 5,523 5,663
Restricted cash reserves............................... 17,122 20,307
Cash and cash equivalents.............................. 7,900 10,363
--------- ---------
$245,957 $249,418
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................ $ 219,644 $ 221,814
Investment in Santa Clara Partnership................ 7,726 8,737
Due to Marriott International, Inc................... 4,203 3,567
Accounts payable and accrued expenses................ 1,677 4,163
--------- ---------
Total Liabilities.................................. 233,250 238,281
--------- ---------
PARTNERS' CAPITAL
General Partner...................................... 272 256
Limited Partners..................................... 12,435 10,881
--------- ---------
Total Partners' Capital............................ 12,707 11,137
--------- ---------
$245,957 $249,418
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-270
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
----------------
1998 1997
------- -------
<S> <C> <C>
REVENUES..................................................... $37,946 $36,584
------- -------
OPERATING COSTS AND EXPENSES
Depreciation............................................... 6,285 6,042
Incentive management fees.................................. 5,550 5,410
Property taxes............................................. 3,178 2,760
Base management fees....................................... 2,390 2,303
Ground rent................................................ 1,090 993
Insurance and other........................................ 559 467
------- -------
19,052 17,975
------- -------
OPERATING PROFIT............................................. 18,894 18,609
Interest expense........................................... (8,708) (8,827)
Interest income............................................ 714 957
------- -------
INCOME BEFORE EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP.... 10,900 10,739
------- -------
EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP.................. 1,856 1,112
------- -------
NET INCOME................................................... $12,756 $11,851
======= =======
ALLOCATION OF NET INCOME
General Partner............................................ $ 127 $ 119
Limited Partners........................................... 12,629 11,732
------- -------
$12,756 $11,851
======= =======
NET INCOME PER LIMITED PARTNER UNIT
(745 Units)................................................. $16,952 $15,748
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
F-271
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 12,756 $ 11,851
Noncash items............................................. 4,647 5,087
Change in operating accounts.............................. (3,273) 546
-------- --------
Cash provided by operating activities................... 14,130 17,484
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net.................. (2,946) (2,764)
Change in property improvement fund....................... (2,521) (1,922)
Distributions from Santa Clara Partnership................ 845 982
-------- --------
Cash used in investing activities....................... (4,622) (3,704)
-------- --------
FINANCING ACTIVITIES
Capital distributions to partners......................... (11,186) (9,875)
Repayment of mortgage debt................................ (2,170) --
Change in restricted lender reserves, net................. 1,385 (2,139)
Payment of financing costs................................ -- (34)
-------- --------
Cash used in financing activities....................... (11,971) (12,048)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (2,463) 1,732
CASH AND CASH EQUIVALENTS at beginning of period............ 10,363 16,372
-------- --------
CASH AND CASH EQUIVALENTS at end of period.................. $ 7,900 $ 18,104
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest........................... $ 9,181 $ 9,246
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
F-272
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Marriott Hotel Properties II Limited Partnership (the "Partnership") without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included in the Partnership's Form 10-K for the
fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
99% to the limited partners and 1% to the General Partner. Significant
differences exist between the net income for financial reporting purposes and
the net income reported for Federal income tax purposes. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods and shorter depreciable lives of assets and differences in the timing
of recognition of incentive management fee expense.
2. The Partnership owns the New Orleans, San Antonio Rivercenter and San
Ramon Marriott Hotels (the "Hotels"). In addition, the Partnership owns a 50%
limited partnership interest in the Santa Clara Marriott Hotel Limited
Partnership (the "Santa Clara Partnership") which owns the Santa Clara
Marriott Hotel (the "Santa Clara Hotel"). The sole general partner of the
Partnership and the Santa Clara Partnership, with a 1% interest in each, is
Marriott MHP Two Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"). The remaining 49%
interest in the Santa Clara Partnership is owned by HMH Properties, Inc., a
wholly-owned subsidiary of Host Marriott. The Partnership's income from the
Santa Clara Partnership is reported as Equity in Income of the Santa Clara
Partnership. In arriving at Equity in Income from the Santa Clara Partnership,
the Partnership is allocated 100% of the interest expense related to the debt
incurred to purchase the Santa Clara Partnership interest. Summarized
financial information for the Santa Clara Partnership is presented in Note 5.
3. Certain reclassifications were made to the prior year condensed financial
statements to conform to the current year presentation.
4. Hotel revenues represent house profit of the Partnership's Hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, Inc. (the "Manager"). House profit reflects hotel operating results
which flow to the Partnership as property owner and represents gross hotel
sales less property-level expenses, excluding depreciation and amortization,
base and incentive management fees, property taxes, ground rent, insurance and
certain other costs, which are disclosed separately in the condensed statement
of operations
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
F-273
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $41.7 million and $40.1 million for the first two quarters of
1998 and 1997, respectively, and will have no impact on operating profit or
net income.
Partnership revenues generated by the Hotels for 1998 and 1997, consist of
(in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
-------- --------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $ 52,920 $ 50,384
Food and beverage.......................................... 22,223 22,072
Other...................................................... 4,514 4,320
-------- --------
79,657 76,776
-------- --------
HOTEL EXPENSES
Departmental direct costs
Rooms...................................................... 9,499 9,151
Food and beverage.......................................... 15,315 14,952
Other hotel operating expenses............................. 16,897 16,089
-------- --------
41,711 40,192
-------- --------
HOTEL REVENUES............................................... $ 37,946 $ 36,584
======== ========
</TABLE>
5. Summarized financial information for the Santa Clara Partnership for 1998
and 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
REVENUES.................................................... $ 12,490 $ 10,247
-------- --------
OPERATING COSTS AND EXPENSES
Incentive management fees................................. 2,008 1,610
Depreciation and amortization............................. 1,424 1,134
Base management fees...................................... 760 668
Property taxes............................................ 245 244
Ground rent, insurance and other.......................... 257 230
-------- --------
4,694 3,886
-------- --------
OPERATING PROFIT............................................ 7,796 6,361
Interest expense.......................................... (1,675) (1,699)
Interest income........................................... 107 102
-------- --------
NET INCOME.................................................. $ 6,228 $ 4,764
======== ========
</TABLE>
F-274
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
CONDENSED BALANCE SHEET
Property and equipment, net.......................... $ 27,623 $ 28,688
Property Improvement Fund............................ 3,554 2,619
Due from Marriott Hotel Services, Inc................ 2,649 2,059
Cash and cash equivalents............................ 4,949 3,177
-------- --------
Total Assets....................................... $ 38,775 $ 36,543
======== ========
Mortgage debt........................................ $ 42,942 $ 43,366
Due to Marriott Hotel Services, Inc.................. 475 970
Accounts payable and accrued expenses................ 322 482
Partners' deficit.................................... (4,964) (8,275)
-------- --------
Total Liabilities and Partners' Deficit............ $ 38,775 $ 36,543
======== ========
</TABLE>
6. As previously reported, Host Marriott, parent company of the General
Partner of the Partnership, announced on April 17, 1998, that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Marriott Hotel Properties II Limited Partnership, are expected
to be given an opportunity to receive, on a tax-deferred basis, Operating
Partnership units in the Operating Partnership in exchange for their current
limited partnership interests. The Operating Partnership units would be
redeemable by the limited partner for freely traded Host Marriott shares (or
the cash equivalent thereof) at any time after one year from the closing of
the merger. In connection with the REIT conversion, the Operating Partnership
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission on June 2, 1998. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
F-275
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with the audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ---------- ----------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 3,358 $ 2,952 $ 6,568 $ 5,660 $ 4,913 $ 4,509 $ 4,311
Operating profit........ 1,412 1,236 2,673 1,772 788 567 444
Net income (loss)....... 437 266 582 (565) (1,655) (1,920) (2,031)
Distributions:
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:(1)
Net income (loss)...... 1,281 776 1,701 (1,651) (4,839) (5,617) (5,941)
Distributions.......... -- -- -- -- -- -- --
Cash provided by (used
in) operating activi-
ties................... 1,244 1,076 1,881 798 636 881 (739)
Cash used in investing
activities............. (300) (244) (1,052) (517) (486) (343) (315)
Cash used in financing
activities............. (118) (477) (721) (342) -- -- --
Increase (decrease) in
cash and cash equiva-
lents.................. 826 355 108 (61) 150 538 (1,054)
Ratio of earnings to
fixed charges (unau-
dited)(2).............. 1.41x 1.25x 1.26x -- -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(2) ........ -- -- -- 565 1,655 1,920 2,031
Total assets at book
value.................. 26,710 26,056 25,962 25,701 25,975 27,002 27,701
Cash and cash equiva-
lents.................. 1,667 1,088 841 733 794 644 106
Total debt.............. 24,885 25,220 25,003 25,361 25,500 25,500 25,500
Total liabilities....... 29,094 29,193 28,783 29,104 28,813 28,185 26,964
Partner's capital (defi-
cit)(3):
Limited partners....... (2,378) (3,124) (2,811) (3,387) (2,821) (1,200) 682
General partner........ (6) (13) (10) (16) (17) 17 55
Book Value per Partner-
ship Unit (unau-
dited)(1).............. (7,081) (9,287) (8,361) (10,063) (8,421) (3,582) 2,036
Exchange Value per
Partnership Unit
(unaudited)(1)......... 33,133 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $35,000 original investment in Chicago
Suites and excludes MB Investment Properties 1% limited partner interest.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation of $1,234,000, $1,644,000, $1,541,000 and $1,637,000 for
fiscal years ended December 31, 1996, 1995, 1994 and 1993, respectively.
(3) On August 26, 1996, MB Investment Properties, Inc. withdrew as a general
partner of the Partnership and converted its 1% interest to a Limited
Partner interest.
F-276
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITES HOTEL PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. For the first two quarters 1998, revenues increased 14% or
$406,000, over the same period in 1997 from $3.0 million to $3.4 million.
Revenues and operating profit were impacted primarily by growth in revenue per
available room ("REVPAR") of 10% over the comparable period in 1997 from $119
to $131. REVPAR represents the combination of the average daily room rate
charged and the average daily occupancy achieved and is a commonly used
indicator of hotel performance. REVPAR does not include food and beverage or
other ancillary revenues generated by the property. The increase in REVPAR was
the result of a 12% increase in average room rate from $143 to $160, slightly
offset by a 1.4 percentage point decrease in average occupancy to 82%. The
increase in average room rate for the first two quarters 1998 was primarily
due to the Hotel limiting the sale of discounted rooms, creating a breakfast-
included rate which raised the non-corporate premium rate, and increasing its
corporate room rate $10 to $199, which represents a $30 increase over the
corporate rate charged in the second quarter of 1997. The slight decrease in
occupancy was the result of the Hotel's corporate rate increase.
Operating Costs and Expenses. Operating costs and expenses increased 13% to
$1.9 million for the first two quarters 1998 when compared to the same period
in 1997. The increase in operating costs and expenses was primarily due to the
21% or $82,000 increase in depreciation expense and the 18% or $70,000
increase in incentive management fees. The increase in depreciation expense
was due to the completion of the rooms renovation in 1997. The increase in
incentive management fees was the result of the improvement in revenues
discussed above. As a percentage of revenues, operating costs and expenses
remained stable at 58% for the first two quarters 1998 when compared to the
same period in 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $176,000 to $1.4
million for the first two quarters 1998 from $1.2 million for the same period
in 1997. Operating profit was 42% of revenues during both time periods.
Interest expense. Interest expense increased for the first two quarters 1998
when compared to the same period in 1997 due primarily to interest expense
from the roof and facade loan with a subsidiary of the Manager. The loan,
which matures in June 2000, bears interest at 9% and will be repaid from the
Partnership's cash flow from operations after defined priorities. Payments of
approximately $19,000 per month began in June 1998, following the final
disbursement of loan proceeds.
Net income. For the first two quarters 1998, net income increased $171,000
to $437,000, compared to $266,000 for the same period in 1997. This increase
was primarily due to an increase in hotel revenues, offset by the changes in
expenses discussed above.
1997 Compared to 1996
Revenues. Revenues increased $908,000 or 16%, to $6.6 million in 1997 from
$5.7 million in 1996 as a result of strong growth in REVPAR of 13%. Hotel
sales increased $1.4 million, or 10%, to $14.4 million in 1997 also reflecting
improvements in REVPAR for the year. The increase in REVPAR was the result of
a 14% increase in average room rates from $129 in 1996 to $147 in 1997, while
average occupancy decreased one percentage point to 83%. The decrease in
occupancy was primarily the result of the Hotel's suites refurbishment which
displaced approximately 1,000 roomnights during the First Quarter 1997.
Operating Costs and Expenses. Operating costs and expenses remained stable
at $3.9 million in 1997 compared to 1996. As a percentage of revenues,
operating costs and expenses decreased to 59% of revenues in 1997 from 69% in
1996. Operating costs and expenses remained stable primarily due to the
$399,000 decrease in depreciation expense as a result of the majority of the
Hotel's furniture and equipment becoming fully
F-277
<PAGE>
depreciated in 1996, offset by the $171,000 increase in combined incentive and
base management fees and the $33,000 increase in ground rent due to improved
revenues as discussed above.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $901,000 to $2.7
million, or 41% of total revenues, in 1997 from $1.8 million, or 31% of
revenues in 1996.
Interest Expense. Interest expense decreased to $2.2 million in 1997 from
$2.4 million in 1996 due to regular and additional principal amortization on
the debt totaling $886,000. Additionally, the weighted average interest rate
on the mortgage debt in 1997 decreased to 7.69% from 9.31% in 1996 due to the
1996 refinancing. See "Refinancing."
Net Income. Net income increased $1.1 million to $582,000 in 1997 over 1996
due to the items discussed above.
1996 Compared to 1995
Revenues. Revenues increased $747,000, or 15%, to $5.7 million in 1996 from
$4.9 million in 1995 as a result of strong growth in REVPAR. REVPAR increased
10% to $108 in 1996. Hotel sales increased $1.4 million, or 12%, to $13
million in 1996 also reflecting improvements in REVPAR for the year. The
increase in REVPAR was the result of a 7% increase in average suite rate from
$121 in 1995 to $129 in 1996, combined with a three percentage point increase
in average occupancy to 84%.
Operating Costs and Expenses. Operating costs and expenses decreased
$237,000 to $3.9 million in 1996 from $4.1 million in 1995. As a percentage of
revenues, operating costs and expenses represented 69% of revenues in 1996 and
84% in 1995. The decrease in operating costs and expenses was primarily due to
a $410,000 decrease in depreciation expense due to the majority of the Hotel's
furniture and equipment becoming fully depreciated in early 1996.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $984,000 to $1.8
million, or 31% of total revenues, in 1996 from $788,000, or 16% of revenues
in 1995.
Interest Expense. Interest expense was $2.4 million in 1996 and $2.5 million
in 1995.
Net Loss. Net loss decreased $1.1 million to a net loss of $565,000 in 1996
over the net loss of $1.7 million in 1995 due to the items discussed above.
CAPITAL RESOURCES AND LIQUIDITY
General
The General Partner believes that cash from operations will provide adequate
funds for the operational needs of the Partnership for the foreseeable future.
PRINCIPAL SOURCES AND USES OF CASH
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to fund the property improvement fund of the Hotel and to pay
required principal amortization of the mortgage debt. Additionally, the
Partnership is required to use its excess annual cash flow to pay additional
principal on the mortgage debt.
Total cash provided by operating activities for the first two quarters 1998
and 1997, was $1.2 million and $1.1 million, respectively. The increase was
primarily due to an increase in hotel revenues when compared to 1997. See
"Results of Operations" above.
F-278
<PAGE>
Cash provided by operating activities was $1.9 million in 1997, $798,000 in
1996 and $636,000 in 1995. The $1.1 million increase in cash provided by
operating activities between 1997 and 1996 was due primarily to the $908,000
increase in revenues, offset by $606,000 in incentive management fee paid, and
$1 million in reduced interest payments, due to the debt refinancing discussed
below. The $162,000 increase in cash provided by operating activities between
1996 and 1995 was due primarily to the $747,000 increase in revenues, offset
by $465,000 in increased interest payments. Interest payments increased
primarily as a result of the 1996 debt refinancing which resulted in one
additional debt service payment in 1996 compared to 1995.
For the first two quarters 1998 and 1997, cash used in investing activities
was $300,000 and $244,000, respectively, and consisted of contributions to and
expenditures from the property improvement fund.
Cash used in investing activities was $1.1 million, $517,000 and $486,000 in
1997, 1996 and 1995, respectively. The Partnership's cash investing activities
consist primarily of contributions to the property improvement fund and
capital expenditures for improvements to the Hotel. In 1997, the Hotel
completed a roof and facade restoration project, with funds provided by the
Partnership, for which approximately $528,000 was spent.
For the first two quarters 1998 and 1997, cash used in financing activities
was $118,000 and $477,000, respectively, and consisted primarily of repayments
on the mortgage debt. Additionally, during the second quarter of 1998, the
Partnership made its final draw of $35,000 on the roof and facade loan.
Cash used in financing activities was $721,000 in 1997 and $342,000 in 1996.
In 1997, the Partnership's cash financing activities consisted of repayment of
mortgage debt of $886,000, $528,000 in proceeds from a loan from a subsidiary
of Marriott International, and $363,000 in payments of financing costs related
to the 1996 refinancing. The Partnership made debt principal payments of
$139,000 and paid financing costs of $203,000 in 1996. Financing activity in
1995 consisted entirely of the $164,000 advance from, and subsequent repayment
into the property improvement fund, so that the Partnership could make its
First Quarter debt service payment in 1995. Prior to the debt refinancing in
1996, no repayments of mortgage principal were required prior to maturity. See
"Refinancing."
REFINANCING
On September 24, 1996, the Partnership successfully refinanced its $25.5
million mortgage debt. Proceeds from the new loan were used to repay the
existing mortgage debt and pay refinancing costs. The refinanced debt bears
interest at a floating rate of 200 basis points over the three-month LIBOR
rate, with an option to fix the interest rate during the first two years of
the loan term, and requires quarterly payments of principal and interest based
upon a 20-year amortization schedule for a five-year term expiring on the
maturity date of June 12, 2001. The weighted average interest rate on the
Partnership's debt in 1997, 1996 and 1995 was 7.69%, 9.31% and 9.575%,
respectively. The weighted average interest rate during the first two quarters
1998 was 7.69%, compared to 7.64% during the comparable period in 1997.
PROPERTY IMPROVEMENT FUND
The Partnership is required to maintain the Hotel in good condition. Under
the Management Agreement, the Partnership is required to make annual
contributions to the property improvement fund which provides funding for
capital expenditures and replacement of furniture, fixtures and equipment.
Contributions to the fund equaled 4% of gross Hotel sales in 1997, 1996 and
1995. The contribution amount will remain at 4% of gross Hotel sales in 1998
and 1999. In 2000 and thereafter, the Partnership is required to contribute 5%
of gross Hotel sales to the fund. In 1997, 1996 and 1995, the Partnership
contributed $577,000, $523,000 and $468,000, respectively, to the property
improvement fund. For the first two quarters 1998 and 1997, the Partnership
contributed $284,000 and $260,000, respectively, to the property improvement
fund.
F-279
<PAGE>
The General Partner expects that contributions to the property improvement
fund will provide a sufficient reserve for the future capital repair and
replacement needs of the Hotel's property and equipment.
MANAGEMENT FEES
For 1997, the Partnership paid a base management fee equal to 3% of gross
Hotel sales to the Manager. In addition, the Partnership paid an incentive
management fee of $606,000 payable from cash flow remaining after payment of
ground rent, debt service and an owner's priority return of $1,020,000.
Payment of the incentive management fee is subordinated to the required
principal and interest payments on the Amended and Restated Mortgage Debt,
ground rent and an 8% annual priority return to the Partners. Of the remaining
amount, the Partnership pays 50% of the current year incentive management fee
to the extent of cash available. Fifty percent of any remaining cash is then
applied to 50% of the current year incentive management fee and unpaid
incentive management fees from prior years. Unpaid incentive management fees
are reflected as deferred incentive management fees due to Marriott
International, Inc. in the Partnership's balance sheet. The Manager waived its
right to any unpaid deferred incentive management fees due to Marriott
International which were earned during the period from June 12, 1989 to June
14, 1991. During the first two quarters of 1998 and 1997, the Manager received
$439,000 and $261,000, respectively, of incentive management fees. The
remaining $20,000 and $128,000, respectively, of incentive management fees
earned were accrued as deferred incentive management fees payable to Marriott
International. During 1997 the Manager received $606,000 of incentive
management fee, while the remaining $258,000 of incentive management fee
earned was accrued as a deferred incentive management fee payable to Marriott
International. In 1996 and 1995, incentive management fees earned and accrued
as deferred incentive management fees totaled $734,000 and $591,000,
respectively. No incentive management fees were paid prior to 1997. As of
December 31, 1997 and 1996 and June 19, 1998, the balance of deferred
incentive management fees was $3.6 million, $3.3 million and $3.6 million,
respectively.
INFLATION
For the first two quarters 1998 and the three fiscal years ended December
31, 1997, the rate of inflation has been relatively low and, accordingly, has
not had a significant impact on the Partnership's revenues and net income. The
Manager is generally able to pass through increased costs to customers through
higher room rates. In 1997, the increase in average room rates at the Hotel
exceeded the general level of inflation. The amount of the Partnership's
interest expense under floating rate debt for a particular year will be
affected by changes in short-term interest rates.
SEASONALITY
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of March
through November than during the remainder of the year. This seasonality tends
to affect the results of operations, increasing hotel revenues during these
months. In addition, this seasonality may also increase the liquidity of the
Partnership during these months.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the Manager has 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.
F-280
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.:
We have audited the accompanying balance sheet of Mutual Benefit Chicago
Marriott Suite Hotel Partners, L.P. (a Rhode Island limited partnership) as of
December 31, 1997 and 1996 and the related statements of operations, changes
in partners' capital (deficit) and cash flows for the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mutual Benefit Chicago
Marriott Suite Hotel Partners, L.P. as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
February 23, 1998
F-281
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net................................ $ 23,784 $ 23,640
Property improvement fund.................................. 402 329
Deferred financing costs, net.............................. 428 512
Due from Marriott International, Inc....................... 507 487
Cash and cash equivalents.................................. 841 733
-------- --------
$ 25,962 $ 25,701
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $ 24,475 $ 25,361
Deferred incentive management fees due to Marriott Inter-
national, Inc........................................... 3,587 3,329
Note payable to Marriott International, Inc.............. 528 --
Accounts payable and accrued expenses.................... 193 414
-------- --------
Total Liabilities.................................... 28,783 29,104
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution................................... 120 120
Capital distributions.................................. (23) (23)
Cumulative net losses.................................. (107) (113)
-------- --------
(10) (16)
-------- --------
Limited Partners
Capital contribution, net of offering costs of $1,512.. 10,249 10,249
Capital distributions.................................. (2,819) (2,819)
Cumulative net losses.................................. (10,241) (10,817)
-------- --------
(2,811) (3,387)
-------- --------
Total Partners' Deficit.............................. (2,821) (3,403)
-------- --------
$ 25,962 $ 25,701
======== ========
</TABLE>
See Notes to financial statements.
F-282
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Hotel revenues (Note 3)........................... $ 6,568 $ 5,660 $ 4,913
------- ------- -------
OPERATING COSTS AND EXPENSES
Real estate taxes and other....................... 1,295 1,139 1,172
Incentive management fee.......................... 864 734 591
Depreciation...................................... 835 1,234 1,644
Base management fee............................... 433 392 351
Ground rent....................................... 341 308 300
Administrative and other.......................... 127 81 67
------- ------- -------
3,895 3,888 4,125
------- ------- -------
OPERATING PROFIT.................................... 2,673 1,772 788
Interest expense.................................. (2,150) (2,406) (2,526)
Interest income................................... 59 69 83
------- ------- -------
NET INCOME (LOSS)................................... $ 582 $ (565) $(1,655)
------- ------- -------
ALLOCATION OF NET INCOME (LOSS)
General Partner................................... $ 6 $ (6) $ (17)
MBIP Interest..................................... 6 (6) (17)
Limited Partner Unit Holders...................... 570 (553) (1,621)
------- ------- -------
$ 582 $ (565) $(1,655)
------- ------- -------
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
(335 Units)....................................... $ 1,701 $(1,651) $(4,839)
======= ======= =======
</TABLE>
See Notes to financial statements.
F-283
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1994............................ $ 17 $(1,200) $(1,183)
Net loss............................................ (34) (1,621) (1,655)
---- ------- -------
Balance, December 31, 1995............................ (17) (2,821) (2,838)
Transfer of MBIP 1% GP interest to 1% LP interest... 11 (11) --
Net income.......................................... (10) (555) (565)
---- ------- -------
Balance, December 31, 1996............................ (16) (3,387) (3,403)
Net income.......................................... 6 576 582
---- ------- -------
Balance, December 31, 1997............................ $(10) $(2,811) $(2,821)
==== ======= =======
</TABLE>
See Notes to financial statements.
F-284
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 582 $ (565) $ (1,655)
Noncash items:
Depreciation................................... 835 1,234 1,644
Deferred incentive management fees............. 258 734 591
Amortization of deferred financing costs as in-
terest........................................ 124 33 46
Deferred interest on mortgage loan............. 63 -- --
Changes in operating accounts:
Accounts payable and accrued expenses.......... 39 (607) 30
Due from Marriott International, Inc........... (20) (31) (20)
------- ------- --------
Cash provided by operating activities........ 1,881 798 636
------- ------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net......... (979) (1,013) (492)
Change in property improvement fund.............. (73) 496 6
------- ------- --------
Cash used in investing activities............ (1,052) (517) (486)
------- ------- --------
FINANCING ACTIVITIES
Repayment of mortgage debt....................... (886) (139) --
Proceeds from note payable to Marriott Interna-
tional, Inc..................................... 528 -- --
Payment of financing costs....................... (363) (203) --
------- ------- --------
Cash used in financing activities............ (721) (342) --
------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 108 (61) 150
CASH AND CASH EQUIVALENTS at beginning of year..... 733 794 644
------- ------- --------
CASH AND CASH EQUIVALENTS at end of year........... $ 841 $ 733 $ 794
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................. $ 1,947 $ 2,947 $ 2,482
======= ======= ========
</TABLE>
See Notes to financial statements.
F-285
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the
"Partnership"), a Rhode Island limited partnership, was formed in 1988 to
acquire and own the 256 suite Marriott Suites O'Hare Hotel (the "Hotel")
located near the O'Hare International Airport in Rosemont, Illinois. The
Hotel, which opened on November 28, 1988, is managed by Marriott
International, Inc. ("Marriott International") as part of its full service
hotel system.
In 1989, 335 limited partnership interests (the "Units"), representing a 98%
interest in the Partnership, were sold pursuant to a private placement
offering at $35,000 per Unit. Each general partner contributed $119,500 in
cash for their respective 1% general partner interests. Under the purchase and
sale agreement, Host Marriott Corporation ("Host Marriott") agreed to reduce
the purchase price of the Hotel up to an aggregate total of $3,000,000 to the
extent that the Hotel did not provide cash flow, after payment of ground rent
and debt service, equivalent to $1,000,000 for each of the three years ended
June 19, 1992 (the "Cash Flow Guaranty"). A total of $2,476,000 was paid to
the Partnership under the Cash Flow Guaranty. The price adjustments were
allocated as a reduction of the carrying value of the Partnership's property
and equipment in the accompanying balance sheet.
On August 23, 1996, MB Investment Properties, Inc. ("MBIP") withdrew as a
general partner of the Partnership and converted its 1% interest to a limited
partner. At December 31, 1997 the sole general partner is MOHS Corporation
("MOHS"), a Delaware corporation and subsidiary of Host Marriott.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
(a) Cash available for distribution is distributed (i) first, 100% to the
limited partners (excluding MBIP) until they have received an annual 8%
cumulative preferred return on their invested capital; (ii) to Host
Marriott to repay principal and interest on advances made under the Debt
Service Guarantee, as defined in Note 5, if any; and (iii) 100% to the
general partner and MBIP until they have received an annual 8% cumulative
preferred return on their invested capital. The balance, if any, shall be
distributed (i) 1% to the general partner, 1% to MBIP and 98% to the
remaining limited partners until the general partner and the limited
partners (collectively, the "Partners") have received cumulative
distributions of net proceeds from capital transactions and/or refinancing
equal to $5,982,000; (ii) next, 10% to MOHS, 5% to MBIP and 85% to the
remaining limited partners until the Partners have received cumulative
distributions of net proceeds from capital transactions and/or refinancing
equal to $11,964,000; and (iii) thereafter, 20% to MOHS, 10% to MBIP and
70% to the remaining limited partners.
(b) Net proceeds from capital transactions and refinancing are generally
distributed in the following order of priority: (i) first, 1% to the
general partner, 1% to MBIP and 98% to the remaining limited partners until
the Partners have received their initial capital contribution to the extent
not previously distributed; (ii) then, to the limited partners (excluding
MBIP) in an amount equal to their 8% cumulative preferred return on their
invested capital; (iii) then, to the general partner and MBIP in an amount
equal to their 8% cumulative preferred return on their invested capital;
(iv) then, to Host Marriott to repay any advances made under the Debt
Service Guarantee, together with accrued interest thereon; (v) then, to
Marriott International to pay any unpaid deferred incentive management fee;
and (vi) the balance, if any, 20% to MOHS, 10% to MBIP and 70% to the
remaining limited partners.
(c) For financial reporting purposes, profits and losses are allocated
among the Partners based on their ownership interests.
F-286
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Revenues represent house profit from the Hotel because the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit of the Hotel to Marriott International. House
profit reflects the net revenues flowing to the Partnership as property owner
and represents hotel operating results less property-level expenses, excluding
depreciation and amortization, base management fee, real estate taxes, ground
rent, insurance and certain other costs, which are disclosed separately in the
statement of operations (see Note 3).
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $7.9 million, $7.4 million and $6.8 million for the year ended
December 31, 1997, 1996 and 1995, respectively, and will have no impact on
operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold improvements.......................................... 40 years
Furniture and equipment......................................... 7 years
</TABLE>
All property and equipment is pledged to secure the Amended and Restated
Mortgage Debt defined in Note 5.
The Partnership assesses impairment of the Hotel based on whether estimated
undiscounted future cash flows from the Hotel will be less than its net book
value. If the Hotel is impaired, its basis is adjusted to fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
mortgage debt (see Note 5) matured on June 12, 1996. Deferred financing costs
associated with that debt, totaling $320,000, were fully amortized at December
31, 1996 and were subsequently written off in 1997. Costs associated with the
mortgage debt refinancing (see Note 5) totaled $566,000 and will be amortized
over the term of the loan. Accumulated amortization of deferred financing
costs at December 31, 1997 and 1996 totaled $138,000 and $334,000,
respectively.
F-287
<PAGE>
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements because the Partnership does not pay income
taxes but rather allocates profits and losses to the Partners in accordance
with the partnership agreement. Significant differences exist between the net
income for financial reporting purposes and the net income as reported on the
Partnership's tax return. These differences are due primarily to the use, for
income tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets. As a result of these differences, the excess
of the tax basis in the net Partnership liabilities over the net Partnership
liabilities reported in the accompanying financial statements was $896,000 and
$969,000, respectively as of December 31, 1997 and 1996.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1997 presentation.
NOTE 3. REVENUES
Hotel revenues consist of Hotel operating results for the three years ended
December 31 (in thousands) are:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $11,336 $10,224 $ 9,100
Food and beverage................................. 2,588 2,337 2,092
Other............................................. 505 509 497
------- ------- -------
14,429 13,070 11,689
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................... 2,541 2,509 2,311
Food and beverage............................... 2,088 1,896 1,722
Other hotel operating expenses.................... 3,232 3,005 2,743
------- ------- -------
7,861 7,410 6,776
------- ------- -------
HOTEL REVENUES...................................... $ 6,568 $ 5,660 $ 4,913
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Leasehold improvements................................... $ 26,453 $ 26,015
Furniture and equipment.................................. 8,768 8,227
-------- --------
35,221 34,242
Less accumulated depreciation............................ (11,437) (10,602)
-------- --------
$ 23,784 $ 23,640
======== ========
</TABLE>
F-288
<PAGE>
NOTE 5. DEBT
Mortgage Debt
The Partnership entered into a loan agreement on June 12, 1989 with a bank
to provide non-recourse mortgage debt of $25.5 million (the "Mortgage Debt")
to finance the acquisition of the Hotel. The Mortgage Debt initially bore
interest at a floating interest rate. On August 11, 1989 the Partnership
exercised its option to fix the interest rate at 9.575% until maturity on June
12, 1996. Interest on the Mortgage Debt was payable on the last day of March,
June, September and December of each year. No amortization of principal was
required prior to maturity or the sale or refinancing of the Hotel.
The Mortgage Debt matured on June 12, 1996 (the "Maturity Date"). On
September 24, 1996 (the "Closing Date"), the Partnership completed a
refinancing of the Mortgage Debt (the "Amended and Restated Mortgage Debt").
The lender granted the Partnership a forbearance of the loan for the period
between the Maturity Date and the Closing Date. During the forbearance period
from the Maturity Date until August 15, 1996 the Partnership continued to pay
interest at the contract rate of 9.575%. Thereafter, until the Closing Date,
the Partnership paid interest at a rate of 10.575%. The Amended and Restated
Mortgage Debt matures on June 12, 2001 and carries a floating interest rate of
200 basis points over the three-month London Interbank Offered Rate ("LIBOR"),
with an option to fix the interest rate during the first two years of the loan
term. The weighted average interest rate from the Closing Date through
December 31, 1996, was 7.62%. The weighted average interest rate for 1997 was
7.69%. The restructured loan requires minimum quarterly amortization payments
based on a 20-year schedule. Additionally, all excess cash flow after payment
of ground rent, required principal and interest payments, incentive management
fee, partnership administrative expenses and refinancing costs is to be
applied toward principal amortization. On June 24, 1997 the Partnership paid
$305,000 from excess cash flow generated during 1996 toward additional
principal amortization. The Partnership made a $766,000 principal payment in
June 1998 from excess cash flow generated during 1997.
As of the Closing Date, the lender deferred a $128,000 restructuring fee and
$302,000 of expenses incurred by the lender in connection with restructuring
the Mortgage Debt. On December 24, 1996, the Partnership paid $107,000 of
lender's expenses. A total of $323,000 was accrued as deferred financing costs
which is included in accounts payable and accrued expenses on the balance
sheet for the year ended December 31, 1996. This accrued liability was paid in
April 1997.
Scheduled debt maturities under the Amended and Restated Mortgage Debt are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 627
1999............................................................. 676
2000............................................................. 728
2001............................................................. 22,444
-------
$24,475
=======
</TABLE>
The Amended and Restated Mortgage Debt is secured by the Hotel, an
assignment of the Partnership's interest under the Ground Lease (as defined in
Note 6), an assignment of the Hotel management agreement, and by the grant of
a security interest in the Partnership's cash accounts and the personal
property and fixtures of the Hotel.
Debt Guarantees
No debt service guarantee was provided on the Amended and Restated Mortgage
Debt. However, MOHS reaffirmed its guarantee to the lender, that in the event
of a foreclosure, proceeds payable to the lender would be at least $5,000,000.
F-289
<PAGE>
Roof and Facade Loan
Marriott International Capital Corporation ("MICC"), a subsidiary of
Marriott International, provided $605,000 in available loan proceeds for the
completion of the facade and roof restoration project at the Hotel. As of
December 31, 1997, $528,000 has been disbursed under the loan. The loan
matures in June 2000, bears interest at 9% and will be repaid from the
Partnership's cash flow from operations after defined priorities. Payments of
approximately $19,000 in principal and interest per month began in June 1998
following the final loan disbursement.
Simultaneous with the execution of the loan agreement between the
Partnership and MICC, Host Marriott purchased a 50% participation interest in
the loan from MICC. Pursuant to the participation agreement, Host Marriott
reimbursed MICC for 50% of the loan advances made to-date and will continue to
reimburse MICC for 50% of any additional advances. Upon the final loan
disbursement, Host Marriott will be reimbursed by MICC for 50% of the loan
repayments as they are made by the Partnership to MICC.
NOTE 6. GROUND LEASE
In 1989, the leasehold interest in the land upon which the Hotel is located
was assigned to the Partnership by Host Marriott. The lease was created on
June 16, 1986 pursuant to a ground lease (the "Ground Lease") from the
landlord to Host Marriott. The initial term of the Ground Lease expires in
2014. The Ground Lease may be renewed at the option of the Partnership for
five successive terms of ten years each. Upon expiration or termination of the
Ground Lease, title to the Hotel and all improvements revert to the lessor.
Rent expense under the Ground Lease is calculated at an amount equal to the
greater of a minimum rental of $300,000 per year or a percentage rental equal
to 3% of annual gross room sales. Ground rent expense for 1997, 1996 and 1995
was $341,000, $308,000 and $300,000, respectively.
NOTE 7. MANAGEMENT AGREEMENT
The Partnership entered into a hotel management agreement (the "Management
Agreement") with Marriott International (the "Manager") to manage the Hotel as
part of Marriott International's full service hotel system. The Management
Agreement has an initial term expiring in 2008. The Manager may renew the
Management Agreement, at its option, for five successive ten-year terms. The
Partnership may terminate the Management Agreement if specified minimum
operating results are not achieved. However, the Manager may prevent
termination by paying the Partnership the amount by which the minimum
operating results were not achieved.
The Management Agreement provides for annual payments of (i) the base
management fee equal to 3% of gross sales from the Hotel, and (ii) the
incentive management fee equal to 20% of net house profit, as defined. Payment
of the incentive management fee is subordinated to the prior payment of
required principal and interest payments, ground rent and an 8% annual
priority return to the Partners. Unpaid incentive management fees are
reflected as deferred incentive management fees payable to Marriott
International in the accompanying balance sheet. The incentive management fee
earned in 1997 was $864,000. Of this amount $606,000 was paid to the Manager
and $258,000 was accrued as unpaid deferred incentive management fees. Unpaid
incentive management fees earned in 1996 and 1995 were $734,000 and $591,000,
respectively. The balance of deferred incentive management fees at December
31, 1997 and 1996 was $3.6 million and $3.3 million, respectively.
Pursuant to the terms of the Management Agreement, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotel. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Management
Agreement, the working capital and supplies will be returned to the
Partnership. The individual components of working capital and supplies
controlled by the Manager are not reflected in the Partnership's balance
sheet. As of December 31, 1997 and 1996, $357,000 has been advanced to the
Manager for working capital and supplies and is reflected in Due from Marriott
International, Inc. on the accompanying balance sheet.
F-290
<PAGE>
Pursuant to the terms of the Management Agreement, the Manager is required
to furnish the Hotel with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in Marriott
International's full service hotel system. Chain Services include central
training, advertising and promotion, a national reservation system 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 full service hotels managed, owned or leased by
Marriott International or its subsidiaries. In addition, the Hotel also
participates in Marriott International's Marriott's Rewards Program ("MRP"),
which was formerly called Marriott International's Honored Guest Awards
Program. The cost of this program is charged to all hotels in Marriott
International's hotel system based upon the MRP sales at each hotel. The total
amount of Chain Services and MRP costs charged to the Partnership was
$783,000, $757,000 and $649,000 for 1997, 1996 and 1995, respectively.
The Management Agreement provides for the establishment of a property
improvement fund for the Hotel which provides for the replacement of
furniture, fixtures and equipment. Contributions to the property improvement
fund are based on a percentage of gross Hotel sales equal to 4% for 1995
through 1999 and 5% thereafter. Contributions to the property improvement fund
for 1997, 1996 and 1995 were $577,000, $523,000 and $468,000, respectively.
NOTE 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage Debt............ $ 24,475 $ 24,700 $ 25,361 $ 25,200
</TABLE>
The estimated fair value of the Mortgage Debt is based on the expected
future debt service payments discounted at estimated market rates.
F-291
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net.......................... $23,733 $23,784
Due from Marriott International, Inc................. 652 507
Other assets......................................... 658 830
Cash and cash equivalents............................ 1,667 841
------- -------
$26,710 $25,962
======= =======
LIABILITIES AND PARTNERS' DEFICIT
Mortgage debt........................................ $24,322 $24,475
Deferred incentive management fees due to Marriott
International, Inc.................................. 3,607 3,587
Accounts payable and accrued expenses................ 602 193
Note payable to Marriott International, Inc.......... 563 528
------- -------
Total Liabilities................................ 29,094 28,783
------- -------
PARTNERS' DEFICIT
General Partner.................................... (6) (10)
MBIP Limited Partner Interest...................... (6) (10)
Limited Partner Unit Holders....................... (2,372) (2,801)
------- -------
Total Partners' Deficit.......................... (2,384) (2,821)
------- -------
$26,710 $25,962
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
F-292
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- ------
<S> <C> <C>
HOTEL REVENUES (Note 2)........................................ $ 3,358 $2,952
------- ------
OPERATING COSTS AND EXPENSES
Real estate taxes and other.................................. 594 579
Depreciation................................................. 467 385
Incentive management fees.................................... 459 389
Base management fees......................................... 213 195
Ground rent and administrative............................... 213 168
------- ------
1,946 1,716
------- ------
OPERATING PROFIT............................................... 1,412 1,236
Interest expense............................................. (1,006) (999)
Interest income.............................................. 31 29
------- ------
NET INCOME..................................................... $ 437 $ 266
======= ======
ALLOCATION OF NET INCOME
General Partner.............................................. $ 4 $ 3
MBIP Limited Partner Interest................................ 4 3
Limited Partner Unit Holders................................. 429 260
------- ------
$ 437 $ 266
======= ======
NET INCOME PER LIMITED PARTNER UNIT (335 Units)................ $ 1,281 $ 776
======= ======
</TABLE>
See Notes to Condensed Financial Statements.
F-293
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
--------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 437 $ 266
Noncash items................................................. 572 597
Changes in operating accounts................................. 235 213
------ ------
Cash provided by operating activities....................... 1,244 1,076
------ ------
INVESTING ACTIVITIES
Additions to property and equipment........................... (416) (440)
Change in property improvement fund........................... 116 196
------ ------
Cash used in investing activities........................... (300) (244)
------ ------
FINANCING ACTIVITIES
Principal repayments of mortgage debt......................... (153) (336)
Proceeds from note payable to Marriott International, Inc..... 35 --
Payment of financing costs.................................... -- (141)
------ ------
Cash used in financing activities........................... (118) (477)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS........................... 826 355
CASH AND CASH EQUIVALENTS at beginning of period................ 841 733
------ ------
CASH AND CASH EQUIVALENTS at end of period...................... $1,667 $1,088
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest............................... $ 484 $ 481
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
F-294
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the "Partnership")
without audit. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included in the Partnership's Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998, and the results of operations and cash
flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
For financial reporting purposes, net profits and net losses of the
Partnership are allocated 1% to MOHS Corporation (the "General Partner"), a
wholly owned subsidiary of Host Marriott Corporation ("Host Marriott"), 1% to
Mutual Benefit Investment Properties ("MBIP"), a limited partner, and 98% to
the remaining limited partners. Significant differences exist between the net
profits and net losses for financial reporting purposes and the net profits
and net losses reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives of the assets, differences in the timing of
the recognition of management fee expense and the deduction of certain costs
incurred during construction which have been capitalized in the accompanying
condensed financial statements.
2. Hotel revenues represent house profit from the Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotel to Marriott International, Inc.
(the "Manager"). House profit reflects hotel operating results which flow to
the Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base and
incentive management fees, property taxes and certain other costs, which are
disclosed separately in the condensed statement of operations.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $3.7 million and $3.6 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
F-295
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Hotel revenues consist of hotel operating results as follows (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-------------
1998 1997
------ ------
<S> <C> <C>
HOTEL SALES
Rooms....................................................... $5,642 $5,106
Food and beverage........................................... 1,222 1,171
Other....................................................... 242 232
------ ------
7,106 6,509
------ ------
HOTEL EXPENSES
Departmental Direct Costs
Rooms..................................................... 1,198 1,145
Food and beverage......................................... 1,001 946
Other hotel operating expenses.............................. 1,549 1,466
------ ------
3,748 3,557
------ ------
HOTEL REVENUES................................................ $3,358 $2,952
====== ======
</TABLE>
3. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), parent
company of the General Partner of the Partnership, announced that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P., are
expected to be given an opportunity to receive, on a tax-deferred basis,
Operating Partnership units in the Operating Partnership in exchange for their
current limited partnership interests. The Operating Partnership units would
be redeemable by the limited partner for freely traded Host Marriott shares
(or the cash equivalent thereof) at any time after one year from the closing
of the merger. In connection with the REIT conversion, on June 2, 1998, the
Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission. Limited partners will be able to vote on
this Partnership's participation in the merger later this year through a
consent solicitation.
F-296
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997, the unaudited condensed financial statements
for the First Two Quarters 1998 and the First Two Quarters 1997. The following
data should be read in conjunction with the audited financial statements and
the notes thereto, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $14,521 $12,504 $26,699 $22,374 $19,715 $17,020 $15,148
Operating profit.......... 9,225 7,868 15,433 12,125 10,039 5,658 3,335
Income (loss) before
extraordinary item(2).... 5,396 3,784 6,986 3,418 393 (1,982) 158
Net income (loss)......... 5,396 3,784 6,986 3,418 393 (1,982) 4,152
Distributions:
General partner.......... -- 15 14 19 18 15 --
Limited partners......... -- 1,368 1,368 1,894 1,855 1,419 --
------- ------- ------- ------- ------- ------- -------
Total..................... -- 1,383 1,382 1,913 1,873 1,434 --
Per Partnership Unit(1):
Net income (loss)......... 12,903 9,048 16,705 8,174 940 (4,739) 9,928
Distributions............. -- 3,453 3,453 4,575 4,481 3,428 --
Cash provided by operating
activities............... 7,579 6,180 15,597 11,041 6,990 5,957 --
Cash used in investing
activities............... (920) (1,549) (3,133) (2,752) (1,686) (1,694) (504)
Cash used in financing
activities............... (6,378) (6,236) (14,089) (8,537) (4,898) (4,027) (4,110)
Increase (decrease) in
cash and cash
equivalents.............. 281 (1,605) (1,625) (248) 406 236 (4,614)
Ratio of earnings to fixed
charges (unaudited)(3)... 2.29x 1.90x 1.78x 1.37x 1.04x -- 1.00x
Deficiency of earnings to
fixed charges
(unaudited)(3)........... -- -- -- -- -- 1,982 --
Total assets at book
value.................... 124,009 126,620 129,831 129,918 130,360 133,073 137,310
Cash and cash
equivalents.............. 1,418 1,157 1,137 2,762 3,010 2,604 2,368
Total debt(4)............. 125,822 138,181 137,643 144,374 147,052 150,350 152,489
Total liabilities......... 135,092 146,301 146,310 152,001 153,948 155,181 156,032
Partner's deficit:
Limited partners......... (11,023) (19,534) (16,365) (21,913) (23,403) (21,937) (18,586)
General partner.......... (60) (147) (114) (170) (185) (171) (136)
Book value per Partnership
Unit(1) (unaudited)...... (26,626) (47,184) (39,529) (52,930) (56,529) (52,988) (44,894)
Exchange value per
Partnership Unit(1)
(unaudited)................109,216. -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MDAH.
(2) In 1993, the Partnership recorded an extraordinary gain of $3,994,000 for
the forgiveness of accrued incentive management fees in conjunction with
the refinancing of certain debt.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. Interest
expense in 1993 includes a reduction of $2,884,000 related to rate swap
termination costs. The deficiency of earnings to fixed charges is largely
the result of depreciation and amortization of $6,548,000 in 1994.
(4) Total debt amounts includes amounts due to Host Marriott under Debt
Service guarantees, Notes Payable and Deferred Purchase Debt of
$15,629,000 as of June 19, 1998, June 20, 1997 and December 31, 1997 and
1996, $15,106,000 as of December 31, 1995 and $15,706,000 as of December
31, 1994 and 1993.
F-297
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Hotel revenues represent house profit of the Hotels since substantially all
of the operating decisions related to the generation of house profit of the
Hotels rest with MHSI. House profit reflects Hotel operating results and
represents gross Hotel sales less property level expenses, excluding
depreciation and amortization, base management fees, property taxes, equipment
rent and certain other costs which are disclosed separately in the statement
of operations.
REVPAR, or revenue per available room, represents the combination of daily
room rate charged and the average daily occupancy achieved and is a commonly
used indicator of hotel performance (although it is not a GAAP, or generally
accepted accounting principles, measure of revenue). REVPAR does not include
food and beverage or other ancillary revenues generated by the properties.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. For the first two quarters 1998, revenues increased $2.0 million
or 16% to $14.5 million when compared to the same period in 1997. The increase
in revenues is primarily due to an 11% increase in REVPAR during the first two
quarters 1998, when compared to the same period in 1997. The increase in
REVPAR resulted primarily from a 12% increase in the combined average room
rate to approximately $115 in the first two quarters 1998 when compared to the
same period in 1997. This was offset by a decrease in the combined average
occupancy of one percentage point to 77% for the first two quarters 1998, when
compared to the same period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased by
$660,000 or 14% to $5.3 million for the first two quarters 1998 when compared
to the same period in 1997. As a percentage of Hotel revenues, Hotel operating
costs and expenses remained at 37% for the first two quarters 1998 and 1997.
Operating Profit. As a result of the changes in revenues and expenses
discussed above, operating profit increased $1.4 million to $9.2 million for
the first two quarters 1998, as compared to the same period in 1997.
Interest Expense. For the first two quarters 1998, interest expense
decreased slightly by one percent when compared to the same period in 1997 due
to principal repayments of mortgage debt.
Net Income. For the first quarters 1998, net income increased $1.6 million
to $5.4 million as compared to the same period in 1997 due to the items
discussed above.
1997 Compared to 1996
Revenues. Revenues increased $4.3 million, or 19% in 1997 to $26.7 million
in 1997 as a result of strong growth in REVPAR of 13%. Hotel sales increased
$5.8 million, or 8%, to $75.3 million in 1997 also reflecting improvements in
REVPAR for the year. The increase in REVPAR was the result of an increase in
average room rates of 10% coupled with a 1.8 percentage point increase in
average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1.0
million to $11.3 million in 1997 from $10.2 million in 1996. As a percentage
of Hotel revenues, Hotel operating costs and expenses represented 42% of
revenues for 1997 and 46% in 1996.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $3.3 million to $15.4
million, or 58% of total revenues in 1997 from $12.1 million, or 54% of
revenues in 1996.
Interest Expense. Interest expense decreased $200,000 to $8.9 million in
1997 from $9.1 million in 1996.
F-298
<PAGE>
Net Income. Net income increased $3.6 million to $7.0 million in 1997, due
to the items discussed above.
1996 Compared to 1995
Revenues. Revenues increased $2.7 million, or 13%, to $22.4 million in 1996
from $19.7 million in 1995 as a result of strong growth in REVPAR of 6%. The
increase in REVPAR was primarily the result of a 8% increase in average room
rates offset by a 1.5 percentage point decrease in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased
$600,000 to $10.2 million, or 46% of Hotel revenues, in 1996 from $9.7
million, or 49% of Hotel revenues, in 1995.
Operating Profit. Operating profit increased $2.1 million to $12.1 million,
or 54% of Hotel revenues, in 1996 from $10.0 million, or 51% of Hotel
revenues, in 1995 due to the changes in Hotel revenues and Hotel operating
costs discussed above.
Interest Expense. Interest expense decreased $1.0 million to $9.1 million in
1996. This decrease can be attributed to a decline in interest rates, as well
as a lower outstanding principal balance due to principal amortization on the
Mortgage Debt.
Net Income. Net income increased to $3.4 million in 1996, from $393,000 in
1995 due to the items discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. The General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to conduct its operations in the ordinary course of business.
The Partnership is required to maintain the Hotels in good condition. The
hotel management agreement provides for the establishment of a property
improvement fund for each Hotel. Contributions to the property improvement
fund are equal to a percentage of gross Hotel sales. Contributions to the fund
for the Fairview Park, Southfield, Livonia and Fullerton Hotels were 3% for
the years 1995 through 1999 and 4% for the year 2000 and thereafter. The
Dayton Hotel will contribute 4% annually. Annual contributions at the Research
Triangle Park Hotel were 3% through 1997 and will be 4% in 1998 and
thereafter. The Partnership believes that the contributions provide sufficient
reserve for the capital repair and replacement needs of the Hotels in 1998.
However, it is anticipated that shortfalls in the property improvement fund
will occur after 1998. The General Partner will work with the Manager to
resolve the expected shortfall.
For 1997, the Partnership paid a base management fee equal to 3% of gross
sales. No incentive management fees will be accrued by the Partnership or be
considered earned by the manager until the entire mortgage principal balance,
together with accrued interest, is paid in full. No incentive management fees
have been earned by or paid to MHSI since the inception of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel operations. Its
principal uses of cash are to pay debt service, fund the property improvement
fund and, until September 1996, make distributions to partners. Cash provided
by operations was $15.6 million, $11.0 million and $7.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively and $7.6 million and $6.2
million for the first two quarters of 1998 and 1997, respectively. The
increase is primarily due to improved Hotel operations.
Cash used in investing activities was $3.1 million, $2.8 million and $1.7
million in 1997, 1996 and 1995, respectively. The Partnership's cash investing
activities consist primarily of contributions to the property improvement fund
and capital expenditures for improvements to existing hotels. Contributions to
the property
F-299
<PAGE>
improvement fund amounted to $2,442,000, $2,558,000 and $2,104,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Cash used in
investing activities for the first two quarters of 1998 and 1997 was $920,000
and $1,549,000, respectively. Contributions to the property improvement fund
were $1.3 million and $1.1 million for the first two quarters of 1998 and
1997, respectively.
Cash used in financing activities was $14.1 million, $8.5 million and $4.9
million in 1997, 1996 and 1995, respectively. The Partnership's cash financing
activities consist primarily of capital distributions to partners and payments
of the mortgage debt. The increase in cash used in financing activities in
1997 is primarily due to the increased principal amortization in 1997 as
compared to 1996 and 1995 as required under the loan agreement. For the first
two quarters of 1998 and 1997, cash used in financing activities was $6.4
million and $6.2 million, respectively. The increase in cash used during the
first two quarters of 1998 compared to the comparable period in the prior year
is due to increased principal amortization in 1998. Principal payments on the
mortgage debt increased due to improved operations at the hotels.
INFLATION
For the three fiscal years ended December 31, 1997 and the first two
quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott, the parent company of the General
Partner, has invested in implementing new accounting systems which are Year
2000 compliant. Accordingly, the General Partner believes that future costs
associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHSI,
the manager of its properties to obtain financial information. The General
Partner believes that the manager has begun to implement changes to the
property specific software to ensure the software will function properly in
the Year 2000 and does not expect to incur significant costs related to these
modifications.
F-300
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.:
We have audited the accompanying balance sheet of Marriott Diversified
American Hotels, L.P. (a Delaware limited partnership) as of December 31, 1997
and 1996, and the related statements of operations, changes in partners'
deficit and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Diversified
American Hotels, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
April 8, 1998
F-301
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net.............................. $108,153 $111,278
Mortgage escrow.......................................... 11,624 5,710
Due from Marriott Hotel Services, Inc.................... 3,714 4,571
Debt service reserve fund................................ 3,000 3,000
Property improvement fund................................ 1,667 1,781
Deferred financing costs, net............................ 536 816
Cash and cash equivalents................................ 1,137 2,762
-------- --------
Total Assets........................................... $129,831 $129,918
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $122,014 $128,745
Debt service guarantee and related interest payable to
Host Marriott Corporation................................ 19,762 18,600
Note payable and related interest due to the General
Partner................................................. 2,804 2,615
Deferred purchase debt and related interest payable to
Host Marriott Corporation................................ 676 675
Accounts payable and accrued expenses.................... 1,054 1,366
-------- --------
Total Liabilities...................................... 146,310 152,001
-------- --------
Partners' Deficit
General Partner
Capital contribution, net of offering costs of $15...... 403 403
Capital distributions................................... (98) (84)
Cumulative net losses................................... (419) (489)
-------- --------
(114) (170)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $4,785.. 35,830 35,830
Investor notes receivable............................... (966) (966)
Capital distributions................................... (9,738) (8,370)
Cumulative net losses................................... (41,491) (48,407)
-------- --------
(16,365) (21,913)
-------- --------
Total Partners' Deficit................................ (16,479) (22,083)
-------- --------
$129,831 $129,918
======== ========
</TABLE>
See Notes to Financial Statements.
F-302
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
REVENUES
Hotel Revenues (Note 3).......................... $26,699 $22,374 $ 19,715
------- ------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................... 6,398 6,032 5,534
Base management fee due to Marriott
Hotel Services, Inc.............................. 2,260 2,086 1,944
Property taxes and other......................... 2,608 2,131 2,198
------- ------- --------
11,266 10,249 9,676
------- ------- --------
OPERATING PROFIT................................... 15,433 12,125 10,039
Interest expense................................. (8,944) (9,129) (10,093)
Interest income.................................. 497 422 447
------- ------- --------
NET INCOME......................................... $ 6,986 $ 3,418 $ 393
======= ======= ========
ALLOCATION OF NET INCOME
General Partner.................................. $ 70 $ 34 $ 4
Limited Partners................................. 6,916 3,384 389
------- ------- --------
$ 6,986 $ 3,418 $ 393
======= ======= ========
NET INCOME PER LIMITED PARTNER UNIT (414 UNITS).... $16,705 $ 8,174 $ 940
======= ======= ========
</TABLE>
See Notes to Financial Statements.
F-303
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $(171) $(21,937) $(22,108)
Capital distributions............................. (18) (1,855) (1,873)
Net income........................................ 4 389 393
----- -------- --------
Balance, December 31, 1995.......................... (185) (23,403) (23,588)
Capital distributions............................. (19) (1,894) (1,913)
Net income........................................ 34 3,384 3,418
----- -------- --------
Balance, December 31, 1996.......................... (170) (21,913) (22,083)
Capital distributions............................. (14) (1,368) (1,382)
Net income........................................ 70 6,916 6,986
----- -------- --------
Balance, December 31, 1997.......................... $(114) $(16,365) $(16,479)
===== ======== ========
</TABLE>
See Notes to Financial Statements.
F-304
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 6,986 $ 3,418 $ 393
Noncash items:
Depreciation and amortization.................... 6,398 6,032 5,534
Deferred interest................................ 1,414 1,375 1,414
Amortization of deferred financing costs as in-
terest expense.................................. 280 279 278
Loss on retirement of property and equipment..... 15 12 73
Changes in operating accounts:
Due to/from Marriott Hotel Services, Inc......... 816 (730) (153)
Accounts payable and accrued expenses............ (312) 55 104
Due to/from Host Marriott Corporation............ -- 600 (653)
-------- ------- -------
Cash provided by operations.................... 15,597 11,041 6,990
-------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment.............. (3,288) (3,588) (2,895)
Change in property improvement fund, net......... 114 786 609
Return of working capital from Marriott Hotel
Services, Inc................................... 41 50 600
-------- ------- -------
Cash used in investing activities.............. (3,133) (2,752) (1,686)
-------- ------- -------
FINANCING ACTIVITIES
Payment of mortgage debt......................... (6,731) (3,201) (2,698)
Mortgage escrow.................................. (5,914) (3,341) (326)
Capital distributions to partners................ (1,382) (1,913) (1,873)
Repayment of deferred purchase debt due to Host
Marriott Corporation............................ (62) (82) --
Deferred financing costs......................... -- -- (1)
-------- ------- -------
Cash used in financing activities.............. (14,089) (8,537) (4,898)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (1,625) (248) 406
CASH AND CASH EQUIVALENTS at beginning of year..... 2,762 3,010 2,604
-------- ------- -------
CASH AND CASH EQUIVALENTS at end of year........... $ 1,137 $ 2,762 $ 3,010
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest:
Mortgage debt.................................... $ 7,373 $ 7,491 $ 8,362
Deferred purchase debt due to Host Marriott Cor-
poration........................................ 62 10 81
-------- ------- -------
$ 7,435 $ 7,501 $ 8,443
======== ======= =======
</TABLE>
See Notes to Financial Statements.
F-305
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Diversified American Hotels, L.P. (the "Partnership"), a Delaware
limited partnership, was formed on October 4, 1989 to acquire, own and operate
the following hotels (the "Hotels") which are managed as part of the Marriott
full-service hotel system by Marriott Hotel Services, Inc. ("MHSI"), a wholly-
owned subsidiary of Marriott International, Inc. ("Marriott International"):
(i) the 395-room Fairview Park Marriott in Virginia; (ii) the 399-room Dayton
Marriott in Ohio; (iii) the 224-room Marriott at Research Triangle Park in
North Carolina; (iv) the 226-room Detroit Marriott Southfield in Michigan; (v)
the 224-room Detroit Marriott Livonia in Michigan; and (vi) the 224-room
Fullerton Marriott in California. The sole general partner of the Partnership,
with a 1% interest, is Marriott MDAH One Corporation (the "General Partner"),
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott").
Partnership operations commenced on February 8, 1990 (the "Initial Closing
Date"). Between November 14, 1989 and the Initial Closing Date, 381 limited
partnership interests (the "Units") were sold pursuant to a private placement
offering. Between the Initial Closing Date and April 23, 1990 (the "Final
Closing Date"), the offering was completed with the sale of 33 additional
Units. The offering price per Unit was $100,000; $15,000 payable at
subscription with the balance due in three annual installments through June
20, 1992, or, alternatively, $88,396 in cash at closing as full payment of the
subscription price. As of the Final Closing Date, 348.5 Units were purchased
on the installment basis, and 65.5 Units were paid in full. The limited
partners' obligation to make the installment payments is evidenced by
promissory notes (the "Investor Notes") payable to the Partnership and secured
by the Units. The General Partner contributed $418,182 in cash on the Initial
Closing Date for its 1% general partnership interest.
On the Initial Closing Date, the Partnership executed a purchase agreement
with Host Marriott and certain of its affiliates to acquire the Hotels and the
Hotels' working capital and supplies for $157 million. Of the total purchase
price, $131.4 million was paid in cash from the proceeds of mortgage financing
and the initial installment on the sale of the Units with the remaining $25.6
million evidenced by a promissory note (the "Deferred Purchase Debt") payable
to Host Marriott.
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership allocations,
for Federal income tax purposes, and distributions are generally made as
follows:
a. Cash available for distribution will generally be distributed (i) first,
1% to the General Partner and 99% to the limited partners, until the partners
have received, with respect to such year, an amount equal to 10% of
contributed capital, as defined; (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of
cumulative distributions of net refinancing and/or sales proceeds ("Capital
Receipts") previously distributed:
(1) 1% to the General Partner and 99% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(2) 10% to the General Partner and 90% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(3) 20% to the General Partner and 80% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
F-306
<PAGE>
b. Capital Receipts not retained by the Partnership will be distributed (i)
first, 1% to the General Partner and 99% to the limited partners until the
partners have received an amount equal to the unpaid portion of a cumulative
15% return on Net Invested Capital, defined as the excess of capital
contributions over cumulative distributions of Capital Receipts, plus
contributed capital, as defined; and (ii) thereafter, 20% to the General
Partner and 80% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their
capital account balances as adjusted to take into account gain or loss
resulting from such sale.
d. Net profits will generally be allocated to the partners in proportion to
the distributions of cash available for distribution.
e. Net losses will be allocated 75% to the General Partner and 25% to the
limited partners.
f. Deductions for interest on the Deferred Purchase Debt (see Note 6), which
cumulatively will not exceed $11,604 per Unit, will be allocated to those
limited partners owning the Units purchased on the installment basis.
g. Gain recognized by the Partnership will be allocated as follows: (i)
first, to all partners whose capital accounts have negative balances until
such balances are brought to zero; (ii) next, to all partners in amounts
necessary to bring their respective capital account balances to an amount
equal to their Net Invested Capital plus a cumulative 15% return on Net
Invested Capital; and (iii) thereafter, 20% to the General Partner and 80% to
the limited partners.
h. Losses will generally be allocated as follows: (i) first, to all partners
whose capital accounts have positive balances until such balances have been
eliminated; and (ii) thereafter, 100% to the General Partner.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year.
Restricted Cash
In connection with the June 30, 1993 refinancing of the mortgage debt, a
debt service reserve in the amount of $3.0 million was required to be held by
the lender. In addition, the loan agreement requires that to the extent that
there was cash available after payment of principal and interest on Note A and
interest on Note B, then such remaining cash was split 50% to the Partnership
and 50% to the Mortgage Escrow. The Mortgage Escrow was applied annually 50%
to the payment of additional principal on Note A, and 50% to the principal on
Note B, until the Partnership received a cumulative amount equal to
$7,352,000. The Partnership reached this cumulative amount in September 1996.
Thereafter, 100% of remaining cash flow is reserved in the Mortgage Escrow and
applied annually 25% to Note A and 75% to Note B. At December 31, 1997, the
balance of the Mortgage Escrow was $11.6 million. This amount will be applied
toward principal amortization in 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-307
<PAGE>
Revenues and Expenses
Revenues represent house profit of the Hotels since the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit from the Hotels to MHSI. House profit reflects
Hotel operating results which flow to the Partnership as property owner and
represents gross Hotel sales less property-level expenses, excluding
depreciation and amortization, base management fees, real and personal
property taxes, ground and equipment rent, insurance and certain other costs,
which are disclosed in the statement of operations (see Note 3).
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses to
approximately $48.6 million, $47.2 million and $45.1 million for the year
ended December 31, 1997, 1996, and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Land improvements........................................... 40 years
Buildings and improvements.................................. 40 years
Leasehold improvements...................................... 40 years
Furniture and equipment..................................... 4 to 10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If the property
is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the Mortgage Debt and are being amortized over the term thereof.
Organization costs incurred in the formation of the Partnership were amortized
on a straight-line basis over five years. Organization costs were fully
amortized and removed from the Partnership's accounts as of December 31, 1995.
As of December 31, 1997 and 1996, accumulated amortization of deferred
financing costs totaled $1,995,000 and $1,715,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
less than three months at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income (loss) for financial
reporting purposes and the net income (loss) reported in the Partnership's tax
return. These differences are primarily due to the use, for income tax
purposes, of accelerated depreciation methods and shorter depreciable lives of
the assets. As a result of these differences, the excess of the tax basis in
net Partnership liabilities over the net liabilities reported in the
F-308
<PAGE>
accompanying financial statements is $3,462,000 and $5,650,000 as of December
31, 1997 and 1996, respectively.
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on the financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3. HOTEL REVENUES
Hotel Revenues consist of Hotel operating results for the three years ended
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms.............................................. $48,427 $43,621 $40,201
Food and beverage.................................. 22,900 22,058 20,716
Other.............................................. 3,994 3,864 3,876
------- ------- -------
75,321 69,543 64,793
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................. 12,063 11,333 10,638
Food and beverage................................. 17,464 17,172 16,439
Other hotel operating expenses..................... 19,095 18,664 18,001
------- ------- -------
48,622 47,169 45,078
------- ------- -------
HOTEL REVENUES....................................... $26,699 $22,374 $19,715
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 14,265 $ 14,265
Buildings and improvements............................... 95,477 94,368
Leasehold improvements................................... 15,717 15,173
Furniture and equipment.................................. 29,255 27,832
-------- --------
154,714 151,638
Less accumulated depreciation............................ (46,561) (40,360)
-------- --------
$108,153 $111,278
======== ========
</TABLE>
F-309
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt.............. $122,014 $113,300 $128,745 $117,231
Debt service guarantee and
related interest payable
to Host Marriott
Corporation............... 19,762 17,600 18,600 7,800
Note payable and related
interest due to the
General Partner........... 2,804 800 2,615 743
Deferred purchase debt and
related interest payable
to Host Marriott
Corporation............... 676 450 675 384
</TABLE>
The estimated fair value of mortgage debt obligations is based on the
expected future debt service payments discounted at estimated market rates.
Notes and other payables due to Host Marriott and affiliates are valued based
on the expected future payments from operating cash flow discounted at risk-
adjusted rates.
NOTE 6. DEBT
Mortgage Debt
On June 30, 1993, the General Partner completed a restructuring of the
Partnership's first mortgage (the "Mortgage Debt"). Pursuant to the terms of
the restructuring, the original Mortgage Debt of $128 million was divided into
two notes, Note A with a principal balance of $85 million and Note B with a
principal balance of $43 million, which mature on December 15, 1999. In
addition, interest rate swap termination costs of $9.3 million relating to the
original Mortgage Debt were established as Note C with a maturity date of
December 15, 2010. The Partnership paid $12.3 million to the lender which was
applied as follows: $7.6 million to the interest due through closing, $3.0
million to fund a new debt service reserve (the "Reserve"), $1.0 million as a
loan extension fee, and $.7 million to principal. The 1992 purchase price
adjustment made by Host Marriott to the Partnership was applied toward the
scheduled interest payment and to partially fund the Reserve. The remainder of
the payment was funded by a $2.0 million loan from the General Partner and
from the Partnership's operating cash account funds. The loan from the General
Partner bears interest at the prime lending rate plus 1% and matures on June
30, 2008.
Interest on Note A accrues at a floating rate, as elected by the
Partnership, equal to one percentage point over either one, two, three or six-
month London interbank offered rate ("LIBOR"). Principal amortization of
$600,000 was required in 1993 escalating annually to $1 million in 1998. To
the extent that operating profit is not sufficient to fund required Note A
interest and principal, then necessary funds will be drawn from the Reserve.
The weighted-average effective interest rate on Note A was 6.7% and 6.2% for
1997 and 1996, respectively. Interest on Note B accrues at LIBOR. To the
extent that operating profit is not sufficient to fund Note B interest in any
fiscal year, then Note B interest is limited to cash available after payment
of Note A principal and interest. Unpaid Note B interest for any fiscal year
is forgiven. The weighted-average effective interest rate on Note B was 5.7%
and 5.5% for 1997 and 1996, respectively. In addition, to the extent that
there was cash available after payment of principal and interest on Note A and
interest on Note B, then such remaining cash was split 50% to the Partnership
and 50% to the Mortgage Escrow. The Mortgage Escrow was applied annually 50%
to the payment of additional principal on Note A, and 50% to the principal on
Note B, until the Partnership received a cumulative amount equal to
$7,352,000. The Partnership reached this cumulative amount in September 1996.
Thereafter, 100% of remaining cash flow is applied 25% to Note A and 75% to
Note B. At December 31, 1997, the balance of the Mortgage Escrow was $11.6
million and is included in the accompanying balance sheet. Note C bears no
interest and has no required principal amortization prior to its maturity.
F-310
<PAGE>
The Mortgage Debt is secured by first mortgages on each of the Hotels, the
Partnership's interest in the Fullerton Hotel ground lease, the land on which
the remaining Hotels are located, the Partnership's interest in the Fairview
Park Hotel parking garage lease, a security interest in all of the personal
property associated with each Hotel, a security interest in the Partnership's
rights under the management and purchase agreement and a security interest in
the Partnership's deposit accounts.
Scheduled amortization and maturities of the Mortgage Debt at December 31,
1997 are (in thousands):
<TABLE>
<S> <C>
1998................................ $ 1,000
1999................................ 111,678
2000................................ 0
2001................................ 0
2002................................ 0
Thereafter.......................... 9,336
--------
$122,014
========
</TABLE>
As of December 31, 1993, Host Marriott's debt service guarantee on the
original Mortgage Debt totaling $13 million was fully exhausted. Advances
under the guarantee bear interest at the prime lending rate plus one-half
percentage point. For 1997 and 1996, the weighted-average effective interest
rate was 8.9% and 8.8%, respectively. These advances will be repaid from
available cash flow after payments of ground rent, Mortgage Debt Service,
Partnership administrative expenses in excess of Partnership interest income
and retention by the Partnership of an amount equal to 10% of the partners'
contributed capital, as defined. During 1997, no amounts were repaid to Host
Marriott pursuant to the debt service guarantees. In addition, the General
Partner has provided a foreclosure guarantee to the lender in the amount of
$25 million. Pursuant to the terms of the foreclosure guarantee, amounts would
be payable only upon a foreclosure on the Hotels and only to the extent that
the gross proceeds from the foreclosure sale were less than $25 million.
Deferred Purchase Debt
The Deferred Purchase Debt bears interest at 10% per annum and was due July
1, 1992. The note was required to be repaid from, and is secured by, the
proceeds of the Investor Notes which were due through June 20, 1992. Investor
Notes outstanding as of December 31, 1997 represent payments due from
defaulters and related interest payable under such notes. As a result of the
Partnership's failure to collect the Investor Notes in full, and subsequent
failure to repay the Deferred Purchase Debt in full, the Partnership is
currently in default under the terms of the Deferred Purchase Debt agreements.
Host Marriott has the right to perfect a security interest in the Units
securing the defaulted Investor Notes. However, Host Marriott agreed not to
foreclose on its interest in the Units prior to the earlier of the sale of the
Hotels or January 1, 1998. As of April 8, 1998, Host Marriott has not
exercised its option to foreclose on its interest in the Units. Total accrued
interest on the Deferred Purchase Debt at December 31, 1997 and 1996, was
$47,000 and $42,000, respectively.
NOTE 7. MANAGEMENT AGREEMENT
The Partnership entered into a hotel management agreement on the Initial
Closing Date with Marriott International to manage the Hotels for an initial
20-year term expiring December 31, 2009. During 1996, Marriott International
assigned all of its interest in the hotel management agreement to MHSI, a
wholly-owned subsidiary of Marriott International. MHSI has the option to
renew the hotel management agreement on one or more of the Hotels for up to
five successive 10-year terms (four successive 10-year terms for the Fullerton
Hotel). MHSI earns a base management fee equal to 3% of gross sales.
In connection with the 1993 loan restructuring, the hotel management
agreement was modified. During the restructured loan term, no incentive
management fees will be accrued by the Partnership or be considered earned by
the manager until the entire mortgage principal balance, together with accrued
interest, is paid in full. No incentive management fees have been paid to MHSI
since the inception of the Partnership.
F-311
<PAGE>
Pursuant to the terms of the hotel management agreement, MHSI 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 full-service 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 full-service
hotels managed, owned or leased by Marriott International or its subsidiaries.
In addition, the Hotels also participate in Marriott's Rewards Program ("MRP")
which succeeded the Marriott Honored Guest Awards Program. The cost of this
program is charged to all hotels in the Marriott full-service hotel system
based upon the MRP sales at each hotel. The total amount of Chain Services and
MRP costs charged to the Partnership was $3,874,000 for 1997, $3,497,000 for
1996, $3,316,000 for 1995.
Pursuant to the terms of the hotel management agreement, the Partnership is
required to provide MHSI with working capital and supplies to meet the
operating needs of the Hotels. MHSI converts cash advanced by the Partnership
into other forms of working capital consisting primarily of operating cash,
inventories, and trade receivables and payables which are maintained and
controlled by MHSI. Upon termination of the hotel management agreement, the
working capital and supplies will be returned to the Partnership. The
individual components of working capital and supplies controlled by MHSI are
not reflected in the Partnership's balance sheet. A total of $4,500,000 was
advanced to MHSI for working capital and supplies of which $600,000 was
returned to the Partnership during 1995, $50,000 was returned during 1996 and
$41,000 was returned in 1997 leaving a balance of $3,900,000, $3,850,000 and
$3,809,000 as of December 31, 1995, 1996 and 1997, respectively, which is
included in Due from Marriott Hotel Services, Inc. in the accompanying balance
sheet. The supplies advanced to MHSI are recorded at their estimated net
realizable value. At December 31, 1997 and 1996, accumulated amortization
related to the revaluation of these supplies totaled $473,000.
The hotel management agreement provides for the establishment of a property
improvement fund for each Hotel. Contributions to the property improvement
fund are equal to a percentage of gross Hotel sales. Contributions to the fund
for the Fairview Park, Southfield, Livonia and Fullerton Hotels were 3% for
the years 1995 through 1999 and 4% for the year 2000 and thereafter. The
Dayton Hotel contributes 4% annually. Annual contributions at the Research
Triangle Park Hotel were 3% through 1997 and will be 4% in 1998 and
thereafter. Aggregate contributions to the property improvement fund amounted
to $2,442,000, $2,258,000 and $2,104,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
NOTE 8. GROUND LEASES
The Partnership leases the land on which the Fullerton Hotel is located. The
initial term expires in 2019 with four successive 10-year renewals at the
Partnership's option. The lease provides for percentage rental equal to 4% of
gross room sales for each year. Prior to October 1995, the lease provided for
percentage rent equal to 1% of gross room sales. Ground rent expense incurred
for this lease for the years ended December 31, 1997, 1996 and 1995 was
$199,000, $185,000 and $99,000, respectively. The Partnership also leases the
land on which the Fairview Park Hotel parking garage is located. The lease
expires in 2085 and requires a nominal rental of $1 per year.
F-312
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $106,447 $108,153
Mortgage escrow....................................... 6,182 11,624
Due from Marriott Hotel Services, Inc................. 4,590 3,714
Debt service reserve fund............................. 3,000 3,000
Property improvement fund............................. 1,964 1,667
Deferred financing costs, net......................... 408 536
Cash and cash equivalents............................. 1,418 1,137
-------- --------
Total Assets...................................... $124,009 $129,831
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $110,193 $122,014
Debt service guarantee and related interest payable
to Host Marriott Corporation....................... 20,307 19,762
Note payable and related interest due to the General
Partner............................................ 2,893 2,804
Deferred purchase debt and related interest payable
to Host Marriott Corporation....................... 706 676
Accounts payable and accrued expenses............... 993 1,054
-------- --------
Total Liabilities................................. 135,092 146,310
-------- --------
PARTNERS' DEFICIT
General Partner..................................... (60) (114)
Limited Partners.................................... (11,023) (16,365)
-------- --------
Total Partners' Deficit........................... (11,083) (16,479)
-------- --------
$124,009 $129,831
======== ========
</TABLE>
See Notes To Condensed Financial Statements.
F-313
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES.................................................. $ 14,521 $ 12,504
--------- ---------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................... 2,779 2,381
Base management fees.................................... 1,144 1,042
Property taxes and other................................ 1,373 1,213
--------- ---------
5,296 4,636
--------- ---------
OPERATING PROFIT.......................................... 9,225 7,868
Interest expense........................................ (4,139) (4,175)
Interest income......................................... 310 91
--------- ---------
NET INCOME................................................ $ 5,396 $ 3,784
========= =========
ALLOCATION OF NET INCOME
General Partner......................................... $ 54 $ 38
Limited Partners........................................ 5,342 3,746
--------- ---------
$ 5,396 $ 3,784
========= =========
NET INCOME PER LIMITED PARTNER UNIT (414 Units)........... $ 12,903 $ 9,048
========= =========
</TABLE>
See Notes To Condensed Financial Statements.
F-314
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 5,396 $ 3,784
Noncash items........................................... 3,570 3,108
Change in operating accounts............................ (1,387) (712)
--------- --------
Cash provided by operating activities................. 7,579 6,180
--------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net................ (1,073) (2,135)
Change in property improvement fund..................... (297) 586
Return of working capital from Marriott Hotel Services,
Inc.................................................... 450 --
--------- --------
Cash used in investing activities..................... (920) (1,549)
--------- --------
FINANCING ACTIVITIES
Payment of mortgage debt................................ (11,821) (6,192)
Change in mortgage escrow............................... 5,443 1,339
Capital distributions to partners....................... -- (1,383)
--------- --------
Cash used in financing activities..................... (6,378) (6,236)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 281 (1,605)
CASH AND CASH EQUIVALENTS at beginning of period.......... 1,137 2,762
--------- --------
CASH AND CASH EQUIVALENTS at end of period................ $ 1,418 $ 1,157
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............... $ 3,357 $ 3,532
========= ========
</TABLE>
See Notes To Condensed Financial Statements.
F-315
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Marriott Diversified American Hotels, L.P. (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included in the Partnership's Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998, the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
99% to the Limited Partners and 1% to the General Partner. Significant
differences exist between the net income for financial reporting purposes and
the net income reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods and shorter depreciable lives of the assets.
2. The Partnership owns and operates the Marriott Research Triangle Park,
Southfield Marriott, Detroit Marriott at Livonia, Fullerton Marriott, Fairview
Park Marriott and Dayton Marriott. The sole general partner of the
Partnership, with a 1% interest, is Marriott MDAH One Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The remaining 99% interest in the Partnership is owned by
the limited partners.
3. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
4. Hotel revenues represent house profit of the Partnership's Hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, Inc. (the "Manager"). House profit reflects hotel operating results
which flow to the Partnership as property owner and represents gross hotel
sales less property-level expenses, excluding depreciation and amortization,
base management fees, property taxes, ground rent, insurance and other costs,
which are disclosed separately in the condensed statement of operations.
F-316
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Partnership revenues generated by the Hotels for 1998 and 1997 consist of
(in thousands):
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
-------------------
1998 1997
--------- ---------
<S> <C> <C>
HOTEL SALES
Rooms................................................. $ 25,093 $ 22,710
Food and beverage..................................... 11,054 10,216
Other................................................. 1,981 1,819
--------- ---------
38,128 34,745
--------- ---------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................... 5,995 5,573
Food and beverage................................... 8,423 7,938
Other hotel operating expenses........................ 9,189 8,730
--------- ---------
23,607 22,241
--------- ---------
REVENUES................................................ $ 14,521 $ 12,504
========= =========
</TABLE>
5. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $23.6 million and $22.2 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
6. On April 17, 1998, Host Marriott, the General Partner of the Partnership,
announced that its Board of Directors has authorized the company to reorganize
its business operations to qualify as a real estate investment trust ("REIT")
to become effective as of January 1, 1999. As part of the REIT conversion,
Host Marriott expects to form a new operating partnership (the "Operating
Partnership") and limited partners in certain Host Marriott full-service hotel
partnerships and joint ventures, including the Marriott Diversified American
Hotels, L.P., are expected to be given an opportunity to receive, on a tax-
deferred basis, Operating Partnership units in the Operating Partnership in
exchange for their current limited partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
on June 2, 1998, the Operating Partnership filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission. Limited partners will be
able to vote on this Partnership's participation in the merger later this year
through a consent solicitation.
F-317
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with the financial statements and
the notes thereto, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT(1))
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 29,480 $ 28,048 $ 50,323 $ 45,853 $ 50,598 $ 43,777 $ 45,994
Operating profit........ 14,077 14,350 21,056 21,898 23,442 9,863 10,593
Income (loss) before ex-
traordinary item(2).... 2,429 3,188 (2,825) (1,841) 20,045 (22,741) (21,729)
Net income (loss)....... 2,429 3,188 (2,825) (1,841) 166,348 24,427 (4,581)
Distributions
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:
Net income (loss)...... 1,336 1,753 (1,554) (1,013) 88,187 8,601 (2,519)
Distributions.......... -- -- -- -- -- -- --
Cash provided by operat-
ing activities......... 17,962 18,043 20,886 19,384 14,812 3,480 5,764
Cash used in (provided
by) investing activi-
ties................... (4,082) (4,195) (7,754) (10,249) 37,237 (36,472) --
Cash used in (provided
by) financing activi-
ties................... (16,473) (18,102) (15,178) (10,046) (53,793) 37,156 (4,372)
Increase (decrease) in
cash and cash equiva-
lents.................. (2,593) (4,254) (2,046) (911) (1,744) 4,164 1,392
Ratio of earnings to
fixed charges (unau-
dited)(3).............. 1.20x 1.27x -- -- -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(3)......... -- -- 2,825 1,841 4,541 22,741 21,729
Total assets at book
value.................. 185,666 188,608 178,224 179,867 176,521 196,061 203,251
Cash and cash equiva-
lents.................. 589 974 3,182 5,228 6,139 7,883 3,719
Total debt(4)........... 292,998 299,940 298,442 304,564 308,519 359,186 401,829
Total liabilities....... 330,359 329,717 325,346 324,164 318,977 506,865 538,482
Partners' deficit:
Limited partners....... (109,876) (106,327) (112,280) (109,483) (107,660) (266,396) (281,878)
General partner........ (34,817) (34,782) (34,842) (34,814) (34,796) (44,408) (53,353)
Book Value per Partner-
ship Unit (unau-
dited)(1).............. (61,042) (59,071) (62,378) (60,824) (59,811) (147,998) (156,599)
Estimated Exchange Value
per Partnership Unit
(unaudited)(1)......... 5,040 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $10,000 original investment in PHLP.
(2) In 1995, an extraordinary gain of $146,303,000 was recognized as a result
of the forgiveness of deferred base and incentive management fees in
connection with the bank loan restructuring. In 1994 and 1993, $47,168,000
and $17,148,000 respectively, of gains on early debt extinguishment
resulting from the foreclosure of the S&L Hotels were recognized as
extraordinary items.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $8,430,000, $5,473,000, $5,912,000,
$7,219,000, and $6,859,000 for the fiscal years 1997, 1996, 1995, 1994,
and 1993, respectively.
(4) Total debt includes amounts due to Host of $123,819,000, $121,952,000,
$125,475,000, $124,348,000, $122,176,000, $114,186,000 and $79,983,000 as
of June 19, 1998, June 20, 1997 and December 31, 1997, 1996 and 1995,
respectively.
F-318
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Hotel Revenues: Hotel revenues increased 5% to 29.5 million for the first
two quarters 1998, when compared to the same period in 1997. The increases in
revenues are primarily due to the increases in REVPAR at seven of the eight
Hotels for the first two quarters 1998. REVPAR, or revenue per available room,
represents the combination of the average daily room rate charged and the
average daily occupancy achieved and is a commonly used indicator of hotel
performance. For the first two quarters 1998, the combined average room rate
increased 7% to $118, while the combined average occupancy decreased one
percentage point to 81%, when compared to the same period in 1997.
Operating Costs and Expenses: Operating costs and expenses increased 12% to
$15.4 million for the first two quarters 1998, when compared to the same
period in 1997. The principal components of this category are:
Management Fees: Incentive management fees, base management fees, and
ground rent are calculated generally as a percentage of Hotel sales or
Hotel revenues. The increases in these expenses for the first two quarters
1998 were directly related to the increases in Hotel sales and Hotel
revenues for the first two quarters 1998.
Depreciation: Depreciation expense increased in the first two quarters of
1998 due to property and equipment additions as well as a change in the
estimated useful lives of certain assets.
Operating Profit: Operating profit decreased 2% to $14.1 million for the
first two quarters 1998, when compared to the same period in 1997. The
decrease in operating profit for the first two quarters 1998 was attributable
to the increase in operating costs and expenses which was partially offset by
the increase in revenues.
Interest Expense: Interest expense increased 4% to $11.9 million for the
first two quarters 1998, when compared to the same period in 1997. The
weighted average interest rate on the Bank Loan was 8.3% for the first two
quarters 1998, as compared to 7.4% for the comparable period in 1997.
Net Income: Net income decreased 24% to $2.4 million for the first two
quarters 1998, when compared to the same period in 1997 due to the increases
in operating costs and expenses and interest expense.
Individual hotel operating results are discussed below:
For the first two quarters 1998 revenues at the MOUNTAIN SHADOWS RESORT
decreased 2% to $5.3 million when compared to the same period of 1997 due to
the decline in food and beverage revenues. In the upcoming months the Hotel
plans to increase its marketing efforts by distributing a newsletter in the
fall and circulating mailers during the holiday season.
Revenues for the TAMPA WESTSHORE HOTEL increased 4% to $2.9 million for the
first two quarters 1998, due to a 9% increase in room sales which was offset
by a 3% decrease in food and beverage sales. REVPAR improved 8% to $106 due to
an increase of 12% in the average room rate to $128 which was offset by a four
percentage point decrease in average occupancy when compared to the first two
quarters 1997. The slight decrease in average occupancy is related to the
customer's sensitivity to increases in average room rates. The Hotel recently
completed the renovation of the Champions lounge and has installed new health
club equipment for the guests. The Hotel is also utilizing focus groups in
order to continue to increase guest satisfaction and employing aggressive
pricing strategies in order to gain group business.
For the first two quarters 1998, revenues at the MIAMI BISCAYNE BAY HOTEL
increased 9% to $6.1 million when compared to the same period in 1997. This
increase was due to a 6% increase in REVPAR to $100 coupled
F-319
<PAGE>
with a 15% increase in food and beverage revenues due to strong catering
sales. The Hotel added two new airline contracts and started to focus on the
Latin American markets to increase it occupancy for the remainder of 1998.
For the first two quarters 1998 revenues at the SEATTLE SEA-TAC HOTEL
increased 17% to $4.8 million when compared to the same period in 1997. REVPAR
increased 10% to $96 due to a four percentage point increase in average
occupancy to 80% and a 6% increase in the average room rate to $120.
Additionally, for the first two quarters 1998 food and beverage revenues
increased 22% to $1.4 million. During 1998, the Hotel implemented revenue-
maximizing strategies, such as requiring large groups to purchase one catered
meal per day, and recent renovations at the Yukon Landing Restaurant and
Snoqualmie Ballroom have helped increase restaurant and banquet business.
During 1998, the Hotel obtained business from several new groups and also
experienced greater success with weekend promotions resulting in increased
revenues.
The GREENSBORO HOTEL experienced a 9% increase in revenues for the first two
quarters 1998 to $2.4 million over the same period in 1997 due to increased
room revenues and food and beverage revenues. Room revenues at the Hotel
increased 6% to $3.4 million when compared to the same period in 1997 due to a
7% increase in REVPAR to $89. The increase in REVPAR was due to a 7% increase
in the average room rate to $111 with average occupancy remaining stable at
80%. Food and beverage revenues increased 38% to $518,000 over the same period
of 1997 due to the significant increases in the Hotel's catering business.
Revenues at the HOUSTON MEDICAL CENTER HOTEL increased 18% to $3.3 million
for the first two quarters 1998 when compared to the same period in 1997. The
Hotel increased its sales 7% while reducing its direct operating expenses by
2%. The increase in sales was due to a 10% increase in REVPAR to $88 which was
attributable to a 14% increase in the average room rate to $109 offset by a
two percentage point decline in average occupancy to 81%. Direct operating
expenses decreased as the Hotel used stricter cost containment measures in its
food and beverage department. In order to address the decline in average
occupancy for the first two quarters 1998, the Hotel is planning several new
promotions. These promotions include using amusement park affiliations to
garner weekend and Labor Day business and using local media to obtain weekend
restaurant business. The Hotel is undergoing a rooms renovation that will
replace the bedspreads, drapery, upholstery, carpet and furniture in all the
guest rooms.
The RALEIGH CRABTREE VALLEY HOTEL reported a 4% increase in revenues for the
first two quarters 1998 to $2.7 million due to a 5% increase in REVPAR to $84.
The average room rate increased 6% to $102 while average occupancy decreased
one percentage point to 82% when compared to same period of last year. The
Hotel increased its corporate room rate by $10 in 1998, which primarily led to
the increase in the average room rate. In order to better serve its guests,
the Hotel opened a business center in May 1998. To improve the Hotel's average
occupancy, the Hotel is continuing its partnership with the North Carolina
State University as the preferred hotel of Wolfpack sporting events.
Revenues for the first two quarters of 1998 at the ALBUQUERQUE HOTEL
decreased 20% to $2 million due to a 7% decrease in REVPAR to $68 and a 36%
decline in food and beverage revenues when compared to the same period in
1997. The decrease in REVPAR was due to a 5% decrease in the average room rate
to $91 and a one percentage point decrease in occupancy to 75%. The Hotel is
trying to increase business on weekends through the "Can't Beat Friday"
discounted rate promotion. In order to increase food and beverage sales, a
director of catering was hired, and a restaurant and bar renovation is planned
for early 1999.
F-320
<PAGE>
The following chart summarizes REVPAR, or revenues per available room, and
the percentage change in REVPAR from the prior year for each Hotel owned by
the Partnership as of the end of the Second Quarter 1998. The percentage
change in REVPAR for the Raleigh and Tampa Hotels from 1994 to 1995 is not
shown because these Hotels were not owned by the Partnership for the entire
year in 1994.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS 1998 1997 1996 1995
----------------------- --------------- --------------- ---------------
REVPAR % CHANGE REVPAR % CHANGE REVPAR % CHANGE REVPAR % CHANGE
------------ ------------ ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mountain Shadows........ $ 139 2% $105 6% $99 5% $94 7%
Seattle................. 96 10 91 11 82 4 79 11
Tampa Westshore......... 106 8 87 9 80 10 73 N/A
Greensboro.............. 89 7 80 7 75 (1) 76 7
Miami Biscayne Bay...... 100 6 80 13 71 1 70 9
Raleigh Crabtree Val-
ley.................... 84 5 76 6 72 9 66 N/A
Houston Medical Center.. 88 10 75 12 67 5 64 2
Albuquerque............. 68 (7) 70 1 69 3 67 0
</TABLE>
1997 COMPARED TO 1996
Mountain Shadows
The Mountain Shadows Resort's revenues increased 10% to $6.8 million in 1997
when compared to 1996 due primarily to a 6% increase in REVPAR to $105. The
increase in REVPAR was due to an 11% increase in the average room rate to $138
offset by a four percentage point decrease in average occupancy to 76%. The
increase in the average room rate was attributable to the increases in the
Hotel's corporate rate by $15 to $151 and in the group rates by $9 to $135.
The decrease in average occupancy was related to unexpected group
cancellations during the second quarter of 1997. In 1997, the Hotel combined
its sales center with two other Marriott properties in the Scottsdale region
which improved its sales and marketing efficiency. Additionally during 1997,
the Hotel completed a renovation of its Cactus Flower Restaurant and its
Shells Seafood Restaurant. In early 1998, the Hotel replaced the carpet in the
ballroom.
Seattle
The Seattle Marriott Hotel reported an increase in revenues of 14% to $9.7
million for 1997 when compared to the prior year due to an 11% increase in
REVPAR to $91. The increase in REVPAR was due to a $12 increase in the average
room rate to $117. The Hotel's average occupancy remained stable at 78%. The
increase in average room rate is the result of the Hotel's ability to increase
room rates with little to no price resistance due to the strong transient
demand in the Seattle area. The Hotel's food and beverage revenues increased
$365,000 or 17% to $2.5 million when compared to 1996. This increase is
attributable to the increase in catering sales. The Hotel completed
renovations of its Snoqualmie Ballroom and Yukon Restaurant in February 1998.
In addition, the Hotel will be adding coffee makers, reading chairs, and
ergonomic workstations to its guest rooms in 1998. The current outlook for the
Seattle area remains strong due to continued growth of large companies such as
Boeing and Microsoft in the region.
Tampa Westshore
The Tampa Marriott Westshore Hotel experienced a 2% increase in revenues to
$4.6 million in 1997 as compared to 1996. REVPAR increased 9% to $87 in 1997
due to an $8 increase in the average room rate to $108 coupled with a two
percentage point increase in average occupancy to 81%. Rooms revenues
increased 7%, or $500,000, in 1997 when compared to 1996. This increase was
partially offset by an increase in repairs and maintenance expense related to
the air conditioning system. In 1998, the Hotel plans to replace the cooling
tower related to the air conditioning system. In early 1997, the Hotel
completed the third phase of the rooms renovation project that replaced the
furniture in approximately 108 guest rooms. All the guest rooms now feature
new furniture. During the summer of 1998, the Hotel plans to replace the guest
room carpet, draperies, and bedspreads. These improvements will enable the
Hotel to compete more effectively in the Tampa market in the future.
F-321
<PAGE>
Greensboro
In 1997, the Greensboro Hotel's revenues increased 4% to $4.7 million when
compared to 1996. REVPAR increased 7% to $80 due to increases in the average
room rate of $3 to $101 and in average occupancy of three percentage points to
79%. The increase in occupancy was primarily due to the addition of 2,000 new
contract roomnights. During 1997, the Hotel filled an open Director of
Marketing position that has helped increase revenues at the Hotel, especially
revenue from group and contract sales. In early 1997 the Hotel renovated the
restaurant, and in 1998 the Hotel will replace fixtures and tiles in all its
guest bathrooms. The Partnership expects the Greensboro market to continue to
improve in 1998 due to the increased popularity of the North Carolina
furniture market.
Miami Biscayne Bay
Miami Biscayne Bay Hotel revenues for 1997 increased an impressive 18% to
$9.1 million when compared to 1996 due primarily to increased rooms revenues.
REVPAR for 1997 increased 13% to $80 when compared to 1996 due to a $10
increase in average room rate to $97 and a one percentage point increase in
average occupancy to 83%. In 1997, the Hotel reduced its lower-rated airline
contract roomnights by approximately 19,000 roomnights and replaced a majority
of these roomnights with higher-rated corporate roomnights. During 1997, the
Hotel sold 64% corporate-rated rooms and 36% group and contract-rated rooms as
compared to 1996 when the Hotel sold 55% corporate-rated rooms and 45% group
and contract-rated rooms. During 1997, the Hotel replaced the furniture in its
guest rooms. During the summer of 1998, the Hotel plans to renovate the lobby,
restaurant and lounges.
Raleigh
In 1997, revenues increased 4% to $5.2 million for the Raleigh Hotel as
compared to 1996. REVPAR increased 6% to $76 due to a 7% increase in the
average room rate to $94. Average occupancy declined slightly to 81%. The
increase in average room rate was due to a $10 increase in the corporate rate
in 1997 to $119 as well as increases in some of the Hotel's special corporate
rates. During 1997, the Hotel began projects to expand its restaurant and to
convert its lounge to additional meeting space. These projects will be
completed in early 1998. Additionally, the Hotel plans to replace its ballroom
carpeting and create a Hotel business center in 1998. The Hotel currently is
marketing to local universities to attract weekend business during the fall
sports season.
Houston Medical Center
Revenues for the Houston Medical Center Hotel increased an impressive 20% to
$5.4 million in 1997 when compared to 1996. REVPAR increased 12% to $75 due to
a 12% increase in average room rate to $97 and a one percentage point increase
in average occupancy to 78%. The Hotel increased its corporate room rate by
$20 to $149 in 1997. Rooms revenues increased 13% due to the increase in the
average room rate. In 1998, the Hotel plans to complete a rooms renovation
that will replace the bedspreads, drapery, upholstery, carpet, and furniture
in all its guest rooms. This renovation will enable the Hotel to have a more
competitive product, and the General Partner anticipates that it will allow
the Hotel to increase its average room rate further in the future.
Albuquerque
Although REVPAR increased $1 to $70, revenues for the Albuquerque Hotel
decreased slightly in 1997 to $4.8 million when compared to the prior year.
The increase in REVPAR was due to the 13% increase in average room rate to $97
offset significantly by the eight percentage point decrease in average
occupancy to 72%. The decrease in revenues was due to the increase in salaries
and wages expenses related to the addition of a director of group sales and
the increase in sales promotion costs. These costs were necessary to address
the declining average occupancy. During 1998, the Hotel plans to replace a
major portion of the roof on the building and renovate the Allies American
Grille restaurant.
F-322
<PAGE>
1997 COMPARED TO 1996 COMBINED RESULTS OF OPERATIONS
Hotel Revenues: Hotel revenues increased 10% to $50.3 million in 1997
primarily due to an increase in REVPAR at each of the Partnership's Hotels in
1997 when compared to 1996.
Hotel Sales: Hotel sales increased 5% to $150.5 million in 1997 due to
increased rooms sales in 1997. The combined average room rate increased 9% to
$105 while combined average occupancy remained stable at 79%.
Direct Hotel Expenses: Direct hotel expenses increased 3% to $100.2 million
in 1997. The increase in direct hotel expenses is due to higher variable costs
related to the increase in hotel sales. However, direct hotel expenses as a
percentage of hotel sales decreased to 67% in 1997 from 68% in 1996.
Depreciation: Depreciation increased in 1997 due to property and equipment
additions, and the change in the estimated useful lives of certain assets.
Management Fees: Incentive and base management fees increased 12% to $8.4
million and 5% to $4.5 million, respectively, in 1997 due to the corresponding
increase in hotel sales.
Net Loss: Net loss increased 53% to $2.8 million in 1997. The increase in
net loss primarily is attributable to increased depreciation expense on the
Partnership's property and equipment and an increase in management fees in
1997 as compared to 1996.
1996 COMPARED TO 1995
Mountain Shadows
REVPAR for 1996 increased 5% to $99. This increase was due to a 3% increase
in the average room rate to $124 combined with a two percentage point increase
in occupancy to 80%. Hotel revenues for 1996 increased 4% to $6.2 million. The
increase in average room rate and hotel revenues is due to the Hotel's
successful efforts in shifting business from lower rated group business to
higher transient rates. The Hotel's marketing promotions include a newsletter
to 3,000 past customers as well as newspaper advertising in key cities such as
Los Angeles, Chicago and New York.
Seattle
Hotel revenues increased 7% to $8.5 million in 1996 when compared to the
prior year due to an increase in REVPAR of 4% to $82. The increase in REVPAR
was due to a $6 increase in average room rate to $105 partially offset by a
one percentage point decrease in occupancy to 78%. The increase in the average
room rate is the result of the strong transient demand in the growing Seattle
economy. The local economy is tied to the global aerospace industry as well as
the availability of raw timber products. Current projections for each of these
industries are strong and indicate steady growth and reliability.
Tampa Westshore
The Tampa Westshore Hotel experienced a 10% increase in REVPAR to $80 for
1996 as compared to 1995. This increase was due to a 6% increase in the
average room rate to $100 coupled with a two percentage point increase in
average occupancy to 79%. The increase in average room rate is attributable to
strong market demand and the successful efforts of Hotel management in
restricting discounted corporate rates. An increase in transient business
contributed to the increase in average occupancy. In early 1997, the Hotel
completed the third phase of a rooms renovation project which replaced the
furniture in approximately 108 guest rooms. All 311 guest rooms now have new
furniture which will enable the Hotel to compete more effectively in the Tampa
market.
F-323
<PAGE>
Greensboro
For 1996, REVPAR decreased slightly to $75 when compared to 1995. The
average room rate increased 6% to $98; however, this increase was offset by a
six percentage point decline in average occupancy to 76% as a result of new
competition in the Greensboro area. Hotel revenues decreased 5% to $4.5
million primarily due to the decline in occupancy. In 1996, the Hotel facade
was painted, and in early 1997 a renovation of the restaurant was completed.
Miami Biscayne Bay
REVPAR for 1996 increased slightly to $71 when compared to 1995 due to a
four and one-half percentage point increase in average occupancy to 82%
partially offset by a 3% decrease in the average room rate to $87. The
increase in average occupancy was due to the addition of a new contract with
United Airlines for 13,000 room nights in 1996. Hotel revenues decreased 7% to
$7.7 million primarily due a decrease in catering profits as a result of
business associated with the 1995 Superbowl not recurring in 1996. During
1996, the Hotel installed new carpet in the ballrooms and in selected
corridors. During 1997, the remaining corridors will receive new carpet, and
285 rooms will undergo a redo which will include new carpet and mattresses.
Raleigh
In 1996, REVPAR increased 9% to $72, due to a 9% increase in average room
rate to $88 while the average occupancy remained stable at 82%. The increase
in average room rate was due to a $10 increase in the corporate rate in 1996.
Hotel revenues increased 16% to $5 million primarily due to the increase in
average room rates. During 1996, the Hotel completed a rooms renovation which
replaced the furniture in 375 guest rooms.
Houston Medical Center
REVPAR for 1996 increased 5% to $67 when compared to 1995 due to the 2%
increase in average room rate to $87 and a two percentage point increase in
average occupancy to 77%. Hotel revenues increased 10% to $4.5 million in
1996. These increases were due to strong demand in the medical markets,
increased business due to city wide conventions and success in shifting lower
rated business to higher corporate rates.
Albuquerque
Hotel revenues for 1996 increased slightly to $5.0 million when compared to
the prior year primarily due a 3% increase in REVPAR to $69. The increase in
REVPAR is primarily due to a one and one-half percentage point increase in
average occupancy to 80% as a result of increased transient demand in the
Albuquerque market. The average room rate remained stable at $86. The Hotel is
focusing its marketing efforts on increasing weekend group business. During
1997, the Hotel will complete a renovation of its meeting rooms.
1996 COMPARED TO 1995 COMBINED RESULTS OF OPERATIONS
Hotel Revenues: Hotel revenues decreased 9% to $45.9 million in 1996
primarily due to the sale of the Dallas Hotel in 1995. For the eight hotels
which were owned by the Partnership continuously throughout 1996 and 1995
(Albuquerque, Greensboro, Houston, Miami Biscayne Bay, Mountain Shadows,
Raleigh, Seattle, and Tampa (the "Combined Hotels")), Combined Hotel revenues
increased 4% in 1996 due to an increase in Combined Hotel sales.
Hotel Sales: Hotel sales decreased 6% to $143.3 million in 1996 due to the
sale of the Dallas Hotel in 1995. Combined Hotel sales increased 3% in 1996
through a 1% increase in the Combined Hotel average room rate to $96 and a
slight increase in the Combined Hotel average occupancy to 79%.
Direct Hotel Expenses: Direct hotel expenses decreased 5% to $97.5 million
in 1996 due to the sale of the Dallas Hotel. Combined direct hotel expenses
increased 5% in 1996. The increase in Combined direct hotel
F-324
<PAGE>
expenses is due to an increase in variable costs related to the increase in
Combined Hotel sales. Furthermore, direct hotel expenses as a percentage of
Hotel sales increased to 68% in 1996 from 67% in 1995.
Management Fees: Incentive and base management fees decreased 14% to $7.5
million and 6% to $4.3 million, respectively, in 1996 due to a corresponding
decrease in hotel sales.
Property Taxes: Property taxes decreased 25% to $3.1 million in 1996 due to
the sale of the Dallas Hotel in 1995.
Interest Expense: Interest expense decreased 17% to $24.6 million in 1996
due to lower principal balances in 1996 and a lower average interest rate on
the Bank Loan in 1996.
Net Income: Net income decreased 101% to a net loss of $1.8 million in 1996.
The decrease is due to the recognition of the gain on the sale of the Dallas
Hotel of $24.6 million and the gain on forgiveness of deferred fees of $146.3
million in 1995.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions, Host Marriott Corporation
("Host Marriott") and its affiliates or Marriott International, Inc.
("Marriott International") and its affiliates. The general partner believes
that the Partnership will have sufficient capital resources and liquidity to
continue to conduct its business in the ordinary course.
Principal Sources and Uses of Cash
The Partnership reported a decrease in cash and cash equivalents of $2.6
million during the first two quarters 1998. This decrease was due to the use
of cash for investing and financing activities partially offset by cash
provided by operating activities. The Partnership reported a decrease in cash
and cash equivalents of $2.0 million for 1997. This decrease was due to the
use of cash for investing and financing activities partially offset by cash
provided by operating activities.
The Partnership's principal source of cash is cash from operations. Total
cash provided by operations remained steady at $18.0 million, for the twenty-
four weeks ended June 19, 1998, when compared to the first two quarters 1997.
Total cash provided by operations increased $1.5 million, to $20.9 million,
for 1997 due to improved Hotel operating results. Total cash provided by
operations was $19.4 million and $14.8 million for 1996 and 1995,
respectively.
The Partnership's principal uses of cash are to (i) pay for capital
expenditures and to fund the property improvement funds, (ii) make deposits to
restricted cash accounts, (iii) pay debt service on the Partnership's mortgage
debt, and (iv) pay amounts owed to Host Marriott and Marriott International.
Cash used in investing activities was $4.1 million for the first two
quarters 1998, and $4.2 million for the first two quarters 1997. Cash used in
investing activities for the first two quarters 1998, included capital
expenditures of $3.4 million primarily related to furniture, fixtures, and
equipment renewals and replacements at the Hotels. Cash used in investing
activities decreased to $7.8 million in 1997 from $10.2 million in 1996. Cash
used in investing activities included cash paid for FF&E of $7.3 million in
1997 compared to $9.9 million in 1996. Cash used in investing activities was
$10.2 million in 1996, and cash provided by investing activities was $37.2
million in 1995 due to proceeds received from the gain on the sale of the
Dallas Hotel.
Cash used in financing activities was $16.5 million and $18.1 million for
the first two quarters 1998 and 1997, respectively. Cash used in financing
activities for the first two quarters 1998, included repayments to Host
Marriott and affiliates of $4.6 million and repayments on the Partnership's
mortgage debt of $3.8 million. Cash used in financing activities increased to
$15.1 million in 1997 from $10.0 million in 1996. Cash used in financing
activities for 1997 included repayments on the Partnership's mortgage debt of
$7.2 million, repayments to Host
F-325
<PAGE>
Marriott and affiliates of $6.1 million, and net deposits to restricted cash
accounts of $1.8 million. Cash used in financing activities was $10.0 million
and $53.8 million in 1996 and 1995, respectively. In 1995, the Partnership
repaid $59 million on its mortgage on the Bank Hotels primarily from proceeds
from the sale of the Dallas Hotel and from a $10 million advance from Host
Marriott under the Bank Guaranty.
No cash was distributed to the partners during the First Two Quarters 1998,
or the First Two Quarters 1997. No cash was distributed to the Partners for
the years ended December 31, 1997, 1996 and 1995. Since all cash flow from the
Partnership's hotels is utilized to pay Partnership obligations, no cash is
expected to be available for distribution to the partners for the foreseeable
future.
Capital Expenditures
It is anticipated that shortfalls in the property improvement fund for the
six hotels financed with the Bank Loan, as defined below, will occur in 1999.
The General Partner is currently working to resolve the expected shortfalls.
Debt
The Partnership's financing needs are funded through loan agreements with
(i) The Mitsui Trust and Banking Company (the "Bank Lender"), (ii) Host
Marriott and its affiliates, and (iii) Marriott International and its
affiliates.
Total Partnership interest expense increased 4% to $11.9 million for the
first two quarters 1998, when compared to the same period in 1997 primarily
due to increased interest expense on the mortgage loan (the "Bank Loan"). The
weighted average interest rate on the Bank Loan was 8.3% for the first two
quarters 1998, as compared to 7.4% for the comparable period in 1997.
On June 22, 1998, the Partnership made the required Bank Loan principal
payment of $3.0 million. Thus, as of June 22, 1998, the Bank Loan principal
balance is $165.9 million.
The Bank Loan was scheduled to mature on December 22, 1998; however, an
additional one-year extension was available. As required under the Bank Loan,
the Partnership provided notice of its intent to extend the loan along with
adequate debt service coverage tests to extend the Bank Loan maturity to
December 22, 1999.
Pursuant to the terms of the restated Bank Loan, operating profit, as
defined, and the subordinated portion of the base management fee in excess of
debt service for the six hotels financed with the Bank Loan must be held in a
collateral account with the lender. After the end of each fiscal year, excess
cash remaining in the collateral account is applied to repay Bank Loan
principal, advances under the $26 million debt service guaranty (the "Bank
Guaranty") provided by Host Marriott and, depending upon the unadvanced
balance of the Bank Guaranty, deferred base management fees to Marriott
International. As a result, on February 23, 1998, the Partnership repaid $3.8
million in principal on the Bank Loan, $2.2 million to Host Marriott on the
Bank Guaranty, and $1.5 million to Marriott International for deferred base
management fees using amounts in the collateral account. As of June 19, 1998,
the balance of the Bank Loan was $168.9 million, $21.6 million was available
under the Bank Guaranty, and deferred base management fees payable to Marriott
International were $2.4 million.
In connection with the restructuring of the Bank Loan, Host Marriott agreed
to provide an additional guaranty (the "Interest Guaranty") for $12 million to
cover any shortfalls in the payment of interest after application of all cash
flow available for debt service. Advances with respect to interest will be
made first under the Interest Guaranty and then under the Bank Guaranty or an
equivalent "backup" guaranty provided by Marriott International. No amounts
have been advanced under the Interest Guaranty. Additionally, in early 1998,
in accordance with the terms of the Interest Guaranty, the amount available
was reduced from $8 million to $4 million.
F-326
<PAGE>
Host Marriott advanced funds (the "Host FF&E Loans") to the Partnership from
1991 through 1994 for the purchase of FF&E. The loans are secured by payments
from Marriott International under leases from the Partnership for FF&E
replacements. On February 9, 1998, Marriott International repaid $1.5 million
of principal to the Partnership on these leases, and the Partnership
subsequently repaid $1.4 million of principal to Host Marriott on the Host
FF&E Loans. Therefore, as of June 19, 1998, the balance of the Host FF&E Loans
was $1.5 million.
INFLATION
For the three fiscal years ended December 31, 1997, the rate of inflation
has been relatively low and, accordingly, has not had a significant impact on
the Partnership's revenues and net losses before extraordinary items. However,
the Hotel's room rates and occupancy levels are sensitive to inflation, and
the amount of the Partnership's interest expense under 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, Host Marriott Corporation, the General Partner, has
invested in implementing new accounting systems which are Year 2000 compliant.
Accordingly, the General Partner believes that future costs associated with
Year 2000 issues will be minimal and not material to the Partnership's
financial statements.
However, the Partnership does rely upon accounting software used by the
Managers of its properties to obtain financial information. The General
Partner believes that the managers have begun to implement changes to the
property specific software to ensure the software will function properly in
the Year 2000 and does not expect to incur significant costs related to these
modifications.
F-327
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF POTOMAC HOTEL LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Potomac Hotel Limited
Partnership, a Delaware limited partnership, (the "Partnership") as of
December 31, 1997 and 1996, and the related statements of operations, changes
in partners' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements referred to below are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Potomac Hotel Limited
Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.,
March 4, 1998
F-328
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net.............................. $ 154,253 $ 155,412
Due from Marriott International, Inc. and affiliates..... 10,173 10,870
Restricted cash.......................................... 6,351 4,507
Property improvement funds............................... 3,792 3,141
Deferred financing costs, net............................ 473 709
Cash and cash equivalents................................ 3,182 5,228
--------- ---------
$ 178,224 $ 179,867
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt.......................................... $ 172,667 $ 179,837
Due to Host Marriott Corporation and affiliates........ 125,549 124,370
Incentive and base management fees due to Marriott In-
ternational, Inc...................................... 25,868 17,172
Due to Marriott International, Inc. and affiliates..... 398 1,956
Accrued interest and other liabilities................. 864 829
--------- ---------
Total Liabilities.................................. 325,346 324,164
--------- ---------
PARTNERS' DEFICIT
General Partner
Capital contribution................................. 172,093 172,093
Cumulative net losses................................ (20,408) (20,380)
Cumulative withdrawals............................... (186,527) (186,527)
--------- ---------
(34,842) (34,814)
--------- ---------
Limited Partners
Capital contributions, net of offering costs......... 15,600 15,600
Cumulative net losses................................ (127,880) (125,083)
--------- ---------
(112,280) (109,483)
--------- ---------
Total Partners' Deficit............................ (147,122) (144,297)
--------- ---------
$ 178,224 $ 179,867
========= =========
</TABLE>
See Notes to Financial Statements.
F-329
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)................................ $ 50,323 $ 45,853 $ 50,598
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation.................................. 8,430 5,473 5,912
Incentive management fee...................... 8,408 7,477 8,651
Base management fee........................... 4,515 4,300 4,597
Property taxes................................ 3,071 3,081 4,082
Ground rent, insurance and other.............. 4,843 3,624 3,914
-------- -------- --------
29,267 23,955 27,156
-------- -------- --------
OPERATING PROFIT................................ 21,056 21,898 23,442
Interest expense.............................. (24,596) (24,582) (29,431)
Other revenue................................. 715 843 1,448
Gain on sale of Dallas Hotel.................. -- -- 24,586
-------- -------- --------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM..... (2,825) (1,841) 20,045
EXTRAORDINARY ITEM
Gain on forgiveness of deferred fees.......... -- -- 146,303
-------- -------- --------
NET (LOSS) INCOME............................... $ (2,825) $ (1,841) $166,348
======== ======== ========
ALLOCATION OF NET (LOSS) INCOME
General Partner............................... $ (28) $ (18) $ 7,612
Limited Partners.............................. (2,797) (1,823) 158,736
-------- -------- --------
$ (2,825) $ (1,841) $166,348
======== ======== ========
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM PER
LIMITED PARTNER UNIT (1,800 UNITS)............. $ (1,554) $ (1,013) $ 7,720
======== ======== ========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT
(1,800 UNITS).................................. $ (1,554) $ (1,013) $ 88,187
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-330
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1994..................... $(44,408) $(266,396) $(310,804)
Net income................................... 7,612 158,736 166,348
Capital contribution from forgiveness of
debt........................................ 2,000 -- 2,000
-------- --------- ---------
Balance, December 31, 1995..................... (34,796) (107,660) (142,456)
Net loss..................................... (18) (1,823) (1,841)
-------- --------- ---------
Balance, December 31, 1996..................... (34,814) (109,483) (144,297)
Net loss..................................... (28) (2,797) (2,825)
-------- --------- ---------
Balance, December 31, 1997..................... $(34,842) $(112,280) $(147,122)
======== ========= =========
</TABLE>
See Notes to Financial Statements.
F-331
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................. $(2,825) $(1,841) $166,348
Extraordinary item................................ -- -- 146,303
------- ------- --------
Net (loss) income before extraordinary item....... (2,825) (1,841) 20,045
Noncash items:
Deferred incentive and base management fees...... 8,696 7,737 9,435
Depreciation..................................... 8,430 5,473 5,912
Interest on amounts due to Host Marriott Corpora-
tion and affiliates............................. 7,084 6,892 6,235
Amortization of financing costs as interest...... 236 237 310
Loss on disposition of property and equipment.... -- 136 103
Interest on amounts due to an affiliate of
Marriott International, Inc..................... -- 29 --
Gain on sale of the Dallas Hotel................. -- -- (24,586)
Changes in operating accounts:
Due from/to Marriott International, Inc. and af-
filiates........................................ (985) 541 (2,719)
Accrued interest and other liabilities........... 250 180 77
------- ------- --------
Cash provided by operating activities........... 20,886 19,384 14,812
------- ------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net.......... (7,271) (9,924) (4,976)
Change in property improvement funds.............. (651) (63) (2,590)
Working capital received from (funded to) Marriott
International, Inc. and affiliates, net.......... 168 (262) 400
Net proceeds from sale of the Dallas Hotel........ -- -- 44,403
------- ------- --------
Cash (used in) provided by investing activities.. (7,754) (10,249) 37,237
------- ------- --------
FINANCING ACTIVITIES
Principal repayments on mortgage debt............. (7,170) (6,163) (59,000)
(Repayments to) advances from Host Marriott Corpo-
ration and affiliates, net....................... (6,120) (4,670) 3,319
Change in restricted cash......................... (1,844) (1,559) (2,948)
(Repayments to) advances from affiliates of
Marriott International, Inc...................... (44) (37) 350
Collection of amounts due from Marriott Interna-
tional, Inc...................................... -- 2,383 5,755
Payment of financing costs........................ -- -- (1,112)
Increase in amounts due from Marriott Internation-
al, Inc.......................................... -- -- (157)
------- ------- --------
Cash used in financing activities................ (15,178) (10,046) (53,793)
------- ------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.............. (2,046) (911) (1,744)
CASH AND CASH EQUIVALENTS at beginning of year..... 5,228 6,139 7,883
------- ------- --------
CASH AND CASH EQUIVALENTS at end of year........... $ 3,182 $ 5,228 $ 6,139
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......... $17,046 $17,528 $ 22,555
======= ======= ========
NONCASH FINANCING ACTIVITIES:
Forgiveness of obligations due to General Partner
accounted for as a capital contribution........... $ -- $ -- $ 2,000
======= ======= ========
</TABLE>
See Notes to Financial Statements.
F-332
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Potomac Hotel Limited Partnership (the "Partnership") was formed in Delaware
on December 17, 1981, to acquire, develop, own, and operate up to 11 Hotels
(the "Hotels"). On July 16, 1982, 1,800 limited partnership interests
("Units") were sold pursuant to a public offering at $10,000 per unit. The
Partnership commenced operations on July 17, 1982. The Hotels are operated as
part of the Marriott full-service hotel system and are managed by Marriott
International, Inc. ("Marriott International") or Marriott Hotel Services,
Inc. ("MHSI"), which is a subsidiary of Marriott International, (collectively
the "Managers"). The sole general partner of the Partnership is Host Marriott
Corporation ("Host Marriott" or the "General Partner").
The General Partner contributed five existing hotels (including one
undergoing substantial renovation), three hotels under construction, and sites
for three hotels planned to be developed to the Partnership in exchange for
$186,527,000 and a 1% General Partner interest. These funds were borrowed by
the Partnership under a loan agreement (see Note 6). The Partnership completed
the development and construction of its final hotel during 1984. On January
31, 1986, the Partnership sold its 307-room Denver West Hotel to Host Marriott
in accordance with provisions of the loan agreement and the partnership
agreement. As discussed in Note 6, foreclosures on the Raleigh, Tampa, and
Point Clear Hotels occurred in 1993 and 1994. In 1994, the Partnership
repurchased the Raleigh and Tampa Hotels using proceeds from two loans
advanced by a subsidiary of Host Marriott. On August 22, 1995, the Partnership
sold its Dallas Hotel to a wholly-owned subsidiary of Host Marriott and used
the proceeds to repay a portion of its mortgage debt in connection with the
restructuring of the Bank Loan, as described in Note 6. As of December 31,
1997, the Partnership owned and operated eight hotels located in the following
cities: Albuquerque, New Mexico; Greensboro, North Carolina; Houston, Texas;
Miami, Florida; Raleigh, North Carolina; Scottsdale, Arizona; Seattle,
Washington; and Tampa, Florida.
Partnership Allocations and Distributions
The partnership agreement provides for the distribution of cash and the
allocation, for tax purposes, of operating income, gains and losses, and
deductions and credits among the partners. Except for all cash proceeds
attributable to the replacement of furniture, fixtures and equipment ("FF&E")
as well as depreciation and interest on indebtedness (all of which are
specially allocated to the General Partner by the partnership agreement),
profits and losses are allocated between the partners as follows:
<TABLE>
<CAPTION>
PROFITS LOSSES
------- ------
<S> <C> <C>
General Partner............................................ 25% 1%
Limited Partners........................................... 75% 99%
</TABLE>
Any future distributions of cash will be made in the same percentages that
profits and losses are allocated.
Gains (for financial statement purposes) from the sale or other disposition
of Partnership property are allocated (i) first, to the partners with negative
capital accounts in proportion to their capital investment balances and (ii)
thereafter 25% to the General Partner and 75% to the limited partners.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year.
F-333
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreements discussed
in Note 8, the Partnership is required to provide the Managers with working
capital and supplies to meet the operating needs of the Hotels. The Managers
convert cash advanced by the Partnership into other forms of working capital
consisting primarily of operating cash, inventories, and trade receivables and
payables which are maintained and controlled by the Managers. Upon the
termination of the agreements, it is expected that the working capital and
supplies will be converted into cash and returned to the Partnership or
transferred to a subsequent owner or operator for consideration. As a result
of these conditions, the individual components of working capital and supplies
controlled by the Managers are not reflected in the accompanying balance
sheet.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Managers. House profit
reflects hotel operating results which flow to the Partnership as property
owner and represents gross hotel sales less property-level expenses, excluding
depreciation, base and incentive management fees, property taxes, ground rent,
insurance, and certain other costs, which are disclosed separately in the
statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $100.2 million, $97.5 million and $102.6 million for the year
ended December 31, 1997, 1996 and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at the cost incurred directly by the
Partnership or at the cost incurred by the General Partner in the case of
those assets contributed by the General Partner. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
as follows:
<TABLE>
<S> <C>
Buildings and improvements..................................... 40 years
Leasehold improvements......................................... 40 years
Furniture and equipment........................................ 4-10 years
</TABLE>
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is
adjusted to fair market value.
F-334
<PAGE>
Deferred Financing Costs
Deferred financing costs consist of legal and accounting fees and other
costs incurred in connection with obtaining Partnership financing. Financing
costs are amortized using the straight-line method, which approximates the
effective interest rate method, over the life of the mortgage debt. As of
December 31, 1997 and 1996, deferred financing costs totaled $1,256,000.
Accumulated amortization of deferred financing costs as of December 31, 1997
and 1996, was $783,000 and $547,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for federal and state income taxes has not been made in the
accompanying financial statements because the Partnership does not pay income
taxes but, rather, allocates profits and losses to the individual partners.
Significant differences exist between the net income or loss for financial
reporting purposes and the net income or loss as reported in the Partnership's
tax return. These differences are due primarily to the use for tax purposes of
differing useful lives and accelerated depreciation methods for assets,
differing bases in contributed capital, and differing timings of the
recognition of management fee expenses. As a result of these differences, the
excess of the net liabilities reported on a tax basis over the net liabilities
reported in the accompanying financial statements was $36 million as of
December 31, 1997, and $46 million as of December 31, 1996.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior years financial statements
to conform to the current year presentation.
NOTE 3. REVENUES
Hotel revenues consist of the following hotel operating results for the
three years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
HOTEL SALES
Rooms.......................................... $ 95,761 $ 89,916 $ 94,654
Food and beverage.............................. 43,385 42,111 46,605
Other.......................................... 11,348 11,315 11,977
-------- -------- --------
150,494 143,342 153,236
-------- -------- --------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................ 23,556 22,619 23,443
Food and beverage............................ 33,231 32,863 35,569
Other hotel operating expenses................. 43,384 42,007 43,626
-------- -------- --------
100,171 97,489 102,638
-------- -------- --------
HOTEL REVENUES................................... $ 50,323 $ 45,853 $ 50,598
======== ======== ========
</TABLE>
F-335
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land..................................................... $ 10,444 $ 10,444
Building and improvements................................ 194,661 191,449
Furniture and equipment.................................. 26,758 22,699
-------- --------
231,863 224,592
Less accumulated depreciation............................ (77,610) (69,180)
-------- --------
$154,253 $155,412
======== ========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
DEBT AND OTHER LIABILITIES
Mortgage debt............. $ 172,667 $ 173,474 $ 179,837 $ 177,695
Due to Host Marriott Cor-
poration and affiliates.. 122,356 40,803 118,280 41,313
Due to Marriott Interna-
tional, Inc. and affili-
ates..................... 26,168 3,208 17,515 2,086
</TABLE>
The estimated fair value of mortgage debt is based on the expected future
debt service payments, discounted at estimated market rates adjusted for the
presence of debt service guaranties. "Due to Host Marriott Corporation and
affiliates" and "Due to Marriott International, Inc. and affiliates" are
valued based on the expected future payments from operating cash flow
discounted at risk adjusted rates.
NOTE 6. DEBT
Host Marriott Guaranty
The Partnership originally entered into a loan agreement dated January 14,
1982, (the "Original Loan") which funded up to $348 million to finance the
acquisition and development of the Hotels. In connection with the Original
Loan, the General Partner agreed to advance up to $42.6 million to cover debt
service shortfalls (the "Host Marriott Guaranty"). The General Partner
advanced a total of $33.4 million under the Host Marriott Guaranty. The
Partnership repaid $22.3 million and $5 million from the proceeds of the S&L
Loan and the Bank Loan, respectively, as defined below. Therefore, as of
December 31, 1997, $6.1 million plus accrued interest was outstanding related
to the Host Marriott Guaranty.
Savings and Loan Association Loan
On February 28, 1985, the Partnership borrowed $103 million (the "S&L Loan")
from a savings and loan association (the "S&L Lender") to refinance the loans
on three of its hotels located in Raleigh, North Carolina; Tampa, Florida; and
Point Clear, Alabama (the "S&L Hotels") and to repay a portion of the Host
Marriott Guaranty ($22.3 million). The S&L Loan, with an original maturity of
March 1, 2000, bore interest at 2.75% over the monthly average rate on six-
month Treasury Bills (subject to a 9% floor and a 16% ceiling). For the years
1989 through 1992, the S&L Lender, the Manager, and the General Partner agreed
to several modifications including (i) reductions in the interest rate, (ii)
reductions in the base management fees paid to the Manager, (iii) increases in
the debt service guaranty provided by Host Marriott (the "S&L Guaranty"), and
(iv) Host Marriott's subordination of cash flow generated from the Host
Marriott owned 66-room addition to the Raleigh Hotel.
F-336
<PAGE>
Bank Loan
On December 22, 1987, the Partnership borrowed $245 million (the "Bank
Loan") from The Mitsui Trust and Banking Company (the "Bank Lender") to repay
the outstanding indebtedness on seven of its Hotels (the "Bank Hotels"), a
portion of the Host Marriott Guaranty ($5.0 million), and related transaction
costs. The Bank Loan bore interest at an effective fixed rate of 10.37% and
required monthly interest payments with the entire principal balance due at
maturity.
The Bank Loan was secured by first priority liens on the Bank Hotels and all
related assets, including working capital and supplies advanced to the Manager
for each Bank Hotel. The Bank Loan established a priority for distributions of
cash from operations, prohibited the Partnership from creating any other liens
on the Bank Hotels, and restricted the Partnership from incurring certain
other indebtedness. The Bank Loan was non-recourse to the Partnership and its
partners, but was supported by a $26 million Host Marriott guaranty (the "Bank
Guaranty") and an equivalent Marriott International "backup" guaranty (to be
funded only if Host Marriott did not fund its guaranty).
The Bank Loan matured on December 22, 1994, with a principal balance of $245
million, and was not repaid at that time because the Partnership had
insufficient funds to do so. On December 22, 1994, the Partnership entered
into a forbearance agreement with the Bank Lender under which the Bank Lender
agreed not to exercise its rights and remedies for nonpayment of the Bank Loan
on the maturity date until February 24, 1995. The forbearance agreement was
subsequently extended until August 22, 1995, to allow the Partnership time to
solicit the consent of its limited partners regarding the sale of the Dallas
Hotel to a subsidiary of the General Partner in connection with the
restructuring of the Bank Loan. In exchange for the Bank Lender's agreement to
forbear, the Partnership made monthly interest payments at the one-month
London Interbank Offered Rate ("LIBOR") rate plus two percentage points for
the period December 22, 1994, through June 21, 1995, and at the one-month
LIBOR rate plus two-and-one-quarter percentage points for the period June 22,
1995, through August 21, 1995.
Restructured Bank Loan
On August 22, 1995, the General Partner and the Bank Lender successfully
completed the restructuring and extension of the Bank Loan. The principal
terms of the restructured Bank Loan are as follows: (i) the General Partner
advanced $10 million under the Bank Guaranty, which was used to pay down
principal on the Bank Loan (advances under the Bank Guaranty bear interest at
an annual rate equal to the prime rate, as announced by Bankers Trust
Company); (ii) the Partnership used $44 million of proceeds from the sale of
the Dallas Hotel to repay principal on the Bank Loan; (iii) the maturity of
the Bank Loan was extended to December 22, 1997, with two additional one-year
extensions available if certain debt service coverage tests are met; (iv)
semi-annual payments of interest at the six-month LIBOR rate plus 1.5
percentage points and annual payments of principal of $5 million during the
first three years of the restructured loan and $6 million during any extension
periods; (v) the General Partner's liability under the Bank Guaranty remained
at $26 million (subject to a credit for the advance of $10 million described
in (i) above); (vi) Marriott International continued its "backup" guaranty (
the "Marriott International Backup Guaranty"), under which Marriott
International agreed to advance any amounts not advanced by Host Marriott
under the Bank Guaranty; (vii) Host Marriott (but not Marriott International)
agreed to an additional guaranty (the "Interest Guaranty") for $12 million to
cover any shortfalls in the payment of interest after application of all cash
flow available for debt service (advances in respect to interest will be made
first under the Interest Guaranty then under the Bank Guaranty or the Marriott
International Backup Guaranty); (viii) the Interest Guaranty is to be reduced
each year by $4 million less any Interest Guaranty advances as of the date
such reduction is to occur and the Interest Guaranty will be increased by $4
million for each extension period, if applicable (the remaining liability
under the Bank Guaranty and the Marriott International Backup Guaranty in any
event must at least be equal to the scheduled amortization payments due during
the extension periods); (ix) all Partnership cash relating to the Bank Hotels
(including the Bank Hotels property improvement fund and the subordinated base
management fees) collateralize the Bank Loan; (x) the Bank Lender was paid a
fee of $573,000 for the successful restructuring of the Bank Loan; and (xi)
the Bank
F-337
<PAGE>
Lender required Marriott International to terminate the management agreement
related to the Bank Hotels (the "Marriott International Management Agreement")
and to forgive the deferred balances of base and incentive management fees
outstanding as of December 31, 1994. The Partnership recorded an extraordinary
gain of $146.3 million in 1995 to recognize the gain which resulted from the
forgiveness of the deferred fees. In addition, the Bank Lender required a
portion of the base management fee equal to 1% of gross Bank Hotel sales and a
portion of the property improvement fund contribution equal to 1% of gross
Bank Hotel sales to be subordinated to the payment of debt service.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June
19, 1997, the Partnership provided notice to the lender of its intent to
extend the loan along with a debt service coverage ratio calculation with a
required ratio greater than 1.2 and successfully extended the Bank Loan
maturity to December 22, 1998. An additional one-year extension is available
under the Bank Loan, and in order to extend the loan to December 22, 1999, the
Partnership must provide notice of its intent to extend the loan along with
adequate debt service coverage tests to the lender by June 22, 1998. Based on
current debt service coverage tests, the Partnership expects to be able to
exercise the additional one-year extension of the loan upon its maturity on
December 22, 1998.
Pursuant to the terms of the restated Bank Loan, operating profit, as
defined, and the subordinated portion of the base management fee from the Bank
Hotels in excess of debt service must be held in a collateral account with the
Bank Lender. After the end of each fiscal year, excess cash remaining in the
collateral account is applied as follows: (i) 50% to repay Bank Loan principal
and (ii) 50% to pay principal and interest on advances under the Bank
Guaranty, until the unadvanced portion of the Bank Guaranty is replenished to
a balance of $20.0 million. Thereafter, excess cash in the collateral account
is applied as follows: (i) 50% to repay Bank Loan principal, (ii) 25% to pay
principal and interest on advances under the Bank Guaranty, and (iii) 25% to
repay deferred base management fees to Marriott International.
As of December 31, 1997 and 1996, the principal balance of the Bank Loan was
$172.7 million and $179.8 million, respectively. As of December 31, 1997 and
1996, $8.5 million and $10.0 million including accrued interest, respectively,
was outstanding pursuant to the Bank Guaranty. On February 23, 1998, in
accordance with the cash flow priorities described in the preceding paragraph,
the Partnership repaid $3.8 million in principal on the Bank Loan, $2.2
million to Host Marriott on the Bank Guaranty, and $1.5 million to Marriott
International for deferred base management fees using amounts in the
collateral account. Therefore, as of February 23, 1998, the balance on the
Bank Loan was $168.9 million, $21.6 million was available under the Bank
Guaranty, and deferred base management fees payable to Marriott International
were $2.1 million. The weighted average interest rate on the Bank Loan was
7.46% for 1997, 7.26% for 1996, and 7.89% for 1995. At December 31, 1997, the
interest rate on the Bank Loan was 8.25%. The weighted average interest rate
on the Bank Guaranty was 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995.
At December 31, 1997, the interest rate on the Bank Guaranty was 8.50%.
No amounts were advanced under the Interest Guaranty during 1997.
Additionally on December 22, 1997, in accordance with the terms of the
Interest Guaranty, the amount available was increased from $4 million to $8
million, and in early 1998, the amount available was reduced to $4 million.
Raleigh and Tampa Loans
The Partnership repurchased the Raleigh Hotel and the Tampa Hotel on May 20,
1994, and July 11, 1994, respectively, with funding provided by non-recourse
loans to the Partnership from a wholly-owned subsidiary of Host Marriott.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover
the $18.7 million purchase price and closing costs. Under the terms of the
loan, $14.0 million of principal ("Raleigh Note A") bears interest at a fixed
rate of 10% and requires quarterly payments of interest and principal, based
on a 25-year amortization schedule, with a balloon payment due at maturity on
May 20, 2001. The remaining principal of $5.4 million
F-338
<PAGE>
("Raleigh Note B") bears interest at a fixed rate of 11.5% and matures on May
20, 2006. Cash flow from the Raleigh Hotel is used to pay debt service in the
following order of priority: (i) interest on Raleigh Note A, (ii) principal on
Raleigh Note A, and (iii) interest on Raleigh Note B. The remaining cash flow
is used to pay principal on Raleigh Note B. If cash flow is insufficient to
pay interest on Raleigh Note B, the unpaid interest rolls into the Raleigh
Note B principal balance annually. As of December 31, 1997 and 1996, the
Raleigh Note A principal balance was $13.5 million, and the Raleigh Note B
principal balance was $3.8 million and $4.8 million, respectively.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan,
$10.0 million of principal ("Tampa Note A") bears interest at a fixed rate of
10% and requires quarterly payments of interest and principal, based on a 25-
year amortization schedule, with a balloon payment due at maturity on July 11,
2001. The remaining principal of $6.3 million ("Tampa Note B") bears interest
at a fixed rate of 11.5% and matures on July 11, 2006. Cash flow from the
Tampa Hotel is used to pay debt service in the following order of priority:
(i) interest on Tampa Note A, (ii) principal on Tampa Note A, and (iii)
interest on Tampa Note B. The remaining cash flow is used to pay principal on
Tampa Note B. If cash flow is insufficient to pay interest on Tampa Note B,
the unpaid interest rolls into the Tampa Note B principal balance annually. As
of December 31, 1997 and 1996, the Tampa Note A principal balance was $9.7
million, and the Tampa Note B principal balance was $5.4 million and $6.1
million, respectively.
Both of the Raleigh and Tampa loans are secured by a first priority lien on
the building; land (the Partnership's leasehold interest in the case of the
Tampa Hotel); furniture, fixtures and equipment; and working capital and
supplies advanced to the Manager.
As of December 31, 1997, required principal payments related to the Raleigh
and Tampa Loans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998.............................................................. $ 325
1999.............................................................. 357
2000.............................................................. 393
2001.............................................................. 22,125
2002.............................................................. --
Thereafter........................................................ 9,200
-------
$32,400
=======
</TABLE>
Furniture, Fixtures and Equipment Loans
Prior to December 22, 1994, the Bank Loan and Marriott International
Management Agreement, as defined in Note 8, required the Partnership to
deposit funds in an escrow account (based on a percentage, ranging from 1% to
5%, of Bank Hotel sales) to be used to replace FF&E at the Bank Hotels.
Additionally, the Bank Loan required the General Partner to fund up to $30
million of these reserves, if necessary (the "FF&E Guaranty"). The Marriott
International Management Agreement contained a similar reserve requirement for
the S&L Hotels.
Host Marriott advanced funds (the "Host FF&E Loans") for the purchase of
FF&E for the Bank Hotels from 1991 through 1994 pursuant to the FF&E Guaranty
and also provided loans for the purchase of FF&E at the S&L Hotels for 1991
and 1992. The Host FF&E Loans bear interest at the prime rate and are to be
repaid in annual installments over six years. As of December 31, 1997 and
1996, $2.9 million and $5.2 million was outstanding under the Host FF&E Loans.
The weighted average interest rate was 8.44% for 1997, 8.27% for 1996 and
8.85% for 1995. At December 31, 1997, the interest rate was 8.50%.
F-339
<PAGE>
As of December 31, 1997, required principal payments related to the Host
FF&E Loans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998............................................................... $2,600
1999............................................................... 300
------
$2,900
======
</TABLE>
Subsequent to year-end, the Partnership repaid $1.4 million of principal to
Host Marriott on the Host FF&E Loans, thereby reducing the balance on the Host
FF&E Loans to $1.5 million.
These loans are non-recourse to the Partnership and its partners and are
secured by payments from Marriott International under the FF&E Leases, as
defined in Note 8. Interest expense on these loans is offset by lease payments
received under the Marriott International FF&E Leases. As of December 31, 1997
and 1996, Marriott International owed $2.9 million plus accrued interest to
the Partnership pursuant to these agreements with the final installment due on
December 31, 1999. Subsequent to year-end, Marriott International repaid $1.5
million of principal to the Partnership on the Marriott International FF&E
Leases.
Since 1995 the Bank Hotels' FF&E funding requirements have been met through
contributions to a property improvement fund for the combined Bank Hotels.
Since its acquisition date in 1994, the FF&E funding requirements for the
Tampa Hotel have been met through the establishment of a property improvement
fund for the Hotel. However, the Raleigh Hotel required additional funds, as
described below. See Note 8 for further details on the property improvement
funds.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and MHSI each provided an unsecured loan to the
Partnership in the amount of $350,000 ("Raleigh $350,000 FF&E Loans") to fund
costs of a softgoods rooms renovation at the Raleigh Hotel in excess of
amounts available in the Hotel's property improvement fund. Each Raleigh
$350,000 FF&E Loan was fully advanced to the Partnership by January 24, 1995.
The Raleigh $350,000 FF&E Loans bear interest at the prime rate. Payments on
the loans are made each accounting period from a portion of the property
improvement fund contribution equal to 1% of gross Hotel sales and are applied
first to interest and then to principal. The Raleigh $350,000 FF&E Loans are
due and payable on the earlier of the termination of the Raleigh management
agreement or December 31, 2005. Interest accrued in 1995 was added to the
principal balance of each of the loans. As of December 31, 1997 and 1996,
$298,000 and $342,000, respectively, was due on each of the Raleigh $350,000
FF&E Loans. The weighted average interest rate was 8.44% for 1997, 8.27% for
1996, and 8.85% for 1995. At December 31, 1997, the interest rate on the
Raleigh $350,000 FF&E Loans was 8.50%.
In 1996, Host Marriott provided another unsecured loan to the Partnership in
the amount of $700,000 ("Raleigh $700,000 FF&E Loan") to fund costs of a
casegoods rooms renovation at the Raleigh Hotel in excess of the amounts
available in the Hotel's property improvement fund. The Raleigh $700,000 FF&E
Loan was fully advanced to the Partnership by December 9, 1996. The Raleigh
$700,000 FF&E Loan bears interest at the prime rate plus 0.5%. Payments on the
loan are made each accounting period from a portion of the property
improvement fund contribution equal to 1% of gross Hotel sales and are applied
first to interest and then to principal. The Raleigh $700,000 FF&E Loan is due
and payable on the earlier of the termination of the Raleigh management
agreement or December 31, 2003. As of December 31, 1997 and 1996, $571,000 and
$658,000, respectively, was due on the Raleigh $700,000 FF&E Loan. The
weighted average interest rate was 8.94% for 1997 and 8.75% for 1996. At
December 31, 1997, the interest rate was 9.00%.
Other Loans
As of December 31, 1997, the Partnership also owed Host Marriott $88.8
million including accrued interest, as follows: (i) $64.4 million related to
the original Host Marriott Guaranty and the S&L Guaranty; (ii) $8.5
F-340
<PAGE>
million related to the Bank Guaranty; (iii) $5.4 million related to working
capital advances; (iv) $8.9 million for capital improvements at the Point
Clear, Alabama Hotel; and (v) $1.6 million from Host Marriott's subordination
of cash flow from the 66-room Raleigh addition. All of the above-mentioned
advances bear interest at the prime rate as announced by Bankers Trust Company
with a weighted average interest rate of 8.44% for 1997, 8.27% for 1996, and
8.85% for 1995. At December 31, 1997, the interest rate was 8.50%.
All Partnership indebtedness, including the Bank Loan, guaranty advances,
other General Partner loans, and deferred base and incentive management fees,
which is outstanding upon dissolution of the Partnership must be repaid before
any cash distributions can be made to the partners.
NOTE 7. LEASES
The Partnership's five ground leases have lease terms expiring in 2006
(Tampa), 2008 (Greensboro and Miami), 2009 (Houston), and 2032 (Albuquerque)
and contain one or more renewal options that allow the Partnership to extend
the leases from 15 to 50 additional years. The leases generally provide for
minimum base rentals as well as additional ground rentals which are calculated
as a percentage of sales in excess of minimum base rentals. Total ground
rental expense for the three years ended December 31 consisted of (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Minimum rentals..................................... $1,548 $1,548 $1,548
Additional rentals based on sales................... 719 706 664
------ ------ ------
$2,267 $2,254 $2,212
====== ====== ======
</TABLE>
Minimum rentals for the five Hotels operating under noncancelable leases for
real estate for future years (exclusive of percentage rentals) are as follows
(in thousands):
<TABLE>
<CAPTION>
MINIMUM
YEAR RENTAL
---- -------
<S> <C>
1998............................................................. $ 1,548
1999............................................................. 1,548
2000............................................................. 1,548
2001............................................................. 1,548
2002............................................................. 1,548
Thereafter....................................................... 13,216
-------
Total minimum lease payments..................................... $20,956
=======
</TABLE>
NOTE 8. MANAGEMENT AGREEMENTS
Marriott International Management Agreement
On July 16, 1982, the Partnership entered into a management agreement with
Marriott International (the "Marriott International Management Agreement") to
manage and operate the Hotels for a term of 25 years from the opening of each
Hotel with renewal terms, at the option of Marriott International, of up to an
additional 50 years. The Marriott International Management Agreement provided
for payment of base management fees equal to a percentage of sales ranging
from 7% to 8% depending on the length of time the Hotel had been open as well
as incentive management fees equal to a percentage of hotel operating profit,
as defined, ranging from 20% to 90% depending on the level of returns from
operating profit paid to the Partnership. In connection with obtaining the
Bank Loan, the Marriott International Management Agreement was amended on
December 22, 1987, with respect to the Bank Hotels to provide for the payment
of base management fees only after payment of debt service on the Bank Loan.
If funds available after debt service were insufficient to pay all base
management fees related to the Bank Hotels, the fees were deferred without
interest and payable in future years. The Partnership and the S&L Lender also
modified the Marriott International Management Agreement with respect to the
S&L Hotels, providing for reductions in the base management fees for 1989
through 1993. As of December 31, 1994,
F-341
<PAGE>
the balance of deferred base management fees was $47.5 million. Payment of the
incentive management fees was dependent upon the availability of cash flow
after debt service, and incentive management fees were payable only after
repayment of certain debt service guaranty advances and certain priority
returns to the Partnership expressed as a percentage of limited partner
invested equity. Through December 31, 1994, no incentive management fees had
been paid since inception. As of December 31, 1994, deferred incentive
management fees were $98.8 million. In connection with the Bank Loan
restructuring in 1995, the Marriott International Management Agreement was
terminated and the deferred balances of base and incentive management fees
outstanding as of December 31, 1994, were forgiven. The Partnership recorded
an extraordinary gain of $146.3 million in 1995 to recognize the gain which
resulted from the forgiveness of the deferred fees.
Until the termination of the Marriott International Management Agreement,
Marriott International entered into leases (the "FF&E Leases") from the
Partnership for all FF&E replacements for terms of up to six years. Lease
payments represent an amount approximately equal to the principal
amortization, interest, and fees associated with indebtedness incurred by the
Partnership to finance the replacements and any sales and use taxes, personal
property taxes, insurance premiums, and additional costs incurred by the
Partnership in connection with the acquisition and use of such replacements.
As of December 31, 1997 and 1996, Marriott International was obligated to pay
$2.9 million and $5.2 million, respectively, to the Partnership under these
agreements.
Bank Hotels Management Agreement
Effective December 31, 1994, in connection with the Bank Loan restructuring,
the Partnership entered into a new management agreement (the "Bank Hotels
Management Agreement") with Marriott International. This agreement provides
for an initial term of 25 years from the opening date, as specified in the
agreement, of each Bank Hotel with renewal terms at the option of Marriott
International of up to an additional 50 years. The Bank Hotels Management
Agreement provides Marriott International with a base management fee of 3% of
gross Bank Hotel sales. In accordance with the restructured Bank Loan, a
portion of the base management fee equal to 1% of gross Bank Hotel sales (the
"Subordinated Base Management Fee") is subordinate to the payment of debt
service on the Bank Loan and repayment of certain advances under the Bank
Guaranty. As a result, the Subordinated Base Management Fee is set aside in a
collateral account to be made available for the payment of (i) debt service on
the Bank Loan, (ii) debt service on the Bank Guaranty, and (iii) depending
upon the balance of the Bank Guaranty, deferred base management fees. Any
unpaid base management fees are deferred without interest and are payable in
future years. As of December 31, 1997 and 1996, deferred base management fees
were $3.6 million and $2.4 million, respectively. On February 23, 1998, the
Partnership repaid $1.5 million to Marriott International for deferred base
management fees. Therefore, as of February 23, 1998, deferred base management
fees were $2.1 million.
The Manager will continue to earn incentive management fees equal to 20% of
hotel operating profit, as defined, and additional incentive management fees,
after certain returns to the Partnership, ranging from 10% to 70% of hotel
operating profit depending upon the level of returns achieved by the
Partnership. Payment of incentive management fees will continue to be fully
subordinated to the payment of debt service and to the replenishment of all
guaranties. As of December 31, 1997 and 1996, deferred incentive management
fees were $22.2 million and $14.8 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to
maintain a property improvement fund (the "Bank Hotels Property Improvement
Fund") to ensure that the physical condition and product quality of the Bank
Hotels are maintained. Contributions to the Bank Hotels Property Improvement
Fund are equal to 5% of gross Bank Hotel sales.
On February 24, 1995, the Partnership, the Bank Lender, and Marriott
International entered into a cash collateral agreement with terms effective
January 1, 1995, whereby all Partnership cash relating to the Bank Hotels
(including the Bank Hotels Property Improvement Fund and the Subordinated Base
Management Fees) was pledged as collateral for the Bank Loan. Pursuant to the
cash collateral agreement, a portion of the Bank Hotels Property Improvement
Fund contribution equal to 4% of gross Bank Hotel sales is to be deposited
into an
F-342
<PAGE>
escrow account for the FF&E needs of the Bank Hotels. This escrow balance as
of December 31, 1997 and 1996, was $2.8 million and $2.4 million,
respectively. The remaining portion of the Bank Hotels Property Improvement
Fund contribution equal to 1% of gross Bank Hotel sales is to be deposited
into a restricted cash account which is subordinated to the payment of current
debt service on the Bank Loan. Any balance remaining in the restricted cash
account at the end of each year, after payment of debt service, will be
released from any restrictions. As of December 31, 1997 and 1996, the balance
in the restricted cash account was $1.1 million. The balance in the fund was
not required for 1997 or 1996 debt service and was transferred to the Bank
Hotels Property Improvement Fund in early 1998 and 1997, respectively.
Raleigh and Tampa Management Agreements
Upon the Partnership's reacquisition of the Raleigh and Tampa Hotels, the
Partnership entered into new management agreements (the "MHSI Agreements")
with MHSI for each of the Hotels. These agreements provide for payments to
MHSI as follows: (i) a base management fee equal to 3% of gross Hotel sales
and (ii) an incentive management fee equal to 20% of operating profit, as
defined. The MHSI Agreements provide for an initial term expiring on December
31, 2009. MHSI may renew each agreement at its option, for up to two
successive eight-year terms. The Partnership may terminate the Raleigh or
Tampa management agreement after June 18, 1999, and July 16, 1999,
respectively, if specified minimum operating results for each Hotel are not
achieved. However, MHSI can prevent termination by waiving its base management
fee with respect to each Hotel for a two-year period.
The MHSI Agreements provide for a priority return to the Partnership equal
to 10.75% of the owner's investment, plus ground rent in the case of the Tampa
Hotel. As of December 31, 1997, the Raleigh and Tampa owner's investment was
$19.6 million and $16.8 million, respectively. The MHSI Agreement for Raleigh
provides for a portion of the base management fee payable to MHSI equal to 1%
of gross Hotel sales to be subordinated to the first 10% of the 10.75%
priority return for five years from the effective date of the Raleigh
agreement. Any unpaid base management fees will accrue and are payable from
any excess operating profit; however, any deferred base management fees
remaining on June 18, 1999, will be waived. As of December 31, 1997 and 1996,
no base management fees were deferred under the Raleigh management agreement.
Incentive management fees are payable from 40% of available cash flow, as
defined. Any unpaid incentive management fees for the Raleigh and Tampa Hotels
are waived annually. In 1997, incentive management fees paid for the Raleigh
and Tampa Hotels were $567,000 and $350,000, respectively. In 1996, incentive
management fees paid for the Raleigh and Tampa Hotels were $574,000 and
$315,000, respectively.
Each MHSI Agreement provides for the establishment of a property improvement
fund ("Property Improvement Fund") for each Hotel. Contributions to the
Property Improvement Fund equal 5% of gross Hotel sales from each Hotel.
However, effective August 1996, MHSI and the Partnership agreed to increase
the contribution from 5% to 7% for the Raleigh Hotel until an additional
$300,000 was deposited to cover the cost of certain renovations. This increase
was in effect until the fourth quarter of 1997. In addition, a portion of the
contribution for the Raleigh Hotel equal to 2% of gross Hotel sales is used to
pay interest and principal on the Raleigh $350,000 FF&E Loans and the Raleigh
$700,000 FF&E Loan. As of December 31, 1997, the balances of the Raleigh and
Tampa Property Improvement Funds were $727,000 and $232,000, respectively. As
of December 31, 1996, the balances of the Raleigh and Tampa Property
Improvement Funds were $678,000 and $67,000, respectively.
General
Pursuant to the terms of the management agreements, the Managers are
required to furnish the Hotels with certain services ("Chain Services") which
generally are provided on a central or regional basis to all hotels in the
Marriott 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
performed more efficiently on a centralized basis. Costs and expenses incurred
in providing such services
F-343
<PAGE>
are allocated among all domestic hotels managed, owned, or leased by Marriott
International or its subsidiaries. In addition, the Hotels also participate in
Marriott International's Marriott Rewards Program ("MRP"). This program was
formerly called the Honored Guest Awards Program. The cost of this program is
charged to all hotels in the Marriott hotel system based on the MRP sales at
each hotel. The total amount of Chain Services and MRP costs charged to the
Partnership was $7.3 million in 1997, $7.1 million in 1996, and $7.6 million
in 1995.
Pursuant to the terms of the management agreements, the Partnership is
required to provide the Managers with working capital and supplies to meet the
operating needs of the Hotels. In 1995, in conjunction with the sale of the
Dallas Hotel, $946,000 was reimbursed by the Dallas Hotel to the Partnership.
These funds were used to pay interest and principal on working capital
advances from Host Marriott. Additionally during 1995, Marriott International
returned $400,000 in working capital to the Partnership. During 1996, the
Partnership advanced $262,000 to Marriott International for working capital.
During 1997, $168,000 in working capital was returned to the Partnership.
Therefore, as of December 31, 1997 and 1996, $5.1 million and $5.3 million,
respectively, has been advanced to the Managers for working capital and
supplies for the Hotels.
NOTE 9. RELATED PARTY TRANSACTIONS
A 66-guest room addition to the Raleigh Hotel was completed and opened on
July 18, 1987. The $3.4 million addition was operated as part of the Raleigh
Hotel but was owned by Host Marriott. Host Marriott subordinated its receipt
of cash flow generated from the Host Marriott-owned Raleigh addition (the
"Addition Deferral") to the payment of debt service on the S&L Loan for the
years 1991 through 1993. The Addition Deferral bears interest at the prime
rate. The weighted average interest rate was 8.44% for 1997, 8.27% for 1996,
and 8.85% for 1995. The balance of the Addition Deferral including accrued
interest at December 31, 1997 and 1996, was $1.6 and $1.5 million,
respectively. Except for the balance of $1.6 million, the Partnership's rights
and obligations under the Addition Deferral arrangement terminated with the
Raleigh Hotel foreclosure. Additionally, the 66-room addition was purchased by
the Partnership when the Raleigh Hotel was repurchased during 1994.
On June 28, 1995, the Partnership assigned its right of first refusal to
purchase the Point Clear Hotel to a subsidiary of Host Marriott, which
subsequently purchased the Hotel. In exchange, Host Marriott agreed to forgive
$2 million of accrued interest on certain advances to the Partnership, which
has been accounted for as a capital contribution by the General Partner.
On August 22, 1995, the Partnership sold the Dallas Hotel to a subsidiary of
Host Marriott. The proceeds from the sale of the Dallas Hotel were used to
repay $44 million of the Bank Loan.
F-344
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $ 153,748 $ 154,253
Due from Marriott International, Inc. and affiliates.. 10,602 10,173
Other assets.......................................... 4,834 4,265
Restricted cash....................................... 15,893 6,351
Cash and cash equivalents............................. 589 3,182
--------- ---------
$ 185,666 $ 178,224
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $ 168,909 $ 172,667
Due to Host Marriott Corporation and affiliates..... 123,819 125,549
Incentive and base management fees due to Marriott
International, Inc. ............................... 29,793 25,868
Due to Marriott International, Inc. and affiliates.. 368 398
Accrued interest and other liabilities.............. 7,470 864
--------- ---------
Total Liabilities................................. 330,359 325,346
--------- ---------
PARTNERS' DEFICIT
General Partner..................................... (34,817) (34,842)
Limited Partners.................................... (109,876) (112,280)
--------- ---------
Total Partners' Deficit........................... (144,693) (147,122)
--------- ---------
$ 185,666 $ 178,224
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
F-345
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Hotel revenues............................................ $ 29,480 $ 28,048
-------- --------
OPERATING COSTS AND EXPENSES
Incentive management fees................................. 5,548 5,195
Depreciation.............................................. 3,891 2,526
Base management fees...................................... 2,370 2,257
Property taxes............................................ 1,625 1,602
Ground rent, insurance and other.......................... 1,969 2,118
-------- --------
15,403 13,698
-------- --------
OPERATING PROFIT............................................ 14,077 14,350
Interest expense.......................................... (11,905) (11,490)
Other revenues............................................ 257 328
-------- --------
NET INCOME.................................................. $ 2,429 $ 3,188
======== ========
ALLOCATION OF NET INCOME
General Partner........................................... $ 25 $ 32
Limited Partners.......................................... 2,404 3,156
-------- --------
$ 2,429 $ 3,188
======== ========
NET INCOME PER LIMITED PARTNER UNIT (1,800 Units)........... $ 1,336 $ 1,753
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
F-346
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 2,429 $ 3,188
Noncash items............................................ 11,251 9,457
Changes in operating accounts............................ 4,282 5,398
-------- --------
Cash provided by operating activities.................. 17,962 18,043
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment...................... (3,404) (3,358)
Change in property improvement funds..................... (678) (1,005)
Working capital received from Marriott International,
Inc. and affiliates, net................................ -- 168
-------- --------
Cash used in investing activities...................... (4,082) (4,195)
-------- --------
FINANCING ACTIVITIES
Change in restricted cash................................ (9,542) (10,490)
Repayments to Host Marriott Corporation and affiliates,
net..................................................... (4,649) (5,419)
Principal repayments on mortgage debt.................... (3,758) (2,171)
Repayments to affiliates of Marriott International,
Inc..................................................... (28) (22)
Collection of amounts due from Marriott International,
Inc..................................................... 1,504 --
-------- --------
Cash used in financing activities...................... (16,473) (18,102)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (2,593) (4,254)
CASH AND CASH EQUIVALENTS at beginning of period........... 3,182 5,228
-------- --------
CASH AND CASH EQUIVALENTS at end of period................. $ 589 $ 974
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................ $ 2,162 $ 2,080
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
F-347
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Potomac Hotel Limited Partnership (the "Partnership") without audit. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have
been condensed or omitted from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed financial statements should be read in
conjunction with the Partnership's financial statements and notes thereto
included in the Partnership's Form 10-K for the fiscal year ended December 31,
1997.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, the Partnership's net income is allocated
99% to the limited partners and 1% to Host Marriott Corporation ("Host
Marriott" or "General Partner"). Significant differences exist between the net
income for financial reporting purposes and the net income for Federal income
tax reporting purposes. These differences are due primarily to the use for tax
purposes of differing useful lives and accelerated depreciation methods,
differing tax bases in contributed capital, and differing timings in the
recognition of management fee expense.
2. Certain reclassifications were made to the prior quarter financial
statements to conform to the current quarter presentation.
3. Hotel revenues represent house profit of the Partnership's hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the hotels to the manager. House
profit reflects hotel operating results which flow to the Partnership as
property owner and represents gross hotel sales less property-level expenses,
excluding depreciation, base and incentive management fees, property taxes,
ground rent, insurance, and certain other costs, which are disclosed
separately in the condensed statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of ETIF 97-2 will increase both revenues and operating expenses by
approximately $49.5 million and $47.2 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
F-348
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Hotel revenues consist of the following hotel operating results (in
thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
-------- --------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $ 51,015 $ 48,339
Food and beverage.......................................... 22,137 21,190
Other...................................................... 5,841 5,704
-------- --------
78,993 75,233
-------- --------
HOTEL EXPENSES
Departmental Direct Costs
Rooms.................................................... 11,780 11,098
Food and beverage........................................ 16,292 15,840
Other hotel operating expenses............................. 21,441 20,247
-------- --------
49,513 47,185
-------- --------
HOTEL REVENUES............................................... $ 29,480 $ 28,048
======== ========
</TABLE>
4. Host Marriott, the General Partner of the Partnership, announced on April
17, 1998, that its Board of Directors has authorized the company to reorganize
its business operations to qualify as a real estate investment trust ("REIT")
to become effective as of January 1, 1999. As part of the REIT conversion,
Host Marriott expects to form a new operating partnership (the "Operating
Partnership") and limited partners in certain Host Marriott full-service hotel
partnerships and joint ventures, including the Partnership, are expected to be
given an opportunity to receive, on a tax-deferred basis, Operating
Partnership units in the Operating Partnership in exchange for their current
limited partnership interests. The Operating Partnership units would be
redeemable by the limited partner for freely traded Host Marriott shares (or
the cash equivalent thereof) at any time after one year from the closing of
the merger. In connection with the REIT conversion, the Operating Partnership
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission on June 2, 1998. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
F-349
<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
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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.
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"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 ten percent (10%) 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.
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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.
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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
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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>
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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.
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.
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(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.
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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.
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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.
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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 such 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 (i) various affiliates of The Blackstone Group and a series of
funds controlled by Blackstone Real Estate Partners pursuant to that certain
contribution agreement dated April 16, 1998 and (ii) Hopeport, Ltd. (or,
alternatively, its partners) and Timeport, Ltd. (or, alternatively, its
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 Crestline Capital Corporation, a Delaware corporation ("Crestline"), and
possibly cash or other consideration that Host or Host REIT will distribute
to their 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
Crestline, 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 Employee
Statutory Trust, the beneficiaries of which will be certain employees of
Host REIT and a designated public charity (the "Host Employee Trust") and
possibly other outside investors;
(vii) the merger of Host into Host REIT, and the subsequent distribution
by Host of Crestline common stock and possibly cash or 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 Crestline;
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 form of Second Amended and
Restated Agreement of Limited Partnership of the Operating Partnership,
proposed to be entered into at or about the time of the Mergers; (3) the
Declaration of Trust of Host REIT, dated as of , 1998; (4) the Articles of
Incorporation of Crestline, dated as of and the Bylaws of Crestline,
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 proposed form of the 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");
C-2
<PAGE>
(10) the form of operating agreement of the Lessees; and (11) 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 Common Share Election or 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 will be true
and correct at the time of the Mergers, that any representation or statement
made as a belief or made "to the knowledge of" or similarly qualified is
correct and accurate without such qualification, 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, the authenticity of the
originals from which any copies were made and that any documents as to which
we have reviewed only in form will be duly executed at the time of the Mergers
without changes from the form reviewed by us; (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.
C-3
<PAGE>
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 receive a Note
upon the exercise of his right to make the Note Election or Common Share
Election upon the exercise of his right to make the Common Share Election;
(ii) 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; (iii)
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; (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 or the Common Share 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 or the Common Share
Election in connection with the Mergers but retains his OP Units should not
be required to recognize gain by reason of the exercise of either 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. Based upon representations made by Host, Host REIT and the Operating
Partnership relating to the facts and circumstances surrounding each such
liability, all direct or indirect liabilities of the Partnerships fall into
one of the four categories of "qualified liabilities" described in Treasury
Regulations Section 1.707-5(a)(6).
9. 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
C-4
<PAGE>
"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 prior to 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.
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, in connection with the Mergers, exercise
his right to make the Note Election and receive a Note, or his right to make
the Common Share Election and receive Common Shares, in exchange for OP Units
received in the Mergers. A Limited Partner who makes either the Common Share
Election or the Note Election will recognize gain for tax purposes to the
extent the amount realized by the Limited Partner (including the Limited
Partner's share of any Operating Partnership liabilities) exceeds his adjusted
tax basis in his OP Units. This opinion letter does not otherwise address the
specific 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 who retain 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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<PAGE>
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") and in
the Prospectus which is part of the Registration Statement filed with the
Securities and Exchange Commission by Host REIT on Form S-4 (File No. )
(the "Prospectus"):
(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 Crestline Capital Corporation, a Delaware corporation ("Crestline") and
possibly cash or other consideration that Host or Host REIT will distribute
to their 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
D-1
<PAGE>
assumption or repayment of debt, OP Units and shares of common stock of
Crestline, 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 Employee
Statutory Trust, the beneficiaries of which will be certain employees of
Host REIT, and a designated public charity (the "Host Employee Trust") and
possibly other outside investors;
(vii) the merger of Host into Host REIT, and the subsequent distribution
by Host of Crestline common stock and possibly cash or 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 Crestline;
and
(ix) the related transactions described in the Consent Solicitation and
the Prospectus 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 and the Prospectus; (2) the form
of Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated as of , 1998; (3) the Declaration of Trust of
Host REIT, proposed to be entered into at or about the time of the Mergers;
(4) the Articles of Incorporation of Crestline dated as of and the Bylaws
of Crestline, 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
and the executed term sheets regarding each such lease (the "Leases"); (10)
the form of sale agreements pursuant to which the Operating Partnership and
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<PAGE>
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 capitalization of each Non-Controlled Subsidiary; (12) the
form of operating agreement of the Lessees; (13) the form of organizational
documents relating to the formation and capitalization of the Host Employee
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 Crestline 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, the Prospectus 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 will be true
and correct at the time of the Mergers, that any representation or statement
made as a belief or made "to the knowledge of" or similarly qualified is
correct and accurate without such qualification, 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, the authenticity of the
originals from which any copies were made and that any documents as to which
we have reviewed only a form will be duly executed at the time of the Mergers
without changes from the form reviewed by us; (iii) that each of Host REIT,
the Operating Partnership, the Hotel Partnerships, Crestline, the Non-
Controlled Subsidiaries, the Host Employee Trust, the Lessees, and the
Subsidiary Partnerships have been (where applicable) 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 and the Prospectus; (iv) that each of Host REIT, the Operating
Partnership, the Hotel Partnerships, Crestline, the Non-Controlled
Subsidiaries, the Host Employee Trust, the Lessees, and the Subsidiary
Partnerships will be duly incorporated or organized and validly existing under
the laws of the state in which it was created at the time of the REIT
Conversion; (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 will be no agreements or understandings between Host
REIT or the Operating Partnership, on the one hand, and the Host Employee
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 Host Employee 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, the Prospectus and the Representation
Letter) may affect the conclusions stated herein.
D-3
<PAGE>
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 and the Prospectus. 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 the Prospectus) 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 to shareholders and
the diversity of its share
D-4
<PAGE>
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" and in the section of the
Prospectus under the heading "Federal Income Tax Consequences--Federal Income
Taxation of Host REIT Following the Merger."
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, the
Prospectus 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 the Prospectus (and under the caption, "Federal Income Tax Consequences,"
in the Supplements) and to the inclusion of (i) this opinion letter as an
exhibit to the Prospectus and (ii) 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......... $ 81,139 $ 18,971 $221,162 $163,994
Chicago Suites.......... $ 58,058 $ 57,533 $ 37,567 $ 35,538
Desert Springs
PIF(3)................. $106,728 $114,222 $115,024 $123,279
Installment(4)......... $106,929 $114,423 $115,024 $123,279
Hanover
PIF(3)................. $204,364 $222,918 $135,329 $150,038
Installment(4)......... $216,764 $235,318 $135,329 $150,038
MDAH
PIF--COD(5)............ $221,425 $201,163 $171,164 $155,313
Installment--COD(6).... $220,666 $200,214 $171,164 $155,313
PIF--COD Deferred(7)... $211,840 $196,011 $171,164 $155,313
Installment--COD
Deferred(8)........... $211,081 $195,062 $171,164 $155,313
MHP..................... $123,046 $137,130 $192,626 $210,276
MHP2
PIF(3)................. $321,053 $316,202 $262,726 $257,539
Installment(4)......... $321,963 $317,112 $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. These amounts 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 an increase (or
decrease, as applicable) for projected taxable income or loss through
December 31, 1998 and 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>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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. The Operating Partnership and
Host REIT will operate together as an umbrella partnership REIT. Host REIT
expects to qualify as a REIT beginning with its first taxable year commencing
after the closing of the REIT Conversion, which Host REIT currently expects to
be the year beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Atlanta Marriott Marquis II Limited
Partnership, a Delaware limited partnership ("Atlanta Marquis" or the
"Partnership"), and up to seven other limited partnerships (the
"Partnerships") that own full-service hotels in which Host or its subsidiaries
are general partners. As more fully described in the Consent Solicitation,
limited partners of those Partnerships that participate in the Mergers will
receive OP Units 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," and with respect to Atlanta Marquis, the "Atlanta Marquis
Limited Partners"). Atlanta Marquis Limited Partners may elect to exchange
such OP Units received in connection with the Merger for either common shares
of beneficial interest, par value $.01 per share, of Host REIT ("Common
Shares") or unsecured 6.56% Callable Notes due December 15, 2005 issued by the
Operating Partnership ("Notes"). Beginning one year after the Mergers, Limited
Partners who retain OP Units will have the right to redeem their OP Units at
anytime and receive, at the election of Host REIT, either 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").
The number of OP Units to be allocated to Atlanta Marquis will be based upon
(i) its Exchange Value (as defined herein) and (ii) the price attributed to an
OP Unit following the Merger, determined as described herein (but in no event
will it be less than $ or greater than $ per OP Unit) and will not be
known at the time of voting. The number of Common Shares an Atlanta Marquis
Limited Partner may elect to receive in connection with the Merger will equal
the number of OP Units received. The principal amount of Notes that Atlanta
Marquis Limited Partners may elect to receive in connection with the Merger
will be based upon Atlanta Marquis' Note Election Amount (as defined herein).
See "Determination of Exchange Value of Atlanta Marquis and Allocation of OP
Units." The estimated Exchange Value and Note Election Amount set forth herein
may increase or decrease as a result of various adjustments, and will be
finally calculated shortly before the Effective Date. Pursuant to the Merger,
Atlanta Marquis Limited Partners have an estimated Exchange Value of $45,425
per Partnership Unit and a Note Election Amount of $36,340 per Partnership
Unit.
RISK FACTORS
In deciding whether to approve the Merger, Atlanta Marquis Limited Partners
should consider certain risks and other factors. The General Partner believes
that Atlanta Marquis Limited Partners should particularly consider the
following, which should be read in conjunction with the information in the
Consent Solicitation under "Risk Factors" and "Federal Income Tax
Consequences:"
. 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-
Atlanta Marquis Supp-1
<PAGE>
level income taxes expected as a result of the REIT Conversion. To the
extent that such 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. The benefits to Host
of the REIT Conversion will be materially reduced if one or more of the
Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Atlanta Marquis Limited Partners
or the other Limited Partners. Although the General Partner has obtained
the Appraisal and the Fairness Opinion from AAA, AAA has not negotiated
with the General Partner 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 Atlanta Marquis Limited
Partners or the other 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 Partner involve the following conflicts of
interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partners and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including Atlanta Marquis, participate and, Host REIT will benefit if the
value of OP Units received by the Limited Partners of Atlanta Marquis is
less than the value of their Partnership Interests. In addition, the
terms of the Leases of the Hotels, including Atlanta Marquis' Hotel, will
be determined by Host and 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, including the Atlanta Marquis
Limited Partners.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the Atlanta Marquis
Limited Partners must vote on the Merger, including (i) the exact
Exchange Value for Atlanta Marquis (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 Merger, which will be determined by reference to the
post-Merger trading prices of Host REIT's Common Shares (but will not be
less than $ or greater than $ ) and which, together with the Exchange
Value, will determine the number of OP Units the Atlanta Marquis Limited
Partners 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 Note Election Amount is determined. For these reasons,
the Atlanta Marquis Limited Partners cannot know at the time they vote on
the Merger these important aspects of the Merger.
. Sale of Personal Property May Result in Gain to Atlanta Marquis Limited
Partners. In order to facilitate the participation of Atlanta Marquis in
the Merger without adversely affecting Host REIT's qualification as a
REIT, the Operating Partnership will require, as part of the Merger, that
Atlanta Marquis sell a portion of the personal property associated with
the Hotel owned by Atlanta Marquis to a Non-Controlled Subsidiary. This
sale would be a taxable transaction and may result in an allocation of a
relatively modest amount of ordinary recapture income by Atlanta Marquis
to Atlanta Marquis Limited Partners. This income, if any, will be
allocated to each Atlanta Marquis Limited Partner in the same proportion
and to the same extent that such Atlanta Marquis Limited Partner was
allocated any deductions directly or indirectly giving rise to the
treatment of such gain as recapture income. An Atlanta Marquis Limited
Partner who receives such an allocation of recapture income would not be
entitled to any special distribution from Atlanta Marquis in connection
with the sale of personal property.
. Exchange Value May Not Equal Fair Market Value of Atlanta Marquis'
Hotel. Each Atlanta Marquis Limited Partner who retains OP Units or
elects to exchange OP Units for Common Shares will receive
Atlanta Marquis Supp-2
<PAGE>
consideration with a deemed value equal to the Exchange Value of such
Atlanta Marquis Limited Partner's Partnership Interest. The determination
of the Exchange Value of Atlanta Marquis involves numerous estimates and
assumptions. There is no assurance that the Exchange Value of Atlanta
Marquis will equal the fair market value of the Hotel and other assets
contributed by Atlanta Marquis. See "Determination of Exchange Value of
Atlanta Marquis and Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other Subsidiaries of Host in the
Mergers and the OP Units to be acquired from Limited Partners who elect
to exchange OP Units for Common Shares in connection with the Mergers)
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. Host REIT's OP Units, in the
aggregate, 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 to Host REIT and Atlanta Marquis Limited Partners and
the other Limited Partners may result in such 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 Value of Atlanta Marquis and
Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Atlanta Marquis Limited Partners' Partnership Interests. The
price of an OP Unit, for purposes of the Merger 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 Merger (but in no event will it be less than $ or greater than
$ per OP Unit). This pricing mechanism has the effect of fixing the
minimum and maximum number of OP Units to be issued in the Merger. It is
likely that, either initially or 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 Merger. This could result in the Atlanta Marquis Limited
Partners receiving OP Units or Common Shares with an actual value that is
less than either the price of the OP Units for purposes of the Merger or
the fair market value of their Partnership Interests.
. Inability of Atlanta Marquis Limited Partners Who Retain OP Units to
Redeem OP Units for One Year. Atlanta Marquis Limited Partners who retain
OP Units received in the Merger will be unable to redeem such OP Units
for one year following the Merger. Until then, Atlanta Marquis Limited
Partners will bear the risk of illiquidity and of not being able to sell
in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection with
the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price is also
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of Atlanta
Marquis. Each Atlanta Marquis Limited Partner may elect to receive in
exchange for OP Units received in the Merger, an unsecured, seven-year
Note of the Operating Partnership with a principal amount equal to the
Note Election Amount of his Partnership Interest, which is based upon
numerous assumptions and estimates. The deemed value of the OP Units to
be received by the Atlanta Marquis Limited Partners will exceed the
principal amount of the corresponding Notes (because the Exchange Value
will be higher than the Note Election Amount) and there is no assurance
that the Note an Atlanta Marquis Limited Partner receives will have a
value equal to either (i) the fair market value of the Atlanta Marquis
Limited Partner's share of the Hotel and other assets owned by Atlanta
Marquis or (ii) the principal amount of the Note. There will be no public
Atlanta Marquis Supp-3
<PAGE>
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 Atlanta Marquis 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
ranks equally with such Notes.
. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of an Atlanta Marquis Limited Partner's
investment from holding an interest in Atlanta Marquis, which was
structured as a tax shelter and tax credit investment, is a finite-life
entity, has a fixed portfolio of one Hotel and distributes the cash flow
from the operation of such Hotel to the Atlanta Marquis Limited Partners,
to holding a direct or indirect interest in the Operating Partnership, an
ongoing real estate company with a portfolio of approximately 125 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 and (iii) is able to reinvest proceeds from sales or
refinancings of existing Hotels in other hotels. In addition, each
Atlanta Marquis Limited Partner's investment will change from one that
allows an Atlanta Marquis Limited Partner to receive a return of capital
in the form of distributions from any net proceeds of a sale or
refinancing of Atlanta Marquis' assets to an investment in which an
Atlanta Marquis Limited Partner who retains OP Units likely would realize
a return of capital only through the exercise of the Unit Redemption
Right. Those Atlanta Marquis Limited Partners who elect to receive Common
Shares in connection with the Merger will hold an equity interest in a
publicly traded REIT that (i) provides immediate liquidity, (ii) intends
to make distributions to its shareholders in an amount equal to at least
95% of its taxable income, (iii) allows shareholders to influence
management by participation in the election of Trustees and (iv) realizes
substantial corporate tax savings as long as certain requirements are
met. An Atlanta Marquis Limited Partner's share of the liquidation
proceeds, if any, from the sale of the Atlanta Marquis Hotel could be
higher than the amount realized upon exercise of the Unit Redemption
Right, the sale of Common Shares received in connection with the Mergers
or payments on any Note received by an Atlanta Marquis Limited Partner
who elects to exchange his OP Units for such Note in connection with the
Merger. An investment in the Operating Partnership or Host REIT may not
outperform an investment in Atlanta Marquis. 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 Merger, Atlanta Marquis Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will own
interests in a much larger enterprise with a broader range of assets than
Atlanta Marquis individually. A material adverse change affecting the
Operating Partnership's assets will affect all Limited Partners,
including Atlanta Marquis Limited Partners, regardless of whether a
particular Limited Partner previously was an investor in such affected
assets. Atlanta Marquis owns discrete assets and the Mergers and the REIT
Conversion will significantly diversify the types and geographic
locations of the Hotels in which the Atlanta Marquis 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 the Hotel previously owned by Atlanta Marquis.
. Atlanta Marquis Limited Partners Have No Cash Appraisal Rights. Atlanta
Marquis Limited Partners who vote against the Merger have no right to
receive cash based upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating Partnership.
The Atlanta Marquis Limited Partners cannot know at the time they vote on
the Merger the exact size and amount of leverage of the
Atlanta Marquis Supp-4
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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, 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 Mergers and the
REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term 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. The Operating Partnership also
will not own any of the voting stock of the Non-Controlled Subsidiaries,
which may own up to 20% by value of the Operating Partnership's assets.
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 and the Non-Controlled Subsidiaries to operate and manage
their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into new
leases with such lessees, which could result in a failure of Host REIT to
qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of Atlanta Marquis Limited Partners Binds All Atlanta
Marquis Limited Partners. For Atlanta Marquis, approval by a majority of
the Class A Limited Partners is required to approve the Merger and the
related amendments to the partnership agreement, as described in "Voting
Procedures--Required Vote and Other Conditions." Such approval will cause
Atlanta Marquis to participate in the Merger and will bind all Atlanta
Marquis Limited Partners, including Atlanta Marquis Limited Partners who
voted against or abstained from voting with respect to the Merger and the
related amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain such
consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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
Atlanta Marquis Supp-5
<PAGE>
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 an approximately 53% 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 $15.00). 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 (including Host REIT), (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 Prior 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 (including Host REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural and
other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder Rights
Plan to replace the existing stockholder rights plan of Host. Host REIT
also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest" and "Certain Provisions of Maryland Law and Host REIT's
Declaration of Trust and Bylaws."
. 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 substantial
corporate-level income taxes in 1999 and could cause the Blackstone
Acquisition not to be consummated.
Atlanta Marquis Supp-6
<PAGE>
. Effect of Subsequent Events upon Recognition of Gain. Even though the
Atlanta Marquis Limited Partners (other than those who elect to receive
Common Shares or a Note in exchange for OP Units in connection with the
Merger) generally are not expected to recognize significant taxable gain
at the time of the Merger, there are a variety of events and transactions
(including the sale of the Hotel currently owned by Atlanta Marquis or
the reduction of indebtedness securing the Hotel) that could cause an
Atlanta Marquis 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 Treatment of Atlanta Marquis
Limited Partners Who Hold OP Units Following the Merger." Certain Hotels
(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. If Atlanta Marquis
elects to participate in the Merger, 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. The partnership agreement of the
Operating Partnership, which is substantially in the form attached to the
Consent Solicitation 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."
. Election to Exchange OP Units for Common Shares. An Atlanta Marquis
Limited Partner who elects to receive Common Shares in exchange for his
OP Units in connection with the Merger will be treated as having made a
fully taxable disposition of his OP Units. If he has a "negative capital
account" with respect to his Partnership Interest, he will recognize
"phantom income" (i.e., the income recognized would exceed the value of
the Common Shares by the amount of his negative capital account). Such
Atlanta Marquis Limited Partner may not defer recognition of any part of
the gain realized from the exchange under the "installment sale" rules.
See "Federal Income Tax Consequences--Tax Treatment of Atlanta Marquis
Limited Partners Who Exercise Their Right to Make the Common Share
Election or the Note Election." An Atlanta Marquis Limited Partner who
elects to receive Common Shares in connection with the Merger will not
receive the Crestline common stock or any other portion of the E&P
distribution made before they become shareholders of Host REIT.
. Election to Exchange OP Units for Notes. An Atlanta Marquis Limited
Partner who elects to receive a Note in exchange for his OP Units in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. An Atlanta Marquis Limited Partner who
receives a Note may be eligible to defer only a small portion of that
gain under the "installment sale" rules until principal on the Note is
paid. An Atlanta Marquis Limited Partner with a "negative capital
account" with respect to his Partnership Interest who elects to receive a
Note in connection with the Merger will recognize "phantom income" in
that amount in any event. See "Federal Income Tax Consequences--Tax
Treatment of Atlanta Marquis Limited Partners Who Exercise Their Right to
Make the Common Share Election or 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
Atlanta Marquis Supp-7
<PAGE>
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 and Common Shares, 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 the Lease of the Hotel to
the Lessee were to be disregarded for tax purposes (for example, because
the Lease was determined to lack economic substance), Host REIT could
fail to qualify as a REIT and the Operating Partnership might be treated
as a corporation for federal income tax purposes, which would have a
material adverse impact on the Atlanta Marquis Limited Partners and the
value of the OP Units and the Common Shares.
. 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.
. Atlanta Marquis Limited Partners Need to Consult with Their Own Tax
Advisors. Because the specific tax attributes of an Atlanta Marquis
Limited Partner and the facts regarding such Atlanta Marquis Limited
Partner's interest in Atlanta Marquis could have a material impact on the
tax consequences to such Atlanta Marquis Limited Partner of the Merger
(including the decision whether to elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger) and the
subsequent ownership and disposition of OP Units, Common Shares or Notes,
it is essential that each Atlanta Marquis Limited Partner consult with
his own tax advisors regarding the application of federal, foreign and
state and local tax laws to such Atlanta Marquis 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 Atlanta Marquis Limited Partners would not be able to use
suspended passive activity losses from other investments (including from
Atlanta Marquis) to offset income from the Operating Partnership. It is
estimated that each Atlanta Marquis Limited Partner 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 significant passive activity loss
carryforward as of December 31, 1998.
. Host REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
Atlanta Marquis Supp-8
<PAGE>
MARRIOTT MARQUIS CORPORATION (THE "GENERAL PARTNER"), THE GENERAL PARTNER OF
ATLANTA MARQUIS, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS
FAIR TO THE ATLANTA MARQUIS LIMITED PARTNERS AND RECOMMENDS THAT ALL ATLANTA
MARQUIS LIMITED PARTNERS VOTE FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO
THE PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for
Atlanta Marquis Limited Partners the specific risks, benefits, effects and
fairness of the Merger to them and to provide other information specific to
Atlanta Marquis. Supplements have also been prepared for each of the other
Partnerships. This Supplement, together with the supplements of the other
Partnerships (collectively, the "Supplements"), are part of the Consent
Solicitation. Upon receipt of a written request by a Limited Partner or his
representative, so designated in writing, the General Partner will send a copy
of any Supplement without charge. All requests for a copy of a Supplement
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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the Atlanta Marquis Limited Partners for the reasons set
forth below. This information is qualified by and should be read in
conjunction with the information in the Consent Solicitation under "Background
and Reasons for the Mergers and the REIT Conversion--Reasons for the Mergers."
These benefits, which should be viewed as alternatives to continuing the
business and operations of Atlanta Marquis, are expected to include:
. Exchange Value of Atlanta Marquis. Atlanta Marquis Limited Partners who
retain OP Units or elect to receive Common Shares in connection with the
Merger will receive OP Units or Common Shares with an estimated Exchange
Value equal to $45,425 per Partnership Unit.
. Liquidity. The REIT Conversion will offer Atlanta Marquis Limited
Partners liquidity with respect to their investments in Atlanta Marquis
because Atlanta Marquis Limited Partners can receive freely tradeable
Host REIT Common Shares by electing to exchange OP Units for Common
Shares in connection with the Merger or by exercising their Unit
Redemption Right at any time after one year following the Effective Date.
Host has approximately 204 million shares of common stock outstanding and
is expected to have a total common equity market capitalization of
approximately $3.6 billion after giving effect to the earnings and
profits distribution (based on a price of $15.00 per Host REIT Common
Share). The exercise of the election to exchange OP Units for Common
Shares in connection with the Merger or the exercise of the Unit
Redemption Right, however, generally would result in recognition of
taxable income or gain at the time of exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that these distributions will be higher than the estimated cash
distributions for 1998 of Atlanta Marquis, 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 Atlanta Marquis and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons
for the Mergers."
. Substantial Tax Deferral for Atlanta Marquis Limited Partners Not
Electing to Exchange OP Units for Common Shares or Notes. The General
Partner expects that Atlanta Marquis Limited Partners who do not elect to
receive Common Shares or a Note in exchange for OP Units in connection
with the Merger
Atlanta Marquis Supp-9
<PAGE>
generally should be able to obtain the benefits of the Merger 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 Atlanta Marquis or a sale or other disposition of its
assets in a taxable transaction (although Atlanta Marquis Limited Partners
may recognize a relatively modest amount of ordinary income as the result
of required sales of personal property to a Non-Controlled Subsidiary in
order to facilitate Host REIT's qualification as a REIT). Thereafter, such
Atlanta Marquis Limited Partners generally should be able to defer at
least a substantial portion of such built-in gain until they elect to
exercise their Unit Redemption Right or the Hotel currently owned
indirectly by Atlanta Marquis is sold or otherwise disposed of in a
taxable transaction by the Operating Partnership or the debt now secured
by the Hotel is repaid, prepaid or substantially reduced. If Atlanta
Marquis participates in the Merger, the Operating Partnership will succeed
to an existing agreement that will restrict its ability to dispose of the
hotel owned indirectly by Atlanta Marquis or to refinance the debt secured
by such hotel for approximately 11 1/2 years beyond the consummation of
the Merger without compensating certain outside partners for the resulting
adverse tax consequences. The federal income tax consequences of the
Merger are highly complex and, with respect to each Atlanta Marquis
Limited Partner, are dependent upon many variables, including the
particular circumstances of such Atlanta Marquis Limited Partner. See
"Federal Income Tax Consequences--Tax Consequences of the Merger." Each
Atlanta Marquis Limited Partner is urged to consult with his own tax
advisors as to the consequences of the Merger in light of his particular
circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of Atlanta Marquis Limited Partners upon the performance of,
and the exposure to the risks associated with, Atlanta Marquis' Hotel 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 generally have a significantly lower leverage
to value ratio, approximately 53%, than Atlanta Marquis currently, which
has a leverage ratio of 71% (calculated as a percentage of Exchange
Value), resulting in significant interest and debt service savings and
greater financial stability.
. Growth Potential. The General Partner believes that the Atlanta Marquis
Limited Partners, by directly or indirectly 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
Atlanta Marquis 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 Atlanta Marquis 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 Atlanta Marquis individually.
. Public Market Valuation of Assets. The Partnership Units of Atlanta
Marquis currently trade at a discount to the net asset value of Atlanta
Marquis' assets. The General Partner believes that by exchanging
interests in Atlanta Marquis, which is a non-traded, finite-life limited
partnership with a fixed portfolio for interests in an ongoing 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 Atlanta Marquis 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 (although not currently), has resulted at various times 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
they will not trade at a discount to private market values. Also, the
benefit of Host's
Atlanta Marquis Supp-10
<PAGE>
conversion to a REIT will not be shared by the Atlanta Marquis 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.
If Atlanta Marquis does not participate in the Merger, its business will
continue in its current manner; however, the Operating Partnership may elect
to contribute some or all of its interest in Atlanta Marquis to a Non-
Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF ATLANTA MARQUIS AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of Atlanta Marquis 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 Partner has retained AAA to
determine the market value of the Hotel as of March 1, 1998 (the
"Appraised Value"). The "Adjusted Appraised Value" of Atlanta Marquis
equals the Appraised Value of its Hotel, adjusted as of the Final
Valuation Date 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 Atlanta Marquis
represents AAA's estimate, as adopted by the General Partner, of the
discounted present value, as of January 1, 1998, of the Atlanta Marquis
limited partners' share of estimated future cash distributions and
estimated net sales proceeds (plus lender reserves), assuming that
Atlanta Marquis 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 Atlanta Marquis represents
the General Partner's estimate of the net proceeds to Atlanta Marquis
limited partners resulting from the assumed sale as of December 31, 1998
of the Hotel of Atlanta Marquis, 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 Atlanta Marquis 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 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 Atlanta Marquis after the Initial
Valuation Date to perform deferred maintenance that were previously subtracted
in determining the estimated Adjusted Appraised Value of Atlanta Marquis and
(iii) to reflect any changes in Atlanta Marquis' other reserves, such as for
litigation expenses and indemnification costs and any revised estimates of
transfer and recordation taxes and fees. The General Partner does not believe
that any adjustments to the Exchange Value will be material; however, if any
such changes are deemed to be material, the General Partner will provide the
Atlanta Marquis Limited Partners an opportunity to change their vote on the
Merger.
APPRAISED VALUE. Atlanta Marquis' Hotel was 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
Atlanta Marquis' Hotel. The appraisal (the "Appraisal") was reviewed by a
Member Appraisal Institute ("MAI") appraiser and certified by such MAI
appraiser as having been prepared in accordance with the requirements of the
Standards of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
The purpose of the Appraisal is to provide an estimate of the "Market Value"
of the Hotel. "Market Value" means the most probable price which a property
should bring in a competitive and open market under
Atlanta Marquis Supp-11
<PAGE>
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 a site visit at Atlanta Marquis' Hotel for purposes of the Appraisal.
In preparing the Appraisal, 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 Atlanta Marquis' 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 Hotel. AAA also
prepared a projection of the net operating income prior to incentive
management fees and certain capital expenditures for the 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 Hotel. The resulting gross margin (ratio
of total revenues to NOI 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 Atlanta Marquis, 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
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
the 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 effective capitalization rates for 1997
and Projected Year's Adjusted NOI resulting from AAA's estimated
Appraised Value of Atlanta Marquis' Hotel.
Atlanta Marquis Supp-12
<PAGE>
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISALS OF ATLANTA MARQUIS'
HOTEL
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.4% 9.4%
</TABLE>
The resulting Appraised Value of Atlanta Marquis' Hotel, as estimated by
AAA, is $ 255,000,000.
. Comparison with Comparable Sales. AAA checked the Appraised Value of the
Hotel derived by the foregoing procedures against its database of
comparable sale transactions for reasonableness.
The Appraised Value assumes 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 Atlanta Marquis' Hotel (but
estimated deferred maintenance costs have been deducted in estimating the
Adjusted Appraised Value of the Atlanta Marquis' Hotel). The Appraised Value
did not take into account the costs that might be incurred in selling the
Hotel (but estimated costs for transfer and recordation taxes and fees have
been deducted in estimating the Adjusted Appraised Value of the Hotel).
The Appraisal is not a guarantee of present or future values and no
assurance can be given as to the actual value of Atlanta Marquis' Hotel. The
Appraisal should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of Atlanta Marquis.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 Appraisal. Furthermore,
the actual results achieved from Atlanta Marquis' Hotel will vary from the
results projected in the Appraisal and the variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of Atlanta Marquis
was determined by making various adjustments to the Appraised Value of Atlanta
Marquis' Hotel, as described below.
. Lender Reserves. Atlanta Marquis' 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 Value of the Hotel.
A final determination of the lender reserves of Atlanta Marquis 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 Reserve. For Atlanta Marquis, an amount equal to
the capital expenditure reserve which was 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 (including any participating interest that would accrue as a
result of the Mergers) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of Atlanta Marquis has been
subtracted from the Appraised Value.
. Mark to Market Adjustment. 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 Atlanta Marquis, the estimated
Adjusted Appraised Value for Atlanta Marquis has been increased 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 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
the loan was calculated by determining the difference between the
Atlanta Marquis Supp-13
<PAGE>
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.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to the
Atlanta Marquis' Hotel 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 the Appraised Value.
The following table sets forth the adjustments to the Appraised Value of
Atlanta Marquis' Hotel made to derive the estimated Adjusted Appraised Value
for Atlanta Marquis as of the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR ATLANTA MARQUIS
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................ $ 255,000
Lender reserves................................................ 3,600
Capital expenditure reserve.................................... 16,750
Mortgage debt.................................................. (162,047)
Other debt..................................................... (20,134)
Mark to market adjustment...................................... 4,693
Deferred maintenance costs..................................... (607)
---------
Estimated Adjusted Appraised Value............................. $ 97,255
=========
General Partner's share(1)..................................... $ 75,223
Limited partners' share(2)..................................... $ 22,032
Per Partnership Unit........................................... $ 41,570
</TABLE>
- --------
(1) Includes the Class B limited partnership interest held by the General
Partner.
(2) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of Atlanta Marquis
using the following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for Atlanta Marquis 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 (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 Atlanta Marquis' 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 Atlanta Marquis' FF&E reserve was adequate and understood
that Host determined that there were no reserve shortfalls or surpluses.
. Determination of Residual Value. To estimate the residual value of the
Atlanta Marquis limited partners' interest in Atlanta Marquis at the end
of the 12-year period, AAA assumed that the Atlanta Marquis Hotel would
be sold as of December 31, 2009 at its then market value. AAA estimated
the market value of the 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 is 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
Atlanta Marquis Supp-14
<PAGE>
determined what portion of such estimated net sales proceeds would be
distributable to Atlanta Marquis' limited partners under the partnership
and debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to Atlanta Marquis'
limited partners from operations and estimated net sales proceeds 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for Atlanta Marquis are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR ATLANTA MARQUIS
(DOLLARS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNTS AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED GENERAL LIMITED ESTIMATED
CONTINUATION PARTNER'S PARTNERS' CONTINUATION VALUE
GROWTH RATE EXIT CAPITALIZATION RATE (2009) VALUE SHARE SHARE (PER PARTNERSHIP UNIT)
----------- ------------------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
4.40% 9.80% $93,889 $64,587 $24,075 $45,425
</TABLE>
LIQUIDATION VALUE. The Liquidation Value of Atlanta Marquis was estimated by
the General Partner and represents the estimated value of Atlanta Marquis if
all of its assets were sold as of December 31, 1998. Such value was based upon
the Adjusted Appraised Value of Atlanta Marquis, 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; and (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 Atlanta Marquis' Hotel was
subtracted from the Appraised Value for estimated liquidation costs, expenses
and contingencies. The General Partner then determined the portion of the
estimated Liquidation Value that would be distributable to Atlanta Marquis'
limited partners under the terms of the partnership agreement and other
contractual arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of Atlanta Marquis as of the
Initial Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF ATLANTA MARQUIS
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................ $ 255,000
Lender reserves................................................ 3,600
Capital expenditure reserve.................................... 16,750
Mortgage debt.................................................. (162,047)
Other debt..................................................... (20,134)
Prepayment/defeasance costs.................................... (10,972)
Deferred maintenance costs..................................... (607)
Sales costs.................................................... (6,375)
---------
Estimated Liquidation Value.................................... $ 75,215
=========
General Partner's share(1)..................................... $ 75,002
Limited partners' share(2)..................................... $ 213
Per Partnership Unit........................................... $ 402
</TABLE>
(1)Excludes amounts attributable to limited partner interest of the General
Partner.
(2)Includes limited partner share of Host subsidiaries.
Atlanta Marquis Supp-15
<PAGE>
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of Atlanta Marquis (based upon the greatest of its estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value), the estimated minimum number of OP Units to be received
(based upon a maximum price of $ per OP Unit) and the estimated Note
Election Amount for Atlanta Marquis, all on a per Partnership Unit basis as of
the Initial Valuation Date. The number of Common Shares received in exchange
for OP Units in connection with the Merger will equal the number of OP Units.
The estimated Note Election Amount for Atlanta Marquis (which will be received
by Atlanta Marquis Limited Partners electing to receive Notes in exchange for
OP Units) is equal to 80% of its Exchange Value for Atlanta Marquis. 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 Atlanta Marquis 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 (but will not be less than $ per OP Unit) and will
not be finally determined until such time.
ESTIMATED EXCHANGE VALUE,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
OF ATLANTA MARQUIS
PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ADJUSTED ESTIMATED ESTIMATED ESTIMATED MINIMUM NOTE
APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF ELECTION
VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
--------- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$41,570 $45,425 $402 $45,425 3,028 $36,340
</TABLE>
- --------
(1) A Partnership Unit in Atlanta Marquis 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units to Pay Exchange Value to Atlanta Marquis Limited
Partners. Each Atlanta Marquis Limited Partner will receive OP Units with a
deemed value equal to the Exchange Value of such Atlanta Marquis 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 will it be less than $ or greater than $ per OP Unit). Thus, if the
20-day average trading price is less than $ , the price per OP Unit in the
Merger would be $ , and if such average trading price is greater than $ ,
the price per OP Unit in the Merger would be $ . The OP Units will be
delivered to the Atlanta Marquis Limited Partners promptly after the twentieth
trading day following the Effective Date of the Merger (which would be
promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998).
Atlanta Marquis Limited Partners at the Effective Date of the Merger who
retain OP Units will receive cash distributions from Atlanta Marquis for all
of 1998 and, if the Merger does not occur in 1998, any portion of 1999 prior
to the Merger for which period they do not receive a cash distribution from
the Operating Partnership. Cash distributions will be made by Atlanta Marquis
in accordance with its partnership agreement on or before June 1, 1999 in
respect of 1998 operations and, if the Merger does not occur prior to January
1, 1999, within 90 days after the Effective Date of the Merger in respect of
any 1999 operations. Atlanta Marquis Limited Partners at the Effective Date of
the Mergers who elect to receive Common Shares in connection with the Merger
in exchange for OP Units will participate in the same distributions from
Atlanta Marquis as Atlanta Marquis Limited Partners who retain OP Units and
will receive distributions from Host REIT with respect to periods after the
Effective Date of the Mergers, which distributions are expected to equal the
amount distributed with respect to the OP Units for such periods. Atlanta
Marquis Limited Partners at the Effective Date of the Merger who
Atlanta Marquis Supp-16
<PAGE>
elect to receive Notes in connection with the Merger in exchange for OP Units
will participate in the same distributions from Atlanta Marquis 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
Merger because they will be entitled to receive interest on their Notes for
such periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTEREST IN ATLANTA MARQUIS AND ALLOCATION OF OP UNITS TO THE GENERAL PARTNER
AND OTHER HOST SUBSIDIARIES
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the Atlanta Marquis Limited Partners'
Partnership Interests, by the same methodologies set forth above and giving
effect to the applicable distribution preferences in the Atlanta Marquis
partnership agreement. The number of OP Units that will be received by the
General Partner will be equal to the value of its interest in Atlanta Marquis
divided by the same price per OP Unit used to determine the number of OP Units
to be received by Atlanta Marquis Limited Partners.
The following table sets forth the estimated value of the interest of the
General Partner and other Host subsidiaries in Atlanta Marquis based upon the
estimated aggregate Exchange Value of the Atlanta Marquis Limited Partners'
Partnership Interests as of the Initial Valuation Date and the minimum number
of OP Units estimated to be received by the General Partner and other Host
subsidiaries in respect thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES' INTEREST
AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value............................................... $88,662
Limited Partners' share of aggregate Exchange Value.................... 24,075
-------
Value of General Partner's interest(1)................................. $64,587
Value of other Host subsidiaries' interest............................. 68
-------
Total interest of General Partner and other Host subsidiaries.......... $64,655
=======
Number of OP Units:
Minimum(2)............................................................ 4,310
</TABLE>
- --------
(1)Excludes limited partner interests owned by the General Partner.
(2)Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and are fair to the Limited Partners of Atlanta Marquis and recommends that
all Limited Partners of Atlanta Marquis consent to the Merger. The General
Partner bases this recommendation primarily on (i) its view that the expected
benefits of the Merger for the Atlanta Marquis Limited Partners outweigh the
risks and potential detriments of the Merger to the Atlanta Marquis Limited
Partners (see "Background and Reasons for the Mergers and the REIT
Conversion--Reasons for the Mergers" and "Risk Factors"), (ii) its view that
the value of the OP Units allocable to the Atlanta Marquis Limited Partners on
the basis of the Exchange Value established for Atlanta Marquis represents
fair consideration for the Partnership Interests held by the Atlanta Marquis
Limited Partners and is fair to the Atlanta Marquis Limited Partners from a
financial point of view and (iii) the Appraisal and Fairness Opinion of AAA.
See "--Fairness Opinion."
Atlanta Marquis Supp-17
<PAGE>
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the Atlanta Marquis Limited Partners,
individually and as a whole, if it is consummated with any combination of
other Participating Partnerships. The General Partner bases this belief
primarily on the fact that the consideration to be paid to the Atlanta Marquis
Limited Partners has been established based upon Atlanta Marquis' Exchange
Value, without regard to any possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for Atlanta
Marquis represents fair consideration for the Partnership Interests of
the Atlanta Marquis Limited Partners in the Merger in relation to Atlanta
Marquis because the Exchange Value is equal to the greatest of the
Adjusted Appraised Value, Continuation Value and Liquidation Value, each
of which is an acceptable method for determining the fair market value of
a Partnership's assets. The General Partner also has concluded that the
Exchange Value established for the Atlanta Marquis Limited Partners
fairly reflects the value of the assets held by Atlanta Marquis. In
addition, the General Partner's own analysis, as well as the Fairness
Opinion, supports these conclusions.
. Atlanta Marquis Limited Partners who retain OP Units will be able to
defer recognition of gain until such time as they choose to realize such
gain based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the Atlanta Marquis 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
Merger for the Atlanta Marquis Limited Partners, as described in "Risk
Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
Atlanta Marquis Limited Partners should consider carefully and does not
conclude that the Exchange Value is the best price that could be
obtained. 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 Merger.
. The General Partner believes that the economic terms of the lease of the
Atlanta Marquis Hotel are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the Atlanta Marquis
Limited Partners.
. The General Partner believes that the value of the consideration to be
received by the Atlanta Marquis Limited Partners in the Merger 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 Atlanta Marquis is equal to its
Continuation Value, which is the greatest of the Adjusted Appraised
Value, the Continuation Value and the Liquidation Value and the historic
prices paid for Atlanta Marquis Partnership Units. The General Partner
does not believe that the sale of Atlanta Marquis' Hotel and liquidation
of Atlanta Marquis would obtain for Atlanta Marquis Limited Partners as
much value as the value to be received by such Atlanta Marquis Limited
Partners following the Merger. In addition, while the Continuation Values
of three of the Partnerships, including Atlanta Marquis, are higher than
the Adjusted Appraised Values of such Partnerships, the General Partner
believes that the Merger provides substantial benefits to the Atlanta
Marquis Limited Partners and the other Limited Partners, including those
benefits described under "Background and Reasons for the Mergers and the
REIT Conversion--Reasons for the Mergers," especially enhanced liquidity
and regular quarterly cash distributions. The
Atlanta Marquis Supp-18
<PAGE>
General Partner believes that the following benefits are of the greatest
value and importance to the Atlanta Marquis Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer Atlanta
Marquis Limited Partners liquidity with respect to their investments
in the Partnerships because Atlanta Marquis Limited Partners can
elect to receive freely tradeable Host REIT Common Shares in
connection with the Merger, or for Atlanta Marquis Limited Partners
who retain OP Units, at any time, commencing one year following the
Effective Date, will be able to exercise their Unit Redemption Right,
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 $3.6
billion after giving effect to the earnings and profits distribution
(based on a price of $15.00 per Host REIT Common Share). The election
to exchange OP Units for Common Shares in connection with the Merger,
or for 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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host REIT will make
regular quarterly cash distributions to holders of Common Shares.
Host expects
that these distributions will be higher than the estimated cash
distributions for 1998 of Atlanta Marquis and, in any event, the
ability to receive distributions quarterly and in regular amounts
would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
Atlanta Marquis Limited Partner's investment will be converted from
an investment in Atlanta Marquis, which owns one hotel into an
investment in an enterprise that initially will own or control
approximately 125 Hotels and will have a total market capitalization
of approximately $3.6 billion, thereby reducing the dependence upon
the performance of, and the exposure to the risks associated with,
the Hotel currently owned by Atlanta Marquis 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 generally have a significantly lower
leverage to value ratio, approximately 53%, than Atlanta Marquis
currently, which has a leverage ratio of 71% (calculated as a
percentage of Exchange Value), resulting in significant interest and
debt service savings and greater financial stability.
. Substantial Tax Deferral for Atlanta Marquis Limited Partners Not
Electing to Exchange OP Units for Common Shares or Notes. The General
Partner expects that Atlanta Marquis Limited Partners who do not
elect to receive Common Shares or Notes in exchange for OP Units in
connection with the Merger generally should be able to obtain the
benefits of the Merger 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
Atlanta Marquis or a sale or other disposition of its assets in a
taxable transaction (although Atlanta Marquis Limited Partners may
recognize a relatively modest amount of ordinary income as the result
of required sales of personal property by Atlanta Marquis to a Non-
Controlled Subsidiary in order to facilitate Host REIT's
qualification as a REIT).
The General Partner believes that the factors described above, which support
the fairness of the Merger to the Atlanta Marquis Limited Partners, when
weighed against the factors that may be disadvantageous, taken as a whole,
indicate that the Merger is fair to the Atlanta Marquis Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other General Partners to perform the Appraisals and to render the Fairness
Opinion that (i) the Exchange Value and the methodologies and underlying
assumptions used
Atlanta Marquis Supp-19
<PAGE>
to determine the Exchange Value, the Adjusted Appraised Value, the
Continuation Value and the Liquidation Value of Atlanta Marquis and each other
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 Atlanta Marquis Limited
Partners and the Limited Partners of each other Partnership and (ii) the
methodologies used to determine the value of an OP Unit and to allocate the
equity in the Operating Partnership to be received by the Atlanta Marquis
Limited Partners and the partners of each other Partnership are fair and
reasonable to the Atlanta Marquis Limited Partners and the Limited Partners of
each other Partnership. The Fairness Opinion is addressed to each Partnership
and it may be relied upon by each of the Atlanta Marquis Limited Partners and
the Limited Partners of the other 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
the Consent Solicitation and should be read in its entirety. The material
assumptions and qualifications to the Fairness Opinion are summarized below,
although this summary does not purport to be a complete description of the
various inquiries and analyses undertaken by AAA in rendering the Fairness
Opinion. Arriving at a fairness opinion is a complex analytical process not
necessarily susceptible to partial analysis or amenable to summary
description. For a more complete description of the assumptions and
qualifications that limit the scope of the Fairness Opinion, see "--
Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 Atlanta Marquis and
the other Partnerships might not have been more favorable to the Limited
Partners in certain of the Partnerships, (c) negotiate with the General
Partner, the General Partners of other Partnerships or Host, (d) participate
in establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of Atlanta Marquis' and each other
Partnership's contingent liabilities.
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.
Atlanta Marquis Supp-20
<PAGE>
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitability Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partners selected AAA,
on the basis of the proposals, 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.
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 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
Atlanta Marquis Supp-21
<PAGE>
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 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 each of the Hotels) are fair and reasonable, from a financial point of
view, to the Atlanta Marquis Limited Partners and the Limited Partners of each
other Partnership and (ii) the methodologies used to determine the value of an
OP Unit and to allocate the equity interest in the Operating Partnership to be
received by the Atlanta Marquis Limited Partners and the Limited Partners of
each Partnership are fair and reasonable to the Atlanta Marquis Limited
Partners and the Limited Partners of each other Partnership.
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.
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by Atlanta Marquis. The following table
sets forth the distributions paid to Atlanta Marquis Limited Partners (per
Partnership Unit) during the periods indicated. The information below should
be read in conjunction with the information in this Supplement under the
caption "Selected Financial Data."
HISTORICAL CASH DISTRIBUTIONS PAID BY ATLANTA MARQUIS
(PER PARTNERSHIP UNIT)(1)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
--------- --------------------------------
1998 1997 1996 1995 1994 1993
--------- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
From net income.................... $5,000 $-- $1,522 $4,386 $3,444 $2,979
Payments due to reallocation of
losses(2)......................... -- 284 -- -- 844 1,411
------ ---- ------ ------ ------ ------
Total............................ $5,000 $284 $1,522 $4,386 $4,288 $4,390
====== ==== ====== ====== ====== ======
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in Atlanta
Marquis.
(2) Represents amounts paid by the General Partner to the Atlanta Marquis
Limited Partners to compensate them for allocations of tax losses
resulting from the 1990 debt refinancing.
Compensation and Distributions to the General Partner. Under Atlanta
Marquis' partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of Atlanta Marquis but
the General Partner and its affiliates are reimbursed for certain costs and
expenses incurred on behalf of Atlanta Marquis. In addition, the General
Partner is entitled to distributions related to its interests in Atlanta
Marquis. The following information has been prepared to compare the amount of
reimbursements paid and cash distributions made by Atlanta Marquis to the
General Partner and its affiliates to the amounts that would have been paid if
the reimbursement and distribution structure which will be in effect after the
REIT Conversion had been in effect for the periods presented.
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
Atlanta Marquis Supp-22
<PAGE>
Host REIT incurs, including taxes (subject to certain limited exceptions).
Marriott International receives management fees and other reimbursements from
Atlanta Marquis under the Management Agreement.
The following table sets forth the reimbursements and distributions paid by
Atlanta Marquis to its General Partner and its affiliates and the payments
made to Marriott International 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 Partner and its affiliates and the
payments made to Marriott International 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 $0.81 per year during such period, which is the expected minimum
distribution for 1999.
HISTORICAL AND PRO FORMA
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNER AND ITS AFFILIATES
AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
FIRST TWO QUARTERS ------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- ---------- ----------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Principal and interest
payments on advance.... $10,863 $ -- $ -- $ -- $ -- $ --
Reimbursements(1)....... 684 -- 196 -- 65 84
Distributions(2)........ -- 1,746 -- 3,491 10 30
Payments to Marriott In-
ternational............ 1,720 1,720 4,530 4,530 5,339 4,866
------- ------ ------ ------ ------ ------
Total................. $13,267 $3,466 $4,726 $8,021 $5,414 $4,980
======= ====== ====== ====== ====== ======
</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 Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $0.81
per annum per OP Unit, (which is the expected minimum distribution per OP
Unit for 1999) with respect to the estimated number of OP Units that the
General Partner and its affiliates will receive in exchange for its
general and limited partner interests in Atlanta Marquis. Such number does
not reflect the aggregate number of OP Units Host REIT will receive in
connection with the REIT Conversion.
CERTAIN INFORMATION REGARDING THE HOTEL OWNED BY ATLANTA MARQUIS
<TABLE>
<CAPTION>
NAME OF HOTEL LOCATION OF HOTEL NUMBER OF ROOMS DATE OPENED
- ------------- ----------------- --------------- -----------
<S> <C> <C> <C>
Atlanta Marriott Marquis
Hotel(1)....................... Atlanta, GA 1,671 1985
</TABLE>
- --------
(1) Atlanta Marquis has an 80% residual interest of the Atlanta Marriott
Marquis Hotel and, for 1998, is expected to receive 100% of the cash flow
from the Hotel.
The table below sets forth certain performance information for Atlanta
Marquis' Hotel for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
----------------- --------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average daily rate............... $138.66 $132.56 $127.36 $131.91 $116.02
Occupancy........................ 69.1 % 74.5% 69.8 % 68.6% 71.6%
REVPAR........................... $ 95.81 $ 98.76 $ 88.90 $ 90.49 $ 83.07
% REVPAR change.................. (3.0)% -- (1.7)% 8.9% --
</TABLE>
The Atlanta Marriott Marquis is a full-service Marriott hotel. It is located
on approximately 3.6 acres of land in the heart of downtown Atlanta. The Hotel
is in the Peachtree Center area of Atlanta's central business
Atlanta Marquis Supp-23
<PAGE>
district and occupies most of the block that is bordered by Baker Street to
the north, Courtland Street to the east, Harris Street to the south and
Peachtree Center Avenue to the west. The Hotel is located within walking
distance of Atlanta's convention facilities, as well as restaurants, lounges,
a gift shop and several retail shops.
The Hotel opened on July 1, 1985. The 1,671 room Hotel includes 72 suites
and contains over 122,000 square feet of meeting and exhibition space and five
restaurants and lounges. Recreational facilities include a complimentary
health club, an indoor/outdoor swimming pool, hydro-therapy pool, sundeck,
steam room and sauna, a rub-down area and a game room. The Hotel features a
spectacular 50-story atrium that soars to an enormous rooftop skylight.
Capital Improvements. In 1997, the Hotel completed a $7.0 million
refurbishment of approximately half its guest rooms which included the
replacement of the carpeting, bedspreads, upholstery, drapes and other similar
items ("Softgoods") and also the dressers, chairs, beds and other furniture
("Casegoods"). The refurbishment of the remaining 711 rooms and 16 suites
began in mid-1998. This portion of the refurbishment will be funded from a
reserve which was established by Atlanta Marquis with the lender on the New
Maturity Date (as defined). Also in 1997, the facade repair project was
started, which entails a repair of the entire facade of the building. The
project is expected to cost $7.5 million and will be funded by Atlanta Marquis
from a reserve which was also established with the lender on the New Maturity
Date. The project is expected to be completed by mid-1999.
Competition. The primary competition for the Hotel comes from the following
four first-class hotels in downtown Atlanta: (i) the 1,278 room Hyatt Regency
Atlanta Hotel, (ii) the 1,222 room Atlanta Hilton & Towers Hotel, (iii) the
1,068 room Westin Peachtree Plaza Hotel and (iv) the 747 room Radisson Hotel
Atlanta. These four competitors contain an aggregate of approximately 4,315
rooms and approximately 332,000 square feet of meeting space. Hotel management
has formed an alliance with the Westin, Hyatt and Hilton (the "Atlanta
Alliance"). The Atlanta Alliance is a formal arrangement among the four hotels
to present a meeting alternative to customers' groups that are too large for a
single hotel but too small for the Georgia World Congress Center, Atlanta's
convention center.
In addition, other hotels in the Atlanta area compete with the Hotel;
however, these differ from the Atlanta Marquis Hotel in terms of size, room
rates, facilities, amenities and services offered, market orientation and/or
location. As a major convention facility, the Hotel also competes with similar
facilities throughout the country.
No new full-service hotels opened in the Atlanta market in 1997 and none are
expected to open in 1998. However, during 1997, 38 new limited service hotels
opened thus adding 3,422 new rooms to the market and approximately 13 more
properties containing a total of 1,498 rooms are expected to open in 1998 in
the Atlanta suburbs. These additions are not expected to have a significant
impact on the Hotel's revenues as these hotels target a significantly
different market segment. In 1997, the Atlanta properties generally reported
decreased results due to higher activity in 1996 related to the Summer
Olympics and the impact of additional supply added to the suburban areas. In
1998, construction began on a 320-room Doubletree Guest Suites hotel which is
expected to open in mid-1999.
LEGAL PROCEEDINGS
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by Host, including Atlanta Marquis,
filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al.
v. Marriott International, Inc., et al., Case No. 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.
Atlanta Marquis Supp-24
<PAGE>
Atlanta Marquis. Certain limited partners of Atlanta Marriott Marquis
Limited Partnership ("AMMLP"), filed a putative class-action lawsuit Hiram and
Ruth Sturm 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 a
refinancing of the partnerships' 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 filed a motion to dismiss.
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.
AMENDMENTS TO THE ATLANTA MARQUIS PARTNERSHIP AGREEMENT
In order to allow the Hotel of Atlanta Marquis to be leased to Crestline in
connection with the Merger and the REIT Conversion, Atlanta Marquis'
partnership agreement must be amended. Currently, there is no provision in
Atlanta Marquis' partnership agreement to allow Atlanta Marquis' Hotel to be
leased. Therefore, Section 5.02B of Atlanta Marquis' partnership agreement
must be amended to add a new paragraph 5.02B(6) to read as follows:
(6) lease (or consent to the lease), directly or indirectly, in one
transaction or a series of related transactions of the Hotel.
Other Amendments. Amendments to certain terms and sections of Atlanta
Marquis' partnership agreement would be made in order to (i) reduce to one the
number of appraisals of the fair market value of Atlanta Marquis Hotel that
Atlanta Marquis must provide to the Atlanta Marquis Limited Partners before
the General Partner can cause Atlanta Marquis to sell its assets to the
General partner of an affiliate and (ii) make any other amendments to Atlanta
Marquis' partnership agreement deemed necessary or advisable, in the sole
discretion of the General Partner, in connection with the consummation of the
Merger and the REIT Conversion. The form of amendment to the Atlanta Marquis
partnership agreement is attached as an exhibit to the Registration Statement
of which this Supplement is a part.
VOTING PROCEDURES
Atlanta Marquis Limited Partners will be asked to vote separately on the
Merger and the proposed amendments to the partnership agreement, but Atlanta
Marquis will not participate in the Merger unless both proposals are approved.
The consent of Atlanta Marquis Limited Partners holding a majority of the
outstanding Class A limited partner interests is required for participation in
the Merger and with respect to amendments to the partnership agreement. The
General Partner holds 0.28% of the outstanding Class A limited partner
interests. The General Partner also owns a Class B limited partners interest
representing a 58.35% limited partner interest in the Partnership. The General
Partner intends to vote its Class A limited partner interests FOR the Merger
and FOR the amendments to the partnership agreement.
At the time of voting, Atlanta Marquis Limited Partners will be asked to
indicate whether they wish to retain OP Units or elect to exchange their OP
Units for Common Shares or a Note in connection with the Merger. The
Atlanta Marquis Supp-25
<PAGE>
OP Units will be delivered to the Atlanta Marquis Limited Partners promptly
after the twentieth trading day following the Effective Date of the Merger
(which would be promptly after January 29, 1999 if the Effective Date of the
Merger is December 30,1998). See "Determination of Exchange Value of Atlanta
Marquis and Allocation of OP Units."
An Atlanta Marquis Limited Partner may mark the Consent Form to vote "FOR,"
"AGAINST" or "ABSTAIN" with respect to participation in the Merger by Atlanta
Marquis and "FOR", "AGAINST" or "ABSTAIN" with respect to the amendments to
the partnership agreement. THE FAILURE OF AN ATLANTA MARQUIS LIMITED PARTNER
TO VOTE OR AN ABSTENTION WILL HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER
HAD VOTED HIS PARTNERSHIP INTERESTS "AGAINST" THE MERGER AND "AGAINST" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENT. ATLANTA MARQUIS LIMITED PARTNERS WHO
RETURN A SIGNED CONSENT FORM BUT FAIL TO INDICATE THEIR APPROVAL OR
DISAPPROVAL AS TO ANY MATTER (INCLUDING THE MERGER AND THE AMENDMENTS TO THE
PARTNERSHIP AGREEMENT) WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER.
The voting procedures applicable to Atlanta Marquis Limited Partners are set
forth in the Consent Solicitation under the heading "Voting Procedures--
Required Vote and Other Conditions."
As of June 19, 1998, no person owned of record, or to the Partnership's
knowledge owns beneficially, more than 5% of the total number of Partnership
Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," Atlanta Marquis Limited Partners
should read carefully the following discussion of federal income tax
consequences applicable specifically to the Atlanta Marquis Limited Partners.
The information included in this discussion is based upon various factual
assumptions and information which are believed by the Operating Partnership
and the General Partner to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances
will occur. Therefore, there likely will be differences between the
information provided herein, including the numerical data and estimates, and
actual results, and the variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the Atlanta Marquis Limited Partners resulting from the
Mergers and the REIT Conversion. The opinion letter is based upon certain
assumptions and certain 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 Hotels contributed to the Operating
Partnership by Host and the Blackstone Entities prior to the Mergers and the
REIT Conversion and of Host REIT, the Operating Partnership and the
Partnerships following the Mergers and the REIT Conversion. In addition, prior
to 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 to the Consent Solicitation) as to the qualification and taxation of Host
REIT as a REIT under the Code following the REIT Conversion. The receipt of
this opinion letter is a condition to the REIT Conversion and each of the
Mergers. See "Federal Income Tax Consequences--Summary of Tax Opinions" in the
Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the
Atlanta Marquis Limited Partners.
Atlanta Marquis Supp-26
<PAGE>
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 prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see--"Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that, except
for any gain attributable to the sale of personal property by Atlanta Marquis
to a Non-Controlled Subsidiary in connection with the REIT Conversion, the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to an Atlanta Marquis Limited Partner (i) who does not elect to
receive Common Shares (the "Common Share Election") or a Note (the "Note
Election") in exchange for his OP Units in connection with the Merger; (ii)
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 Merger; (iii) who does not
receive a cash distribution (or a deemed cash distribution resulting from
relief from liabilities, including as a result of any repayment of the Ivy
Street Mortgage Debt) in connection with the Merger or the REIT Conversion in
excess of his aggregate adjusted basis in his Atlanta Marquis Partnership
Units at the time of the Merger; (iv) who is not required to recognize gain by
reason of the exercise by another Atlanta Marquis Limited Partner of his right
to make the Common Share Election or the Note Election (which, in counsel's
opinion, described below, should not be the result of such election); and (v)
who does not have his "at risk" amount fall below zero as a result of the
Merger or the REIT Conversion. See "Federal Income Tax Consequences--Summary
of Tax Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) an
Atlanta Marquis Limited Partner who acquired his Atlanta Marquis Partnership
Units in the original offering of such Partnership Units and who has held such
Partnership Units at all times since would not be considered to receive, as a
result of the Merger, a distribution (or a deemed cash distribution resulting
from relief from liabilities) that exceeds his aggregate adjusted basis in his
Atlanta Marquis Partnership Units at the time of the Merger, and would not
have his "at risk" amount fall below zero as a result of the Merger (in this
regard, the Operating Partnership has no plan to prepay or repay the Ivy
Street Mortgage Debt in connection with the REIT Conversion), and (ii) a
portion of the personal property associated with the Atlanta Marquis Hotel
will need to be sold to a Non-Controlled Subsidiary in connection with the
REIT Conversion, which may result in the recognition of a relatively modest
amount of income by the Atlanta Marquis Limited Partners. See "Federal Income
Tax Consequences--Tax Consequences of the Mergers--Overview" in the Consent
Solicitation and "Tax Allocations upon the Sale of Certain Personal Property
Associated with the Atlanta Marquis Hotel" below.
With respect to the effects of an Atlanta Marquis Limited Partner's election
to receive Common Shares or a Note in exchange for his OP Units in connection
with the Merger, Hogan & Hartson is of the opinion that, although the matter
is not free from doubt, an Atlanta Marquis Limited Partner who does not make
the Common Share Election or the Note Election in connection with the Merger
should not be required to recognize gain by
Atlanta Marquis Supp-27
<PAGE>
reason of another Atlanta Marquis Limited Partner's exercise of either of such
rights. With respect to the exercise of a Unit Redemption Right, Hogan &
Hartson is of the opinion that it is more likely than not that an Atlanta
Marquis Limited Partner's exercise of his Unit Redemption Right more than one
year after the date of consummation of the Merger but less than two years
after such date will not cause the Merger itself to be a taxable transaction
for the Atlanta Marquis Limited Partner (or the other Atlanta Marquis Limited
Partners). See "Federal Income Tax Consequences--Summary of Tax Opinions" in
the Consent Solicitation. Opinions of counsel, however, do not bind the IRS or
the courts, and no assurances can be provided that such opinions will not be
challenged by the IRS or will be sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
Atlanta Marquis Partnership Units, an Atlanta Marquis Limited Partner will
receive no actual cash distribution in connection with the Merger but would be
deemed to receive a cash distribution in connection with the Merger to the
extent that his share of Operating Partnership liabilities immediately after
the Merger and the REIT Conversion is less than his share of Atlanta Marquis
liabilities immediately prior to the Merger. For example, any repayment of the
Ivy Street Mortgage Debt or debt encumbering other Hotels may result in a
deemed cash distribution to the Atlanta Marquis Limited Partners. See "Federal
Income Tax Consequences--Tax Consequences of the Mergers--Relief from
Liabilities/Deemed Cash Distribution" in the Consent Solicitation. Even though
the Ivy Street Mortgage Debt and the debt encumbering other Hotels is not
expected to be repaid or refinanced in connection with the Mergers and the
REIT Conversion (except as described in the Consent Solicitation), an Atlanta
Marquis Limited Partner's share of indebtedness following the Mergers and the
REIT Conversion may nonetheless decrease in comparison to the Limited
Partner's estimated aggregate share of Atlanta Marquis indebtedness as of
December 31, 1998 (calculated based on the assumption that the Mergers did not
occur) by reason of the manner in which the debt allocation rules work when
multiple assets with different levels of leverage are consolidated into a
single partnership.
An Atlanta Marquis Limited Partner, however, would recognize taxable gain as
a result of any deemed cash distribution only to the extent that the deemed
cash distribution were to exceed his adjusted tax basis in his Atlanta Marquis
Partnership Units immediately prior to the Merger. As noted above, the
Operating Partnership and the General Partner believe, based upon and subject
to the assumptions and other limitations described below, that an Atlanta
Marquis Limited Partner who acquired his Atlanta Marquis Partnership Units in
the original offering of such Partnership Units and has held the Partnership
Units at all times since the offering will have an adjusted tax basis in
excess of the deemed cash distribution that might occur in connection with the
Merger and the REIT Conversion. Therefore, such an Atlanta Marquis Limited
Partner should not recognize gain due to such deemed cash distribution
resulting from the relief from liabilities in connection with the Merger and
the REIT Conversion.
The adjusted tax basis of an Atlanta Marquis Limited Partner who did not
acquire his Atlanta Marquis Partnership Units in the original offering of such
Partnership Units or who has not held his Atlanta Marquis Partnership Units at
all times since such offering could vary materially from that of an Atlanta
Marquis Limited Partner who did so. If an Atlanta Marquis Limited Partner has
an adjusted tax basis in his Atlanta Marquis Partnership Units (per Atlanta
Marquis Partnership Unit) that is substantially less than the adjusted tax
basis of an Atlanta Marquis Limited Partner who acquired his Atlanta Marquis
Partnership Units in the original offering of such Partnership Units and has
held such Partnership Units at all times since, he could recognize gain due to
any deemed cash distribution resulting from the relief from liabilities in
connection with the Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the Ivy Street Mortgage Debt or, except as described in the
Consent Solicitation, any of the nonrecourse liabilities encumbering the
Hotels owned by the other Partnerships (other than with the proceeds of
indebtedness that would be considered nonrecourse liabilities allocable to the
Hotel being refinanced). 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
Atlanta Marquis Supp-28
<PAGE>
secure nonrecourse mortgage indebtedness secured only by those Hotels in an
amount sufficient to avoid a deemed cash distribution to the former Limited
Partners in those Partnerships, including Atlanta Marquis. Moreover, 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 debt as 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. In view of these
considerations and the potential adverse consequences to Limited Partners in
certain Partnerships, including the Atlanta Marquis Limited Partners, 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 (including the
Ivy Street Mortgage Debt), would be considered to be "secured" by those Hotels
for purposes of allocating the liabilities for tax basis purposes (and thus
would be allocable, at least in substantial part, to the former Limited
Partners in the Partnership owning those Hotels, including the Atlanta Marquis
Limited Partners), 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.
Each Atlanta Marquis Limited Partner will gradually begin to recognize
income over the term of his ownership of OP Units (beginning, perhaps, in his
first year of ownership of OP Units) attributable to deemed cash distributions
resulting from the relief from liabilities, as the aggregate principal amount
of nonrecourse indebtedness encumbering (or deemed to encumber) the Atlanta
Marquis Hotel amortizes in accordance with its terms. The Operating
Partnership will make regular quarterly cash distributions to the Atlanta
Marquis Limited Partners that may or may not be sufficient to allow the
Atlanta Marquis Limited Partners to pay the federal and state income tax owed
on the income allocated to such Limited Partners by reason of the amortization
of the debt secured by the Atlanta Marquis Hotel.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner may be required to include in gross income, or
"recapture," losses previously allowed to such partner with respect to his
investment in a partnership if the amount for which the partner is "at risk"
in relation to his investment in the partnership is less than zero at the
close of the taxable year.
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Merger
and the REIT Conversion could, singularly or in combination, cause an Atlanta
Marquis Limited Partner's amount at risk in relation to his investment in
Atlanta Marquis (and, after the Mergers, in the Operating Partnership) to be
reduced below zero, resulting in an income inclusion to the Limited Partner
under Section 465(e) of the Code. Currently, a sufficient portion of the
current debt of Atlanta Marquis constitutes "qualified nonrecourse financing"
so that the Atlanta Marquis Limited Partners have positive at risk amounts.
The Operating Partnership and the General Partner believe, based upon and
subject to the assumptions and other limitations described below, that an
Atlanta Marquis Limited Partner who acquired his Atlanta Marquis Partnership
Units in the original offering of such Partnership Units and has held the
Partnership Units at all times since will have a positive at risk amount
immediately following the Merger and the REIT Conversion.
It is possible, however, that a former Atlanta Marquis Limited Partner's at
risk amount could decline in the future, either because of the allocation of
losses from the Operating Partnership to that former Atlanta Marquis Limited
Partner or because of cash distributions by the Operating Partnership to that
former Atlanta Marquis Limited Partner in excess of the taxable income
allocable to him with respect to his OP Units. Moreover, there can be no
assurance that debt incurred by the Operating Partnership in the future to
refinance the Ivy Street
Atlanta Marquis Supp-29
<PAGE>
Mortgage Debt or outstanding mortgage debt of the other Hotel Partnerships or
the Hotels contributed by the Blackstone Entities will qualify as "qualified
nonrecourse financing." If, however, the Operating Partnership were to obtain
the requested ruling from the IRS and were to refinance existing mortgage
indebtedness of the Partnerships, including the Ivy Street Mortgage Debt, with
the type of indebtedness described in the ruling, such indebtedness should
constitute "qualified nonrecourse financing" for purposes of the "at risk"
rules.
Impact of Assumption of Atlanta Marquis Liabilities by the Operating
Partnership. As described in the Consent Solicitation, see "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Disguised Sale Regulations," an
Atlanta Marquis Limited Partner will recognize gain to the extent he is
treated as having sold all or part of his Atlanta Marquis Partnership Interest
in a "disguised sale." 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. 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" also will not be treated as part of
a disguised sale. A "qualified liability" in connection with a transfer of
property to a partnership includes (i) any liability incurred more than two
years prior to the earlier of the transfer of the property or the date the
partner agrees in writing to the transfer, as long as the liability has
encumbered the transferred property throughout the two-year period; (ii) a
liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within the
two-year period prior to the earlier of the date the partner agrees in writing
to transfer the property or the date the partner transfers the property to a
partnership and that has encumbered the transferred property since it was
incurred; (iii) a liability that is traceable under the Treasury Regulations
to capital expenditures with respect to the property; and (iv) a liability
that was incurred in the ordinary course of the trade or business in which
property transferred to the partnership was used or held, but only if all the
assets related to that trade or business are transferred, other than assets
that are not material to a continuation of the trade or business. However, a
recourse liability is not a "qualified liability" unless the amount of the
liability does not exceed the fair market value of the transferred property
(less any other liabilities that are senior in priority and encumber such
property or any allocable liabilities described in (iii) or (iv), above) at
the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of Atlanta Marquis
(including its share of the Ivy Street Mortgage Debt) fall into one of the
four categories of "qualified liabilities" described above and, accordingly,
that the mere assumption by the Operating Partnership of the outstanding
liabilities of Atlanta Marquis will not give rise to a "disguised sale" by any
of the Atlanta Marquis Limited Partners.
Tax Treatment of Atlanta Marquis Limited Partners Who Hold OP Units Following
the Merger
Initial Basis in Units. In general, an Atlanta Marquis Limited Partner will
have an initial tax basis in his OP Units received in the Merger with respect
to his Atlanta Marquis Partnership Units equal to the basis in his Atlanta
Marquis Partnership Units at the time of the Merger, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of Atlanta
Marquis liabilities and increased to reflect his share of other liabilities of
the Operating Partnership and any gain required to be recognized in connection
with the Mergers and the REIT Conversion (including income, if any,
attributable to the sale of a portion of the personal property associated with
the Atlanta Marquis Hotel, as described below under "--Tax Allocations upon
the Sale of Certain Personal Property Associated with the Atlanta Marquis
Hotel"). For a discussion of the federal income tax consequences for an
Atlanta Marquis Limited Partner from a reduction in basis that may result from
the Merger and the REIT Conversion, see "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Initial
Tax Basis of OP Units" in the Consent Solicitation.
Tax Allocations upon a Sale by the Operating Partnership of Atlanta Marquis
Hotel. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
Atlanta Marquis Supp-30
<PAGE>
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all Atlanta Marquis Limited Partners
(but excluding all of Host's interests) with respect to the Atlanta Marquis
Hotel will be $107,243,380 upon the consummation of the Merger.
If the Operating Partnership were to sell the Atlanta Marquis Hotel, the
former partners of Atlanta Marquis (including Host REIT with respect to Host's
interest in Atlanta Marquis held through Marriott Marquis Corporation) would
be specially allocated by the Operating Partnership an aggregate amount of
taxable gain equal to the aggregate Book-Tax Difference with respect to the
Atlanta Marquis Hotel. The share of such gain allocable to an Atlanta Marquis
Limited Partner who acquired his Atlanta Marquis Partnership Units in the
original offering of such Partnership Units and held such Partnership Units at
all times since would be $202,346 per Atlanta Marquis Partnership Unit. The
share of such gain of an Atlanta Marquis Limited Partner who did not acquire
his Atlanta Marquis Partnership Units in the original offering of such
Partnership Units or who has not held his Atlanta Marquis Partnership Units at
all times since such offering could vary materially from this amount. If the
Operating Partnership were to sell the Atlanta Marquis Hotel, the remaining
Book-Tax Difference at the time the Hotel is sold would be required to be
allocated exclusively to the former Atlanta Marquis Limited Partners and the
General Partner, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Operating Partnership (and would
likely be retained by the Operating Partnership, rather than distributed to
holders of OP Units and Common Shares of Host REIT). The Atlanta Marquis
Limited Partners would not be entitled to any special distributions from the
Operating Partnership in connection with such a sale, and thus would not
necessarily receive cash distributions from the Operating Partnership
sufficient to pay such additional taxes. Although the Partnership Agreement
does not impose any restrictions upon the Operating Partnership preventing it
from causing the sale of the Atlanta Marquis Hotel at any time following the
Merger, the Operating Partnership does not have current plans to pursue a sale
of such Hotel. See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Sale of Individual Hotels"
in the Consent Solicitation.
Tax Allocations upon the Sale of Certain Personal Property Associated with
the Atlanta Marquis Hotel. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Federal Income Taxation of Host REIT
Following the REIT Conversion--Income Tests Applicable to REITs" and "--
Taxable Income Attributable to Sales of Personal Property in Connection with
the REIT Conversion," 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
Partner have determined that the percentage of rent attributable to the
personal property to be leased in connection with the lease of the Atlanta
Marquis Hotel would not satisfy the 15% Personal Property Test. The 15%
Personal Property Test is a mechanical test that is based not on the relative
fair market value of the assets subject to lease, or the relative fair rental
value of those assets, but, rather, is based on the average relative adjusted
tax bases of the assets subject to the lease. Accordingly, immediately prior
to the Merger, the Operating Partnership will require Atlanta Marquis, if it
chooses to participate in the Merger, to sell to a Non-Controlled Subsidiary a
portion of the personal property associated with the Atlanta Marquis Hotel.
This sale, which will be a taxable transaction, may result in the recognition
by Atlanta Marquis (and the allocation to the Atlanta Marquis Limited
Partners) of a relatively modest amount of taxable gain to the extent of
Atlanta Marquis' share of the difference, if any, 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. The actual amount of such gain, if any,
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 Atlanta Marquis
partnership agreement,
Atlanta Marquis Supp-31
<PAGE>
any such taxable gain will be characterized as ordinary recapture income and
will be allocated by Atlanta Marquis to the former Atlanta Marquis Limited
Partners in the same proportions and to the same extent that such Limited
Partners were allocated any deductions directly or indirectly giving rise to
the treatment of such gain as recapture income prior to the Merger. The
Atlanta Marquis Limited Partners would not be entitled to any special
distributions from Atlanta Marquis in connection with such a sale of personal
property.
Tax Allocations with Respect to Contributed Hotel Generally. The tax
allocations of depreciation to the Atlanta Marquis Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
the Atlanta Marquis Limited Partners' share of depreciation and deductions
attributable to the Atlanta Marquis Hotel will be required to be allocated for
federal income tax purposes in a manner such that the Atlanta Marquis Limited
Partners are charged with their share of the Book-Tax Difference associated
with the Atlanta Marquis Hotel at the time of the consummation of the Merger.
Consequently, an Atlanta Marquis Limited Partner will be allocated less
depreciation with respect to the Atlanta Marquis Hotel than would be the case
if the Mergers had not occurred and the Atlanta Marquis Limited Partner had
continued to hold his Atlanta Marquis Partnership Units. (On the other hand, a
former Atlanta Marquis Limited Partner will be allocated depreciation with
respect to other Hotels acquired by the Operating Partnership in connection
with the Mergers and the REIT Conversion, including the Hotels owned by the
other Hotel Partnerships and the Hotels being contributed to the Operating
Partnership by Host and the Blackstone Entities in connection with the Merger
and the REIT Conversion.) Second, the Merger will cause the technical
termination under Section 708(b)(1)(B) of the Code of Atlanta Marquis and
certain of the other Hotel Partnerships that participate in the Merger.
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 real estate components of the Atlanta Marquis Hotel (in which Atlanta
Marquis owns an indirect interest through its interest in Ivy Street Hotel
Limited Partnership) and the Hotels held by the other Hotel Partnerships that
terminate will be depreciated over 39 years, rather than over the remaining
current lives of such Hotels (which range from less than one year to 39
years). See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Effect of Mergers on
Depreciation" in the Consent Solicitation.
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to an Atlanta Marquis
Limited Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for Atlanta Marquis Limited
Partners) to the extent that such losses are not in excess of the taxpayer's
income from passive activities or investments. An Atlanta Marquis Limited
Partner would be able to offset losses from other passive activities 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 Partner
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 limitation rules. In this event, any losses or deductions of
the Operating Partnership allocable to an Atlanta Marquis Limited Partner
after the Merger could not be used to offset passive income from other passive
activities. Similarly, losses from other passive activities
Atlanta Marquis Supp-32
<PAGE>
(including losses attributable to Atlanta Marquis for periods prior to the
Merger) could not be applied to offset income of the Operating Partnership
allocated to an Atlanta Marquis Limited Partner. An Atlanta Marquis Limited
Partner, however, would be able to offset any passive losses from his
investment in Atlanta Marquis (or other investments) against any gain
recognized by the Atlanta Marquis Limited Partner as a result of the Merger.
The Operating Partnership and the General Partner estimate that, as of
December 31, 1998, an Atlanta Marquis Limited Partner who purchased his
Partnership Units at the time of the original offering, has held those
Partnership Units continuously since that time, and whose Partnership Units
have been his only investment in a passive activity would have a passive
activity loss carryforward of approximately $127,233, on a per Partnership
Unit basis.
State and Local Taxes. Atlanta Marquis Limited Partners holding OP Units
will 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 and the REIT Conversion, the
Operating Partnership expects that it will own properties in 28 states across
the United States and the District of Columbia. Currently, Atlanta Marquis
owns, indirectly, property in only one state. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--State and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular Atlanta
Marquis Limited Partner, the tax consequences of the Merger to such Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH ATLANTA MARQUIS LIMITED PARTNER IS STRONGLY URGED TO CONSULT
WITH HIS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH ATLANTA MARQUIS
LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES
OF PARTICIPATING IN THE MERGER.
First, with respect to an Atlanta Marquis Limited Partner's basis in his
Atlanta Marquis Partnership Units prior to the Merger, the Operating
Partnership and the General Partner assumed that an Atlanta Marquis Limited
Partner acquired his Atlanta Marquis Partnership Units in the original
offering of such Partnership Units and has held such Partnership Units at all
times since the offering (the "Original Limited Partner's Adjusted Basis"). In
general, each Atlanta Marquis Limited Partner had an initial tax basis in his
Atlanta Marquis Partnership Units ("Initial Basis") equal to his cash
investment in Atlanta Marquis (plus his proportionate share of Atlanta
Marquis's nonrecourse liabilities at the time he acquired his Atlanta Marquis
Partnership Units). An Atlanta Marquis Limited Partner's Initial Basis
generally has been increased by (a) such Limited Partner's share of Atlanta
Marquis taxable income and (b) any increases in his share of liabilities of
Atlanta Marquis. Generally, such Limited Partner's Initial Basis has been
decreased (but not below zero) by (i) his share of Atlanta Marquis cash
distributions, (ii) any decreases in his share of liabilities of Atlanta
Marquis, (iii) his share of losses of Atlanta Marquis and (iv) his share of
nondeductible expenditures of Atlanta Marquis that are not chargeable to
capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for Atlanta Marquis (i) the Original Limited Partner's Adjusted Basis as of
December 31, 1997 for each such Atlanta Marquis Limited Partner, and (ii) an
estimate of such Atlanta Marquis Limited Partner's 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 the Consent
Solicitation). The Atlanta Marquis General Partner also has set forth on
Appendix E to the Consent Solicitation for each Atlanta Marquis Limited
Partner whose adjusted basis in his Atlanta Marquis Partnership Interest is
the same as the Original Limited Partner's Adjusted Basis (i) the Atlanta
Marquis liabilities allocable to such Atlanta Marquis Limited Partner as of
December 31, 1997, and (ii) an estimate of the Atlanta Marquis 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 the Consent Solicitation).
Atlanta Marquis Supp-33
<PAGE>
The adjusted tax basis of an Atlanta Marquis Limited Partner who did not
acquire his Atlanta Marquis Partnership Units in the original offering of such
Partnership Units could vary materially from that of an Atlanta Marquis
Limited Partner who did so for various reasons. If an Atlanta Marquis Limited
Partner has an adjusted tax basis in his Atlanta Marquis Partnership Units
that is less than the Original Limited Partner's Adjusted Tax Basis, the
Merger might result in the receipt by the Atlanta Marquis Limited Partner of a
deemed distribution of cash in excess of his adjusted tax basis in his Atlanta
Marquis Partnership Units, which could result in the recognition of income or
gain.
Second, the Operating Partnership and the General Partner assumed that the
method expected to be used by the Operating Partnership to allocate
liabilities among the partners will be respected for federal income tax
purposes. The Operating Partnership will allocate liabilities associated with
the Atlanta Marquis Hotel as described in "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Relief from Liabilities/Deemed Cash
Distribution" in the Consent Solicitation. If the method used by the Operating
Partnership were not respected for federal income tax purposes and the
nonrecourse liabilities actually allocable to an Atlanta Marquis Limited
Partner are less than the amount assumed by the Operating Partnership and the
General Partner, the Merger might result in the receipt by such Atlanta
Marquis Limited Partner of a deemed distribution of cash that is greater than
the deemed distribution of cash expected to be received by such Atlanta
Marquis Limited Partner as described above in "Tax Consequences of the
Merger--Deemed Cash Distribution and Resulting Taxable Gain." For an Atlanta
Marquis Limited Partner who did not acquire his Atlanta Marquis Partnership
Units in the original offering of such Partnership Units and who has not held
such Partnership Units at all times since, this deemed distribution of cash
could exceed his adjusted tax basis in his Atlanta Marquis Partnership Units,
which could result in the recognition of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
Atlanta Marquis Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares)
and the subsequent distribution of such OP Units (and possibly Notes and/or
Common Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the Atlanta Marquis Limited Partners likely would be materially
affected.
EACH ATLANTA MARQUIS LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH ATLANTA MARQUIS LIMITED
PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF
PARTICIPATING IN THE MERGER. THE TAX CONSEQUENCES OF PARTICIPATING IN THE
MERGER TO A PARTICULAR ATLANTA MARQUIS LIMITED PARTNER COULD VARY
SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED ABOVE.
Tax Treatment of Atlanta Marquis Limited Partners Who Exercise Their Right to
Make the Common Share Election or the Note Election
An Atlanta Marquis Limited Partner who exercises his right to make the
Common Share Election or the Note Election and receives Common Shares or a
Note in connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $45,425 per Atlanta Marquis
Partnership Unit) plus the portion of Atlanta Marquis' liabilities allocable
to the Atlanta Marquis Limited Partner for federal income tax purposes
immediately prior to the disposition of the OP Units (estimated as $162,595
per Atlanta Marquis Partnership Unit as of December 31, 1998). Generally, the
amount realized in connection with such disposition made pursuant to the
exercise of the Note Election will equal the sum of the "issue price" of
Atlanta Marquis Supp-34
<PAGE>
the Notes (i.e., the face amount of the Note, currently estimated as $36,340
per Atlanta Marquis Partnership Unit) plus the portion of Atlanta Marquis
liabilities allocable to the Atlanta Marquis Limited Partner for federal
income tax purposes immediately prior to the disposition of the OP Units
(estimated as $162,595 per Atlanta Marquis Partnership Unit as of December 31,
1998). To the extent the applicable amount realized exceeds the Atlanta
Marquis Limited Partner's adjusted basis in his Atlanta Marquis Partnership
Units, the Atlanta Marquis Limited Partner will recognize gain. The Operating
Partnership and the General Partner estimate (assuming the Atlanta Marquis
Limited Partner acquired his Atlanta Marquis Partnership Units at the time of
the original offering and has held such Partnership Units at all times since
the offering) that the amount of gain that would be recognized by an Atlanta
Marquis Limited Partner who made the Common Share Election would be
approximately $199,072 per Atlanta Marquis Partnership Unit and that the
amount of gain that would be recognized by an Atlanta Marquis Limited Partner
who made the Note Election would be approximately $189,987 per Atlanta Marquis
Partnership Unit, as of December 31, 1998. This assumes that an Atlanta
Marquis Limited Partner has treated the prior year payment from the General
Partner to compensate the Atlanta Marquis Limited Partners for certain tax
loss reallocations as an adjustment to the original purchase price of his
Partnership Unit(s). These payments totaled $8,624 per Partnership Unit. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--
Disposition of OP Units by Limited Partners" in the Consent Solicitation. In
this regard, the General Partner estimates that, as of December 31, 1998, if
Atlanta Marquis sold its Hotel in a fully taxable transaction for a net
amount, after payment of liabilities, equal to the Exchange Value (with
respect to a Limited Partner who makes the Common Share Election) or
determined by reference to the Note Election Amount of Atlanta Marquis (with
respect to a Limited Partner who makes the Note Election), the "unrecognized
Section 1250 gain" per Atlanta Marquis Partnership Unit would be $137,463 and
the gain subject to tax as ordinary income under Code Section 1245 per Atlanta
Marquis Partnership Unit would be $4,131. An Atlanta Marquis Limited Partner
who makes the Common Share Election or the Note Election would be able to
treat any per Partnership Unit passive activity loss carryforwards with
respect to the activities of Atlanta Marquis, to the extent the sum of such
losses exceeds his passive activity income for 1998, as losses that are not
from a passive activity and, therefore, not subject to the passive activity
loss limitation rules. For purposes of determining the gain recognized by a
Limited Partner as a result of making the Common Share Election or the Note
Election, an Original Limited Partner's Adjusted Basis reflects such Limited
Partner's share of the syndication costs incurred by his Partnership at
formation. An original Atlanta Marquis Limited Partner's share of syndication
costs was $11,898 per Atlanta Marquis Partnership Unit.
An Atlanta Marquis Limited Partner who elects to receive Common Shares will
not be eligible to defer any gain under the "installment sale" rules, while an
Atlanta Marquis Limited Partner who elects to receive a Note will be eligible
to defer only a small portion of that gain under those rules. To the extent
that the face amount of the Note (and any other installment obligations
received by the taxpayer during the year) outstanding at the end of the
taxable year in which the Merger occur exceeds $5,000,000, the "installment
sale" rules will require that the Atlanta Marquis Limited Partner who defers
gain pay to the IRS interest on the resulting tax that has been deferred. The
Atlanta Marquis Limited Partner will not be eligible to defer gain recognized
upon the receipt of the Note to the extent that his share of Atlanta Marquis
liabilities at the time of the Merger exceeds his adjusted tax basis in his
Atlanta Marquis Partnership Units immediately prior to the Merger (that is, to
the extent that he has a "negative capital account" for tax purposes). In
addition, the Atlanta Marquis Limited Partner will not be eligible to defer
gain to the extent that such gain would be taxed as ordinary income under
Sections 1245 and 1250 of the Code. Lastly, if an Atlanta Marquis Limited
Partner disposes of his Note, any gain that had been deferred would be
recognized in the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR ATLANTA MARQUIS LIMITED PARTNER
COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER, AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT
IS ESSENTIAL THAT ATLANTA MARQUIS LIMITED PARTNERS CONSIDERING ELECTING TO
RECEIVE COMMON SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH ATLANTA
Atlanta Marquis Supp-35
<PAGE>
MARQUIS LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY
TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Tax Consequences if Atlanta Marquis Does Not Participate in the Merger
If Atlanta Marquis does not participate in the Merger, the Atlanta Marquis
Limited Partners would not have any tax consequences resulting from the
Merger. The consequences of continued ownership of Atlanta Marquis Partnership
Units will be the same as would have resulted if the Merger had not been
proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
Atlanta Marquis Limited Partners in light of their particular circumstances.
EACH ATLANTA MARQUIS LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN
TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH ATLANTA MARQUIS LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
Atlanta Marquis Supp-36
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
Atlanta Marriott Marquis Limited Partnership ("AMMLP") financial statements
for the five most recent fiscal years in the period ended December 31, 1997
and the unaudited condensed financial statements for the First Two Quarters
1998 and the First Two Quarters 1997. The following data should be read in
conjunction with AMMLP financial statements and the notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT) (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 41,957 $ 43,764 $ 85,397 $ 88,464 $ 81,171 $ 77,889 $ 75,233
Operating profit........ 12,897 12,808 23,933 24,782 21,770 19,071 16,008
Income (loss) before
extraordinary item(2).. 5,087 2,325 (569) 2,543 (413) (3,073) (5,935)
Net income (loss)....... 9,261 2,325 (569) 2,543 (413) (3,073) (5,935)
Distributions:
General partner........ -- -- -- 8 23 19 16
Limited partners--Class
A..................... 2,650 -- -- 811 2,324 1,870 1,581
Limited partners--Class
B(3).................. -- -- -- -- -- -- --
--------- --------- ----------- ----------- ----------- ----------- ----------
Total.................. 2,650 -- -- 819 2,347 1,889 1,597
Per Partnership Unit--
Class A(4)
Net income (loss)...... -- 4,343 (1,062) 4,751 (772) (5,740) (11,087)
Distributions.......... 5,000 -- 284 1,522 4,386 4,288 4,390
Cash provided by (used
in) operating
activities............. (4,909) 15,068 21,608 9,893 10,062 5,602 4,422
Cash used in investing
activities............. (4,764) (2,310) (4,403) (4,483) (3,740) (3,099) (3,002)
Cash provided by (used
in) financing
activities............. (5,638) -- (1,304) (819) (5,847) (4,589) 518
Increase (decrease) in
cash and cash
equivalents............ (15,311) 12,758 15,901 4,591 475 (2,086) 1,938
Ratio of earnings to
fixed charges
(unaudited)(5)......... 1.64x 1.21x -- 1.10x -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(5)......... -- -- 569 -- 413 3,073 5,935
Total assets at book
value.................. 209,192 195,701 194,376 181,508 175,963 179,821 186,138
Cash and cash
equivalents............ 6,191 18,359 21,502 5,601 1,010 535 2,621
Total debt(6)........... 183,366 236,638 229,543 235,708 233,877 235,723 235,658
Total liabilities....... 185,689 250,914 246,484 239,047 235,226 236,324 237,679
Partner's capital
(deficit):
Limited partners--Class
A..................... (60,238) (54,723) (57,588) (57,025) (58,732) (55,999) (51,087)
Limited partner--Class
B..................... 84,261 -- 6,000 -- -- -- --
General partner........ (520) (491) (520) (514) (531) (504) (454)
Book Value per
Partnership Unit (Class
A) (unaudited)(4)...... (113,657) (103,251) (108,657) (107,594) (110,815) (105,658) (96,391)
Exchange value per
Partnership Unit
(unaudited)(4)......... 45,425 -- -- -- -- -- --
</TABLE>
- --------
(1) Revenues represent sales generated by the Partnership's hotel.
(2) During the First Two Quarters 1998, AMMLP recorded an extraordinary gain
of $4,174,000 from the forgiveness of deferred incentive management fees
and early extinguishment of debt recorded in conjunction with the
refinancing of the mortgage debt of AMMLP.
(3) The Class B Limited Partner is Host Marriott Corporation, which does not
own Units, but is entitled to a preferred return.
(4) A Partnership Unit represents a $100,000 original investment in Atlanta
Marquis.
(5) The ratio of earnings to fixed charges is computed by dividing net income
(loss) 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 $5,250,000, $6,608,000, $7,464,000 and
$7,406,000 as of December 31, 1997, 1995, 1994 and 1993, respectively.
(6) Total debt includes amounts due to Host Marriott under the Term Loan of
$20,134,000 as of June 19, 1998 and $30,524,000, $23,634,000 and
$26,334,000 as of December 31, 1997, 1994 and 1993, respectively, and
$20,134,000 as of December 31, 1996 and 1995 under the Original Debt
Service, Commitment and Interest Guarantees.
Atlanta Marquis Supp-37
<PAGE>
THE AMMLP MERGER
On December 31, 1997 limited partners holding a majority of the limited
partner Units in AMMLP consented to the merger of AMMLP with and into Atlanta
Marquis. The merger was part of a series of transactions. On December 31,
1997, AMMLP merged with and into Atlanta Marquis pursuant to an agreement and
plan of merger (the "AMMLP Merger"). The requisite number of AMMLP limited
partners approved the AMMLP Merger in accordance with the applicable
provisions of the partnership agreement and the Delaware Revised Uniform
Limited Partnership Act.
In conjunction with the AMMLP Merger and the refinancing of the mortgage
debt, the following transactions occurred:
. AMMLP was merged with and into Atlanta Marquis. With the AMMLP Merger,
the separate existence of AMMLP ceased and AMMLP limited partnership
units ("Units") were converted on a one-for-one basis into Class A
limited partnership new units ("Partnership Units"). AMMLP limited
partners who held fractional interests in Units received the same
interest in the Partnership Units.
. On December 31, 1997, the General Partner made an initial capital
contribution of $6 million to the Partnership. On January 30, 1998 the
General Partner contributed an additional $69 million. In return for such
additional capital contributions, the General Partner received a new
Class B limited partnership interest in Atlanta Marquis entitling the
General Partner to a 13.5% cumulative, compounding annual preferred
return and priority return of such capital. The General Partner also
surrendered its then existing Class B interest on distributions.
. Partnership Class A limited partners will receive an annual return of 5%
on their initial investment in AMMLP, ratably with a 5% return to the
General Partner on its initial investment in AMMLP, after payment of the
preferred return on the Class B interest. To the extent unpaid in any
year, such return will accumulate and compound and be payable from sale
or refinancing proceeds.
. The General Partner caused the Partnership to contribute the Land to a
subsidiary of Ivy Street Hotel Limited Partnership ("Ivy"), in return for
a credit to the Partnership's capital account of $26.5 million
(represented by a Class C limited partnership interest in Ivy) and a 10%
cumulative, compounding annual preferred return and a priority return.
The General Partner also caused the Partnership to reinvest the capital
contributions received from the General Partner in Ivy (represented by a
Class B partnership interest in Ivy) for a 13.5% cumulative, compounding
annual preferred return and priority return of such capital.
. To facilitate the refinancing of Ivy's mortgage debt, the Hotel and the
Land were conveyed to a special purpose, bankruptcy remote entity, HMA
Realty Limited Partnership ("HMA"). The sole general partner of HMA, with
a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy. Accordingly, the new
mortgage debt agreements were entered into by HMA.
. Host Marriott waived its existing right to priority repayment of the
$20.1 million in prior non-interest bearing Interest Guarantee advances
to Ivy and restructured such advances as a loan with a 15-year term
(interest only for the first five years) bearing interest at a rate of 9%
per annum (the "Term Loan"). Payments are due monthly in arrears from
cash available after payment of debt service on the New Mortgage Debt.
Upon a sale of the Hotel, the Term Loan will accelerate and become due
and payable.
. The outstanding amount of the Interest Guarantee of $10.4 million and
related interest was repaid to Host Marriott.
. The $30 million Principal Guarantee provided by Host Marriott was
eliminated.
. The Partnership distributed funds to Class A limited partners of
approximately $5,000 per Partnership Unit. This distribution represented
the excess of the Partnership's reserve after payment of a majority of
the transaction costs related to the Mortgage Debt refinancing.
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the AMMLP Merger to incorporate the following
revisions: (i) a revised provision regarding a sale of the Hotel to permit
Atlanta Marquis to sell the Hotel to an unaffiliated third party without the
consent of the limited
Atlanta Marquis Supp-38
<PAGE>
partners; (ii) a revised provision limiting the voting rights of the General
Partner and its affiliates to permit the General Partner and its affiliates to
have full voting rights with respect to all Partnership Units currently held
by or acquired by the General Partner and its affiliates; (iii) extinguishment
of the original Class B limited partner interest held by the General Partner
and replacement of it with a new Class B interest which is entitled to a 13.5%
cumulative, compounded annual return; (iv) addition of a mechanism that allows
the Class B limited partner to contribute up to an additional $20 million
should the Hotel require additional funding (such contribution would also be
entitled to the 13.5% return discussed above); (v) a revised right of removal
of the General Partner clause so that an affirmative vote of 66 2/3% would be
needed to effect a removal of the General Partner and; (vi) revisions to the
provisions for allocations and distributions (see Item 8 "Financial Statements
and Supplementary Data" below). As a result of the approval of the AMMLP
Merger, the AMMLP-II Partnership Agreement became effective December 31, 1997.
At the time of the solicitation of consents for the AMMLP Merger, Host had
not determined to go forward with the REIT Conversion and no decision had been
made to acquire the limited partner interests in AMMLP. For these reasons, and
because the possibility of a REIT conversion of Host was not material to the
decision regarding the AMMLP Merger, the consent solicitation materials for
the AMMLP Merger did not mention Host's exploration regarding a potential
conversion of Host to a REIT or potential acqusition of limited partner
interests in AMMLP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenues represent sales generated by the Partnership's hotel. Hotel
property-level costs and expenses reflect all property-level costs and
expenses. Total hotel revenues less hotel property-level costs and expenses
equals house profit which reflects the net revenues flowing to the Partnership
as property owner. As discussed further below, the Partnership previously
recorded only the house profit generated by the Partnership's hotel properties
as revenues.
The Partnership adopted EITF 97-2 which requires that the Partnership
include property-level sales and operating costs and expenses in the statement
of operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying statement of operations.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. Partnership revenues for the first two quarters 1998 decreased 4%,
or $1.8 million, to $42.0 million, when compared to the same period in 1997
due to decreases in room and food and beverage sales. Room sales decreased 3%,
or $801,000, to $27.0 million for the first two quarters 1998, when compared
to the same period in 1997. Food and beverage sales decreased 7%, or $1.0
million, to $12.3 million for the first two quarters 1998 when compared to the
same period in 1997. The decrease in food and beverage sales is primarily due
to lower occupancy levels at the Hotel for the first two quarters 1998 as
compared to the same period in 1997. Room sales decreased due to a 3% decrease
in REVPAR for the first two quarters 1998 when compared to the same period in
1997. REVPAR, or revenue per available room, represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. (although it is not a GAAP,
or generally accepted accounting principles, measure of revenue). REVPAR
decreased for the first two quarters 1998 due to a 5.4 percentage point
decrease in average occupancy to 69%, respectively, when compared to the same
period in 1997. The decrease in occupancy was partially offset by a 5%, or $6,
increase in average room rate to $139 for the first two quarters 1998 when
compared to the same period in 1997. The increase in average room rate is due
to a shift in group mix to higher-rated group business. The decrease in
average occupancy is primarily due to a decrease in the number of city-wide
conventions in the first two quarters of 1998 when compared to the same period
in 1997. Additional supply added to the Atlanta suburbs has also impacted 1998
occupancy levels.
Operating Costs and Expenses. For first two quarters 1998, operating costs
and expenses decreased 6%, or $1.9 million, to $29.1 million when compared to
the same periods in 1997, primarily due to decreases in hotel
Atlanta Marquis Supp-39
<PAGE>
property-level costs and expenses and incentive management fees. For the first
two quarters 1998 hotel property-level costs and expenses decreased 3%, or
$694,000, to $22.9 million when compared to the same period in 1997 primarily
because of lower occupancy levels and lower sales at the hotel. For the first
two quarters 1998, $90,000 of incentive management fees were earned as
compared to $2.0 million for 1997. Incentive management fees decreased due to
an increase in Owner's Priority. Pursuant to the new management agreement,
effective January 3, 1998, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit.
Thereafter, the Manager will receive 20% of the profit in excess of such
figure. As a percentage of revenues, operating costs and expenses represented
32% and 37% of revenues for the first two quarters 1998 and 1997,
respectively.
Operating Profit. As a result of the changes in revenues and expenses
discussed above, operating profit increased 1%, or $89,000, to $12.9 million
for the first two quarters 1998 when compared to the same period in 1997.
Interest Expense. Interest expense decreased 27%, or $2.9 million, to $8.0
million for the first two quarters 1998, when compared to the same period in
1997. The decrease is primarily due to the refinancing of the mortgage debt on
February 2, 1998. On that date, HMA obtained new 12-year first mortgage
financing of $164 million (the "Mortgage Debt") which, together with $35
million from the additional $69 million capital contributed by the General
Partner, was used to pay the $199 million maturing mortgage debt. The Mortgage
Debt bears interest at a fixed rate of 7.4% and required monthly principal and
interest payments based on a 25-year amortization schedule. The prior mortgage
debt bore interest at a fixed rate of 10.3%.
Net Income Before Extraordinary Items. Net income before extraordinary items
increased 119%, or $2.8 million, to $5.1 million for the first two quarters
1998 when compared to the same period in 1997. The increase is primarily due
to decreases in incentive management fees and interest expense.
Extraordinary Items. Pursuant to the terms of the new management agreement,
all unpaid incentive management fees accrued through December 31, 1997
amounting to $4.2 million were forgiven by the Manager. During the first two
quarters 1998, the Partnership recorded an extraordinary gain in conjunction
with the write off. In addition, the Partnership recorded a $19,000
extraordinary gain on extinguishment of debt during the first two quarters
1998.
1997 Compared to 1996:
Revenues. Partnership revenues for 1997 decreased 4% to $85.4 million from
$88.5 million in 1996. The decrease in revenues is primarily due to a 2%
decrease in REVPAR or revenue per available room. REVPAR decreased due to a 3%
decrease in average room rate to approximately $127 partially offset by a 1.2
percentage point increase in average occupancy to 69.8. These results are
primarily due to the impact of the 1996 summer Olympic Games. In 1996, the
Hotel was able to drive up the average room rate throughout the year as room
rates throughout the Atlanta market were high. Occupancy levels, however, were
more directly tied to the timing of the Olympic Games. While occupancy levels
were high during the course of the Olympic Games, there was a significant
decline in demand in the months immediately prior to and subsequent to the
Olympic Games.
No new full-service hotels opened in the Atlanta market in 1997 and none are
expected to open in 1998. However, during 1997, 38 new limited service hotels
opened thus adding 3,422 new rooms and 13 more properties containing a total
of 1,498 rooms are expected to open in 1998 in the Atlanta suburbs. These
additions did not have and are not expected to have a significant impact on
the Hotel's revenues as these hotels target a significantly different market
segment. Construction has been started on a 320-room Doubletree guest suite
hotel which is expected to open in mid-1999. The number of city-wide
conventions is expected to be down only slightly, however, roomnights
associated with these conventions are expected to be down by 80,000. The
Hotel's strategy to mitigate the impact of this will be to continue to focus
on customer service, to work closely with the Atlanta Convention and Visitors
Bureau to generate short term business for 1998 and to put into effect the
marketing plan developed with the other Atlanta Marriott products targeting
leisure weekend and summer customers.
Atlanta Marquis Supp-40
<PAGE>
Operating Costs and Expenses. In 1997, operating costs and expenses
decreased $2.2 million to $61.5 million primarily due to decreases in hotel
property-level costs and expenses and in incentive management fees. In 1997,
hotel property-level costs and expenses decreased by $884,000 when compared to
1996, primarily due to decreased costs associated with the decreases in
revenues discussed above. In 1997, $1.2 million of incentive management fees
were earned as compared to $2.0 million earned in 1996. The decrease in
incentive management fees earned was the result of decreased Hotel operating
results. As a percentage of revenues, operating costs and expenses represented
34% of revenues for 1997 and 36% in 1996.
Operating Profit. In 1997, operating profit decreased $849,000 to $23.9
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 66% in 1997 and 64% in 1996.
Interest Expense. In 1997, interest expense increased $2.5 million to $25.4
million primarily due to a 2.0 percentage point increase in the interest rate
charged on the mortgage debt for the period from the Maturity Date through the
New Maturity Date coupled with financing costs of $900,000 incurred in
connection with the extension of the maturity date of the Mortgage Debt.
Net Income (Loss). In 1997, the Partnership had a net loss of $569,000, a
decrease of $3.1 million over 1996's net income of $2.5 million. This decrease
was primarily due to lower Hotel revenues and an increase in the Partnership's
interest expense, partially offset by a decrease in incentive management fees.
1996 Compared to 1995:
Revenues. Partnership revenues for 1996 increased 9% to $88.5 million from
$81.2 million in 1995. The increase in revenues is the result of a 9% increase
in REVPAR. REVPAR increased due to a 14% increase in average room rate to
approximately $132 partially offset by a 3.0 percentage point decrease in
average occupancy to the high-60's. These changes in average room rate and
average occupancy are primarily due to the impact on the city of the 17-day
Centennial Olympic Games. The increase in average room rate was due to an
increase in room rates throughout the Atlanta market. The decline in average
occupancy was due to a decline in city-wide demand for the months prior to and
immediately after the Olympics. During the Olympic Games, the Hotel hosted the
"Olympic Family" which was comprised of the International Olympic Committee,
the Atlanta Committee for the Olympic Games and federations from each of the
participating countries.
Total Hotel Property-Level Costs and Expenses. In 1996, total hotel property
level costs and expenses increased $3.5 million, or 8%, when compared to 1995
due to higher costs associated with the increased revenues discussed above.
Operating Costs and Expenses. In 1996, operating costs and expenses
increased $4.3 million to $63.7 million. The increase was primarily due to the
changes in the following:
Depreciation. Depreciation decreased $1.1 million, or 16%, in 1996 when
compared to 1995 due to a portion of the Hotel's furniture and equipment
becoming fully depreciated in 1995.
Incentive Management Fees. In 1996, $2.0 million of incentive management
fees were earned as compared to $1.0 million earned in 1995. The increase in
incentive management fees earned was the result of improved Hotel operating
results resulting in certain cash flow priorities having been met.
Equipment Rent and Other. Equipment rent and other increased $460,000 due to
the inclusion of a property tax credit in 1995 results which did not occur in
1996.
As a percentage of revenues, operating costs and expenses represented 36% of
revenues for 1996 and 38% in 1995.
Operating Profit. In 1996, operating profit increased $3.0 million to $24.8
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 64% in 1996 and 63% in 1995.
Atlanta Marquis Supp-41
<PAGE>
Net Income (Loss). In 1996, the Partnership had a net income of $2.5
million, an increase of $3.0 million over 1995's net loss of $413,000. This
increase was primarily due to higher Hotel revenues.
Inflation
The rate of inflation has been relatively low and accordingly has not had a
significant impact on the Partnership's operating results. However, the
Hotel's room rates and occupancy levels are sensitive to inflation. The
Manager is generally able to pass through increased costs to customers through
higher room rates.
CAPITAL RESOURCES AND LIQUIDITY
AMMLP's financing needs have been historically funded through loan
agreements with independent financial institutions. As a result of the
successful refinancing of the Partnership's Mortgage Debt, the General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to conduct its operations in the ordinary course of business.
Mortgage Debt
On February 2, 1998, the mortgage debt was successfully refinanced with a
third party lender. The Partnership's debt now consists of a $164 million
mortgage loan, which is nonrecourse to HMA, which bears interest at a fixed
rate of 7.4% for a 12-year term. The mortgage loan requires payments of
principal and interest based upon a 25-year amortization schedule. As part of
the refinancing, HMA was required to establish certain reserves which are held
by an agent of the lender including:
. $3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and site
improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
. $1.3 million tax and insurance reserve--This reserve will be used to pay
real estate tax and insurance premiums for the Hotel.
In addition, HMA advanced an additional $2.6 million to the Manager for
working capital needs and used the remaining cash to pay transaction costs
associated with the refinancing.
PRINCIPAL SOURCES AND USES OF CASH
General
The Partnership's principal source of cash is cash from Hotel operations.
Its principal uses of cash are to pay debt service payments on the
Partnership's mortgage debt, to make guarantee repayments, to fund the
property improvement fund and to make cash distributions to the partners.
Additionally, in 1998 the Partnership received cash through an equity infusion
by the General Partner and utilized cash to pay financing costs incurred in
connection with the refinancing of the Partnership's mortgage debt and to
establish reserves required by the lender.
First Two Quarters 1998 Compared to First Two Quarters 1997
Total cash used in operating activities was $4.9 million for the first two
quarters 1998 as compared to total cash provided by operations of $15.1
million for the first two quarters of 1997. In 1998, cash was used to pay
accrued interest on the Partnership's debt. In addition, pursuant to the terms
of the Mortgage Debt, the Partnership was required to establish with the
lender a separate reserve account for payments of insurance
Atlanta Marquis Supp-42
<PAGE>
premiums and real estate taxes for the mortgaged property as a result of the
credit rating of Marriott International, Inc. Thus, the Partnership has
transferred $2.2 million into the reserve through June 19, 1998. The reserve
is included in restricted cash reserves and the resulting tax and insurance
liability is included in accounts payable and accrued expenses in the
accompanying balance sheet.
Cash used in investing activities was $4.8 million for the first two
quarters 1998 as compared to $2.3 million for the first two quarters 1997. The
increase in cash used in investing activities is primarily due to an advance
of $2.6 million to the Manager for working capital needs.
Cash used in financing activities was $5.6 million for the first two
quarters 1998. For the first two quarters 1997, no cash was provided by or
used in financing activities. The increase in cash used in financing
activities is primarily the result of the restructuring and refinancing
transactions. During 1998, the Partnership acquired new mortgage debt
financing of $164 million and received the remaining $69 million of the $75
million equity infusion from the General Partner. These proceeds were used as
follows: to repay the $199.8 million of mortgage debt; to repay $10.4 million
of the debt service guarantee and related interest outstanding under the Host
Marriott interest guarantee; to establish $22.5 million of reserves required
by the lender; and, to pay financing costs of $3.0 million. The Partnership
made a cash distribution in February 1998 to the Class A limited partners of
$2.7 million, or $5,000 per limited partner unit, from 1997 operations.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the partnership.
1997, 1996 and 1995:
Cash used in investing activities was $4.4 million, $4.5 million and $3.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Contributions to the property improvement fund for the years ended December
31, 1997, 1996, and 1995, were $3.9 million, $4.1 million, and $3.3 million,
respectively. Property and equipment additions increased in 1997 due to
increased expenditures at the Hotel associated with the first half of the
rooms refurbishment completed in 1997.
Cash used in financing activities was $1.3 million, $1.0 million and $5.8
million for the years ended December 31, 1997, 1996 and 1995, respectively. In
1997, the Partnership drew $10.4 million pursuant to the Interest Guarantee
and received $6 million of the $75 million total equity infusion from the
General Partner. The Partnership paid $28.5 million, $20.4 million and $20.4
million of interest on the mortgage debt for the years ended December 31,
1997, 1996 and 1995, respectively. On the Maturity Date, the Partnership was
required to pay $17.6 million representing the Deferred Interest on the
Mortgage Debt. No guarantee repayments to Host Marriott were made in 1997 and
1996. The Partnership made a guarantee repayment of $3.5 million in 1995. No
distributions to partners were made in 1997 as all cash flow was being
reserved in anticipation of the Mortgage Debt maturity. Distributions to
partners were $819,000 in 1996 and $2.3 million in 1995. Subsequent to year
end, the Partnership made a cash distribution to the Class A limited partners
of $2,648,562 ($5,000 per Partnership Unit).
Total cash provided from operations was $21.6 million, $9.9 million and
$10.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Partnership did not pay the interest payment of the Mortgage
Debt which was due on January 10, 1998 until January 9, 1998. In both 1996 and
1995, the majority of the January interest payment was paid in December of the
preceding year. This difference in the timing of the interest payments
accounts for the difference in the total cash provided from operations.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the Partnership. In addition, the
General Partner believes the property improvement fund and the capital
reserves established in conjunction with the refinancing will be adequate for
the future capital repairs and replacement needs of the Hotel.
Atlanta Marquis Supp-43
<PAGE>
Capital Expenditures
The Partnership is required to maintain the Hotel in good repair and
condition. The new management agreement provides for the establishment of a
property improvement fund to cover the cost of non-routine repairs and
maintenance and renewals and replacements to the Hotel's property and
equipment. Contributions to the fund are 5% of Hotel gross sales. Annual
contributions to the fund equaled 4% of gross Hotel sales through June 1995
and are 5% thereafter. Per the terms of the New Management Agreement,
contributions to the property improvement fund will remain at 5%.
In 1997, the Hotel completed a $7.0 million refurbishment of approximately
half its guest rooms which included the replacement of the carpeting,
bedspreads, upholstery, drapes and other similar items and also the dressers,
chairs, beds and other furniture. The refurbishment of the remaining 711 rooms
and 16 suites began in mid-1998. This portion of the refurbishment will be
funded from a reserve which was established by the Partnership with the lender
on February 2, 1998. The facade repair project which entails a repair of the
entire facade of the building is underway. The project is expected to cost
$9.0 million and will be funded by the Partnership from a reserve which was
also established with the lender in conjunction with the refinancing on the
Maturity Date. The project is expected to be completed by mid-1999.
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotel exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
Atlanta Marquis Supp-44
<PAGE>
FINANCIAL STATEMENTS
Atlanta Marquis Supp-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Atlanta
Marriott Marquis II Limited Partnership (a Delaware limited partnership) and
Ivy Street Hotel Limited Partnership, its majority-owned subsidiary
partnership, as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlanta
Marriott Marquis II Limited Partnership and subsidiary as of December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Partnership has
given retroactive effect to the adoption of EITF 97-2 which required the
Partnership to report gross hotel sales and operating expenses in its
statement of operations.
Arthur Andersen LLP
Washington, D.C.
March 11, 1998
Atlanta Marquis Supp-46
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net................................ $165,372 $162,111
Due from Marriott International, Inc....................... 4,425 6,390
Property improvement fund.................................. 2,756 6,864
Deferred financing costs, net of accumulated amortization.. 321 542
Cash and cash equivalents.................................. 21,502 5,601
-------- --------
$194,376 $181,508
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $199,019 $215,574
Due to Host Marriott under Original Debt Service
Guarantee and Commitment and Interest Guarantee......... 30,524 20,134
Due to Marriott International, Inc....................... 4,198 3,030
Accounts payable and accrued expenses.................... 12,743 309
-------- --------
Total Liabilities...................................... 246,484 239,047
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contributions.................................. 536 536
Capital distributions.................................. (165) (165)
Cumulative net losses.................................. (891) (885)
-------- --------
(520) (514)
-------- --------
Class A Limited Partners
Capital contributions, net of offering costs of
$6,430................................................ 46,570 46,570
Capital distributions.................................. (15,982) (15,982)
Cumulative net losses.................................. (88,176) (87,613)
-------- --------
(57,588) (57,025)
-------- --------
Class B Limited Partner
Capital contribution................................... 6,000 --
-------- --------
Total Partners' Deficit................................ (52,108) (57,539)
-------- --------
$194,376 $181,508
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Atlanta Marquis Supp-47
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
HOTEL REVENUES
Rooms......................................... $ 54,102 $ 56,115 $ 50,515
Food and beverage............................. 25,821 25,968 25,379
Other......................................... 5,474 6,381 5,277
-------- -------- --------
85,397 88,464 81,171
-------- -------- --------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Rooms....................................... 11,485 11,508 10,821
Food and beverage........................... 17,776 18,003 17,289
Other departmental costs and deductions..... 19,665 20,299 18,230
-------- -------- --------
Total property-level costs and expenses... 48,926 49,810 46,340
Depreciation.................................. 5,250 5,525 6,608
Property taxes................................ 2,754 2,858 2,692
Base management fee........................... 2,562 2,654 2,435
Incentive management fee...................... 1,167 2,018 969
Equipment rent and other...................... 805 817 357
-------- -------- --------
61,464 63,682 59,401
-------- -------- --------
OPERATING PROFIT................................ 23,933 24,782 21,770
Interest expense.............................. (25,389) (22,890) (22,712)
Interest income............................... 887 651 529
-------- -------- --------
NET (LOSS) INCOME $ (569) $ 2,543 $ (413)
======== ======== ========
ALLOCATION OF NET (LOSS) INCOME
General Partner............................... $ (6) $ 25 $ (4)
Limited Partners.............................. (563) 2,518 (409)
-------- -------- --------
$ (569) $ 2,543 $ (413)
======== ======== ========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT (530
Units)......................................... $ (1,062) $ 4,751 $ (772)
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Atlanta Marquis Supp-48
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
GENERAL LIMITED LIMITED
PARTNER PARTNERS PARTNER TOTAL
------- -------- ------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1994................. $(504) $(55,999) $ -- $(56,503)
Capital distributions.................... (23) (2,324) -- (2,347)
Net loss................................. (4) (409) -- (413)
----- -------- ------ --------
Balance, December 31, 1995................. (531) (58,732) -- (59,263)
Capital distributions.................... (8) (811) -- (819)
Net income............................... 25 2,518 -- 2,543
----- -------- ------ --------
Balance, December 31, 1996................. (514) (57,025) -- (57,539)
Capital contributions.................... -- -- 6,000 6,000
Net loss................................. (6) (563) -- (569)
----- -------- ------ --------
Balance, December 31, 1997................. $(520) $(57,588) $6,000 $(52,108)
===== ======== ====== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Atlanta Marquis Supp-49
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................ $ (569) $ 2,543 $ (413)
Noncash items:
Depreciation................................... 5,250 5,525 6,608
Deferred interest.............................. 1,035 1,831 1,654
Amortization of financing costs as interest.... 325 621 619
(Gain) loss on disposition of assets........... -- (1) 64
Changes in operating accounts:
Accounts payable and accrued expenses.......... 12,434 24 (178)
Due from Marriott International, Inc........... 1,965 (2,616) 782
Due to Marriott International, Inc............. 1,168 1,966 926
-------- ------- -------
Cash provided by operating activities........ 21,608 9,893 10,062
-------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment, net......... (8,511) (3,444) (2,643)
Change in property improvement fund.............. 4,108 (1,039) (1,097)
-------- ------- -------
Cash used in investing activities............ (4,403) (4,483) (3,740)
-------- ------- -------
FINANCING ACTIVITIES
Advances under Original Debt Service Guarantee
and Commitment and Interest Guarantee........... 10,390 -- --
Payment of deferred interest on mortgage debt.... (17,590) -- --
Capital contributions from General Partner for
Class B Limited Partnership Interest............ 6,000 -- --
Payment of deferred financing costs.............. (104) -- --
Capital distributions............................ -- (819) (2,347)
Repayments under Original Debt Service Guarantee
and Commitment and Interest Guarantee........... -- -- (3,500)
-------- ------- -------
Cash used in financing activities............ (1,304) (819) (5,847)
-------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.............. 15,901 4,591 475
CASH AND CASH EQUIVALENTS at beginning of year..... 5,601 1,010 535
-------- ------- -------
CASH AND CASH EQUIVALENTS at end of year........... $ 21,502 $ 5,601 $ 1,010
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................. $ 28,470 $20,438 $20,438
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
Atlanta Marquis Supp-50
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Atlanta Marriott Marquis Limited Partnership ("AMMLP"), a Delaware limited
partnership, was formed on May 28, 1985 (the "Closing Date"), to (i) acquire
an 80% general partnership interest in the Ivy Street Hotel Limited
Partnership ("Ivy"), a partnership between John C. Portman, Jr. ("Portman")
and Host Marriott Corporation ("Host Marriott") that was formed to develop,
own and operate the 1,671 room Atlanta Marriott Marquis Hotel (the "Hotel"),
and (ii) purchase from Ivy the parcel of land (the "Land") on which the Hotel
is located. The sole general partner of the Partnership, with a 1% interest,
is Marriott Marquis Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott. Marriott International, Inc. serves as the
manager of the Hotel ("Marriott International" or the "Manager").
On the Closing Date, 530 Class A limited partnership interests of $100,000
per Unit ("Unit") were sold in a private placement. The General Partner made a
capital contribution of $536,000 on May 28, 1985 for its 1% general
partnership interest. In addition, the General Partner acquired a Class B
limited partnership interest without making any additional capital
contribution.
The Partnership purchased its 80% general partnership interest in Ivy from
Host Marriott for a total price of $28.8 million. The Partnership also
acquired the Land from Ivy for $10 million in a separate transaction. The
Partnership subsequently leased the Land to Ivy under a 99-year lease with
rentals based primarily on Hotel sales.
On July 9, 1997, Atlanta Marriott Marquis II Limited Partnership (the
"Partnership") was formed in anticipation of the merger discussed below. The
general partner of the Partnership is also Marriott Marquis Corporation. Prior
to December 31, 1997, the Partnership did not engage in any active business
and was organized solely to succeed AMMLP's interest in Ivy. Effective
December 31, 1997, the Partnership succeeded AMMLP as the managing general
partner of Ivy.
On December 31, 1997, AMMLP merged with and into the Partnership (the
"Merger"). The Merger of AMMLP and AMMLP-II was treated as a reorganization of
affiliated entities and AMMLP's basis in its assets and liabilities were
carried over. In conjunction with the Merger, the following transactions
occurred:
. AMMLP was merged with and into the Partnership. With the Merger, the
separate existence of AMMLP ceased and AMMLP limited partner units
("Units") were converted on a one-for-one basis into Partnership Class A
limited partnership units ("Partnership Units"). AMMLP limited partners
who held fractional interests in Units received the same interest in
Partnership Units.
. On December 31, 1997, the General Partner made an initial capital
contribution of $6 million to the Partnership. Subsequent to year end, on
January 30, 1998, the General Partner contributed an additional $69
million. In return for such additional capital contributions, the General
Partner received a new Class B limited partnership interest in the
Partnership entitling the General Partner to a 13.5% cumulative,
compounding annual preferred return and priority return of such capital.
The General Partner also surrendered its then existing Class B interest
on distributions.
. The Partnership Class A limited partners will receive an annual return of
5% on their initial investment in AMMLP, ratably with a 5% return to the
General Partner on its initial investment in AMMLP, after payment of the
preferred return on the Class B interest. To the extent unpaid in any
year, such return will accumulate and compound and be payable from sale
or refinancing proceeds.
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the Merger to incorporate the following revisions:
(i) a revised provision regarding a sale of the Hotel to permit
Atlanta Marquis Supp-51
<PAGE>
the Partnership to sell the Hotel to an unaffiliated third party without the
consent of the limited partners; (ii) a revised provision limiting the voting
rights of the General Partner and its affiliates to permit the General Partner
and its affiliates to have full voting rights with respect to all Partnership
Units currently held by or acquired by the General Partner and its affiliates;
(iii) extinguishment of the original Class B limited partner interest held by
the General Partner and replacement of it with a new Class B interest which is
entitled to a 13.5% cumulative, compounded annual return; (iv) addition of a
mechanism that allows the Class B limited partner to contribute up to an
additional $20 million should the Hotel require additional funding (such
contribution would also be entitled to the 13.5% return discussed above); (v)
a revision of the right of removal of the General Partner clause so that an
affirmative vote of 66 2/3% would be needed to effect a removal of the General
Partner and; (v) revised provisions for allocations and distributions (see
Note 8). As a result of the approval of the Merger, the AMMLP-II Partnership
Agreement became effective December 31, 1997.
Partnership Allocations and Distributions
Ivy generally allocates operating income, gains and losses, deductions and
cash available for distribution 80% to the Partnership and 20% to Portman.
However, the first $1 million plus 5% of annual gross room sales of annual
cash available for distribution from Ivy was paid to AMMLP unless Ivy
exercised its option to repurchase the Land.
During 1990, AMMLP determined that the probability of collecting the
minority interest receivable from Portman was remote. Thus, AMMLP wrote off
this receivable which totaled $3,542,000 and began recording 100% of the
losses of Ivy. In future years, if AMMLP-II records income, 100% of the income
will be allocated to AMMLP-II until such excess income allocated to AMMLP-II
equals the excess losses previously recorded by AMMLP. Thereafter, any income
would be allocated 80% to AMMLP-II and 20% to Portman. As of December 31, 1997
and 1996, excess losses recognized by AMMLP and the Partnership were $621,000
and $50,000, respectively. AMMLP net losses, as defined, were generally
allocated as follows:
(i) beginning in 1991 and continuing until the Class A limited partners
and the General Partner had received sale or refinancing proceeds ("Capital
Receipts") equal to their total cumulative capital contributions ("Original
Capital"), 1% to the General Partner, 80% to the Class A limited partners
and 19% to the Class B limited partner; and
(ii) thereafter, 1% to the General Partner, 65% to the Class A Limited
Partners and 34% to the Class B Limited Partner.
These allocations could have been subject to certain special allocations of
net profit or net loss to the General Partner required by Federal income tax
regulations.
Cash Available for Distribution, as defined, generally was distributed as
follows:
(i) beginning in 1991, and continuing until the Class A Limited Partners
and the General Partner had received distributions of Capital Receipts
equal to their Original Capital, 1% to the General Partner, 80% to the
Class A Limited Partners and 19% to the Class B Limited Partner; and
(ii) thereafter, 1% to the General Partner, 65% to the Class A Limited
Partners and 34% to the Class B Limited Partner. However, until the General
Partner and the Class A Limited Partners had received a return of their
Original Capital through distributions of Capital Receipts, the Class B
Limited Partner will subordinate its cash distributions to an annual non-
cumulative 10% return on Original Capital to the General Partner and the
Class A Limited Partners.
Net profits, as defined, generally were allocated in the same ratio as Cash
Available for Distribution. Excess net profits were then to be applied to
offset prior net losses in excess of the partners' remaining invested capital.
Notwithstanding the above allocations, the Partnership Agreement provided for
specific allocation to the partners of gain realized and proceeds received by
the Partnership upon sale, condemnation or other disposition of the Hotel or
assets of the Partnership. In addition, the Partnership Agreement provided for
specific allocations of any excess refinancing or land sale proceeds.
Atlanta Marquis Supp-52
<PAGE>
As discussed above, on December 31, 1997, the Partnership executed the
AMMLP-II Partnership Agreement which provides for a change in the above
allocations (see Note 8).
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year. The Partnership's
financial statements consolidate the financial statements of Ivy, its
majority-owned subsidiary partnership. All material intercompany transactions,
including the land lease between the Partnership and Ivy described in Note 7,
have been eliminated. All assets and liabilities of AMMLP have been carried
over to the Partnership at their historical basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenues and Expenses
Revenues represent sales generated by the Partnership's hotel. Hotel
property-level costs and expenses reflect all property-level costs and
expenses. Total hotel sales less hotel property-level costs and expenses
equals house profit which reflects the net revenues flowing to the Partnership
as property owner. As discussed below, the Partnership previously recorded
only the house profit generated by the Partnership's hotel properties as
revenues.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires that the Partnership
include property-level sales and operating costs and expenses in its statement
of operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying consolidated statement of operations. The
adoption of EITF 97-2 increased both revenues and operating costs and expenses
by $48.9 million in 1997, $49.8 million in 1996 and $46.3 million in 1995.
There was no impact on operating profit or net income related to the adoption
of EITF 97-2.
Property and Equipment
Property and equipment is recorded at cost which includes interest, rent and
real estate taxes incurred during development. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
Building and improvements................................... 50 years
Furniture and equipment..................................... 3 to 20 years
</TABLE>
All land, property and equipment is pledged as security for the mortgage
debt described in Note 5.
Atlanta Marquis Supp-53
<PAGE>
The Partnership assesses impairment of its real estate property based on
whether estimated undiscounted future cash flows for the property will be less
than its net book value. If the property is impaired, its basis is adjusted to
fair market value.
Deferred Financing Costs
Financing costs incurred in connection with obtaining the mortgage debt have
been deferred and are being amortized using the straight-line method, which
approximates the effective interest rate method, over three to ten years. A
portion of the deferred financing costs totaling $4,249,000 were fully
amortized as of July 10, 1997. Additional financing costs of $104,000 were
incurred in 1997 in connection with the refinancing of the Partnership's
mortgage debt. Accumulated amortization of the deferred financing costs
totaled $4,413,000 and $4,090,000 at December 31, 1997 and 1996, respectively.
This amount includes amortization of deferred financing costs for both Ivy and
the Partnership. Of the total, the Partnership has accumulated amortization of
$164,000 and $151,000 at December 31, 1997 and 1996, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
There are significant differences between the net income/loss reported in
these financial statements and the net income/loss determined for income tax
purposes. These differences are due primarily to the use, for tax purposes, of
accelerated depreciation methods and shorter depreciable lives for the assets,
the timing of the recognition of incentive management fee expense and the
treatment of the minority interest receivable. As a result of these
differences, the (deficit)/excess of the tax basis in net Partnership
liabilities and the net liabilities reported in the accompanying financial
statements is $(90,642,000) and $72,111,000 as of December 31, 1997 and 1996,
respectively. For tax purposes, the assets of the Partnership were stepped up
to fair market value on December 31, 1997 when the General Partner made an
initial capital contribution of $6.0 million to the Partnership for a Class B
limited partnership interest in the Partnership.
Statement of Financial Accounting Standards
In 1996, AMMLP adopted Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an effect on
its financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Leased land acquisition costs and land................... $ 12,617 $ 12,617
Building and improvements................................ 182,629 182,597
Furniture and equipment.................................. 42,621 34,142
-------- --------
237,867 229,356
Less accumulated depreciation............................ (72,495) (67,245)
-------- --------
$165,372 $162,111
======== ========
</TABLE>
For financial reporting purposes the Land is carried at its historical
purchase cost of $10 million as required by generally accepted accounting
principles.
Atlanta Marquis Supp-54
<PAGE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------ ------------------------
<S> <C> <C> <C> <C>
Mortgage debt............. $ 199,019 $ 199,019 $ 215,574 $ 215,574
Due to Host Marriott under
Original Debt Service
Guarantee and Commitment
and Interest Guarantee... 30,524 30,524 20,134 14,300
Incentive management fees
due to Marriott
International, Inc....... 4,155 -- 2,987 --
</TABLE>
The 1997 and 1996 estimated fair value of the mortgage debt is stated at its
carrying value as it was repaid on February 2, 1998. The amounts held in Due
to Host Marriott under original debt service and commitment consist of the
interest guarantee in the amount of $10,390,000 and the original debt service
commitment in the amount of $20,134,000. The estimated fair value of the
interest guarantee is the carrying value as it was also repaid on February 2,
1998. The estimated fair value of the original debt service commitment is its
carrying value as the obligation earns interest at 9% as of February 2, 1998.
The estimated fair value of incentive management fees due to Marriott
International is zero. As part of the new management agreement effective
January 3, 1998, all accrued incentive management fees were waived by the
Manager and the Partnership's accrued liability was written off to income in
1998.
NOTE 5. MORTGAGE DEBT
As of December 31, 1996, the AMMLP's mortgage debt consisted of a total of
$215,574,000 in nonrecourse mortgage notes (the "Mortgage Debt"). Through July
10, 1997 (the "Maturity Date"), interest accrued on the Mortgage Debt at a
fixed rate of 10.3%. Interest only was payable semiannually in arrears. The
cash payment rate was 10.17%. The difference between the cash payment rate and
the accrual rate (the "Deferred Interest") was added to the balance of the
Mortgage Debt. The cumulative Deferred Interest added to the Mortgage Debt
balance amounted to $17.6 million and $16.5 million at July 10, 1997 and
December 31, 1996, respectively. On the Maturity Date, the Mortgage Debt
matured, at which time AMMLP and Ivy entered into a letter agreement (the
"Letter Agreement") with the lender which effectively extended the maturity of
the Mortgage Debt until February 2, 1998 (the "New Maturity Date"). On the
Maturity Date, AMMLP and Ivy were required to pay $17.6 million representing
the Deferred Interest on the Mortgage Debt in addition to the scheduled
interest payment of $ 10.1 million. As a result, the Mortgage Debt balance
outstanding was reduced to $ 199,019,000.
The payment of Deferred Interest was funded from $7.2 million of Ivy cash
reserves established by the General Partner in anticipation of the Mortgage
Debt maturity and $10.4 million drawn pursuant to the Host Marriott interest
guarantee (the "Interest Guarantee"). Host Marriott had agreed to advance up
to $50 million to cover interest and principal shortfalls. Had cash flow from
operations been insufficient to fully fund interest due, $20 million was
available under the Interest Guarantee through the Maturity Date. The
remaining $30 million was available under the Principal Guarantee. Prior to
the payment of Deferred Interest in the amount of $10.4 million on the
Maturity Date, there were no amounts outstanding under either the Principal
Guarantee or the Interest Guarantee. In conjunction with the extension, Host
Marriott reaffirmed its obligations pursuant to these guarantees through the
New Maturity Date. The Principal Guarantee was available in case of a sale,
refinancing or acceleration of the principal amount of the underlying notes
resulting from an Event of Default, as defined. To the extent the Interest
Guarantee was not used, it became available as a Principal Guarantee.
During the term of the Letter Agreement, the Mortgage Debt continued to be
nonrecourse, and accrued interest at 12.3% with interest payments due on
January 10 and February 2, 1998. Additionally, all funds remitted
Atlanta Marquis Supp-55
<PAGE>
by the Manager during the term of the extension were held for the benefit of
the lender. In conjunction with the Letter Agreement, Ivy paid an extension
fee of $500,000 as well as approximately $410,000 representing costs and
expenses related to the transaction.
Host Marriott had guaranteed up to $33 million of the original debt (the
"Original Debt Service Guarantee" and the "Commitment") under which Host
Marriott was obligated to make certain required debt service payments and
restore any cash flow deficits to the extent that Partnership cash flow, as
defined, was insufficient. Pursuant to the terms of the Mortgage Debt, the
Commitment was modified to fund only certain furniture, fixtures and equipment
expenditures and ground rent shortfalls. Any interest, principal or guarantee
loans made at a time when the Commitment was not fully funded reduced, dollar
for dollar, but not below zero, the remaining unfunded amount of the
Commitment. Advances under the Principal Guarantee, Interest Guarantee and
Original Debt Service Guarantee and Commitment up to cumulative fundings of
$33 million did not bear interest. Amounts advanced in excess of $33 million
accrued interest at 1% over the prime rate. As of December 31, 1997,
cumulative fundings equaled $41.6 million, exceeding the $33 million by $8.6
million. The excess fundings accrued interest until they were repaid
subsequent to year-end. Total accrued interest on the cumulative advances for
the period from the Maturity Date through December 31, 1997 equaled $398,000.
As of December 31, 1997 and 1996, Ivy had $20.1 million due to Host Marriott
under the Commitment.
On March 24, 1994, the note holders of the Mortgage Debt voted to accept the
Manager as a back-up guarantor and on December 21, 1994, the agreement was
finalized. The Manager, as back-up guarantor, was required to perform the
obligations under the guarantees in the event that Host Marriott failed to do
so. In conjunction with the extension, the Manager reaffirmed its obligations
pursuant to these guarantees through the New Maturity Date.
Subsequent to year-end, the Mortgage Debt was refinanced (see Note 8).
NOTE 6. HOTEL MANAGEMENT AGREEMENT
Ivy entered into a hotel management agreement (the "Management Agreement")
with the Manager to manage the Hotel for a term of 25 years, renewable at
Ivy's or the Manager's option for five additional 10-year terms. The Manager
was entitled to compensation for its services in the form of a base management
fee equal to 3% of gross sales. Base management fees paid in 1997, 1996 and
1995 were $2,562,000, $2,654,000 and $2,435,000, respectively.
In addition, the Manager earned an incentive management fee equal to 50% of
assumed net cash flow of the Hotel, as defined. However, once total cumulative
incentive management fees reached an amount equal to or greater than 20% of
total cumulative Hotel profit, as defined, the Manager earned an incentive
management fee equal to the average of (i) 50% of assumed net cash flow and
(ii) 20% of Hotel profit. The incentive management fee was paid out of cash
flow available for incentive management fees, as defined, and was subordinated
to the Mortgage Debt, guarantee repayments and rent under the Land lease. Any
incentive management fees earned but not paid were deferred without interest
and paid out of the first cash flow available for the incentive management
fee. During 1997 and 1996, $1,167,000 and $2,018,000, respectively, in
incentive management fees had been earned. Through December 31, 1997, no
incentive management fees had ever been paid. Deferred incentive management
fees as of December 31, 1997 and 1996 were $4,154,000 and $2,987,000,
respectively, and are included in Due to Marriott International, Inc. in the
accompanying consolidated balance sheet. Subsequent to year-end, a new
management agreement was entered into. As part of this new agreement, all
accrued incentive management fees were waived by the Manager (see Note 8) and
the Partnership's accrued liability was written off in 1998 (see Note 8).
Pursuant to the terms of the Management Agreement, the Manager is required
to furnish the Hotel with certain services ("Chain Services") which are
generally provided on a central or regional basis to all domestic full-service
hotels managed, owned or leased by the Manager or its subsidiaries. Chain
Services include central training, advertising and promotion, a national
reservation system, computerized payroll and accounting services
Atlanta Marquis Supp-56
<PAGE>
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 hotels in the Manager's full-service hotel system. In
addition, the Hotel also participates in the Manager's Marriott Rewards
Program ("MRP"). This program succeeded the Honored Guest Awards Program. The
cost of this program is charged to all hotels in the Manager's hotel system.
The total amount of Chain Services and MRP costs allocated to the Hotel were
$2,685,000 in 1997, $1,968,000 in 1996 and $2,431,000 in 1995.
Pursuant to the terms of the Management Agreement, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotel. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Management
Agreement, the working capital and supplies will be returned to the
Partnership. As of December 31, 1997 and 1996, $3,077,000 has been advanced to
the Manager for working capital and supplies which is included in Due from
Marriott International, Inc. in the accompanying consolidated balance sheet.
The supplies advanced to the Manager are recorded at their estimated net
realizable value. At December 31, 1997 and 1996, accumulated amortization
related to the revaluation of these supplies totaled $177,000. Subsequent to
year-end, an additional $2,639,000 was advanced to the Manager for working
capital needs at the Hotel (see Note 8).
The Partnership is required to maintain the Hotel in good repair and
condition. Pursuant to the Agreement, annual contributions to a property
improvement fund provide for the replacement of furniture, fixtures and
equipment. Annual contributions to the fund equaled 4% of gross Hotel sales
through June 1995 and 5% thereafter. Total contributions to the property
improvement fund for the years ended December 31, 1997, 1996, and 1995 were
$3,929,000, $4,122,000 and $3,302,000, respectively.
NOTE 7. LAND LEASE
On the Closing Date, AMMLP acquired the Land on which the Hotel is located
from Ivy for $10 million. AMMLP has leased the Land to Ivy for a period of 99
years. Annual rent was equal to 5% of annual gross room sales from the Hotel.
Ivy had an option to repurchase the Land at any time through 1999. Through
1995, the option price was $25 million and for the ensuing four years the
option price will be adjusted for changes in the Consumer Price Index. At
December 31, 1997 and 1996, the option price was $26,500,000 and $25,825,000,
respectively. Total rentals under the lease, which were eliminated in
consolidation, were $2,705,000 in 1997, $2,806,000 in 1996 and $2,526,000 in
1995.
Subsequent to year-end, the Land lease was terminated (see Note 8) because
the Land was contributed to a subsidiary of Ivy.
NOTE 8. SUBSEQUENT EVENTS
Bankruptcy Remote Entity
To facilitate the refinancing of AMMLP's Mortgage Debt, on January 29, 1998
the Hotel and the Land were conveyed to a special purpose, bankruptcy remote
entity, HMA Realty Limited Partnership ("HMA"). The sole general partner of
HMA with a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy.
Mortgage Debt
On the New Maturity Date, the following transactions occurred:
. HMA obtained new 12-year first mortgage financing of $164 million (the
"New Mortgage Debt") which, together with $35 million from the additional
$69 million capital contributed by the General Partner were used to pay
the maturing Mortgage Debt. The New Mortgage Debt is nonrecourse to HMA,
bears interest at a fixed rate of 7.4% and will require monthly payments
of principal and interest calculated to fully amortize the loan over 25
years resulting in annual debt service of $14.1 million for 1998 and
$14.4 million annually until the end of the 12-year term.
Atlanta Marquis Supp-57
<PAGE>
. Host Marriott waived its existing right to priority repayment of the
$20.1 million in prior non-interest bearing Interest Guarantee advances
to Ivy and restructured such advances as a loan with a 15 year term
(interest only for the first five years) bearing interest at a rate of 9%
per annum (the "Term Loan"). Payments are due monthly in arrears from
cash available after payment of debt service on the New Mortgage Debt.
Upon a sale of the Hotel, the Term Loan will accelerate and become due
and payable.
. The outstanding amount of the Interest Guarantee of $10.4 million and
related interest was repaid to Host Marriott.
. The $30 million Principal Guarantee provided by Host Marriott was
eliminated.
. The Partnership distributed funds to Class A limited partners of
approximately $5,000 per Partnership Unit. This distribution represented
the excess of the Partnership's reserve after payment of a majority of
the transaction costs related to the Mortgage Debt refinancing.
As part of the refinancing, HMA was required to establish certain reserves
which are held by an agent of the lender including:
. $3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and site
improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
. $1.3 million tax and insurance reserve--This reserve will be used to pay
real estate tax and insurance premiums for the Hotel.
In addition, HMA advanced an additional $2,639,000 to the Manager for
working capital needs and used the remaining cash to pay transaction costs
associated with the refinancing.
New Management Agreement
To facilitate the refinancing effective January 3, 1998, a new management
agreement (the "New Management Agreement") was entered into by HMA and the
Manager. The New Agreement expires on July 1, 2010 and is renewable at the
Manager's option for five additional 10-year terms. Pursuant to the terms of
the New Management Agreement, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit (the
"Owner's Priority"). Thereafter, the Manager will receive 20% of the profit in
excess of such Owner's Priority. The amount of the Owner's Priority will not
be reduced but may be increased to take into account additional capital
contributions by the General Partner or its affiliates. As part of the New
Management Agreement, all accrued incentive management fees amounting to $4.5
million were waived by the Manager and the Partnership's accrued liability was
written off in 1998.
Land Lease
As part of the Merger transactions, the Partnership contributed the Land to
a subsidiary of Ivy. This transaction terminated the Land lease and resulted
in cessation of Land lease payments from Ivy to the Partnership. The
Partnership received a credit to its capital account in Ivy of $26.5 million
in consideration of the Land contribution. For financial reporting purposes
the Land will continue to be carried at its historical purchase cost of $10
million as required by generally accepted accounting principles.
New Partnership Agreement
AMMLP's partnership agreement was amended (the "AMMLP-II Partnership
Agreement") as a result of the Merger to incorporate the following revisions:
(i) a revised provision regarding a sale of the Hotel to permit the
Partnership to sell the Hotel to an unaffiliated third party without the
consent of the limited partners;
Atlanta Marquis Supp-58
<PAGE>
(ii) a revised provision limiting the voting rights of the General
Partner and its affiliates to permit the General Partner and its affiliates
to have full voting rights with respect to all Partnership Units currently
held by or acquired by the General Partner and its affiliates;
(iii) extinguishment of the original Class B limited partner interest
held by the General Partner and replacement of it with a new Class B
interest which is entitled to a 13.5% cumulative, compounded annual return;
(iv) addition of a mechanism that allows the Class B limited partner to
contribute up to an additional $20 million should the Hotel require
additional funding (such contribution would also be entitled to the 13.5%
return discussed above);
(v) a revised right of removal of the General Partner clause so that an
affirmative vote of 66 2/3% would be needed to effect a removal of the
General Partner and;
(vi) a revision of AMMLP's allocations and distributions such that
Partnership cash available for distribution is generally allocated as
follows:
(a) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested
capital,
(b) to the General Partner and Class A limited partners, until the
General Partner and the Class A limited partners have received a non-
cumulative, non-compounded annual return of 5% on their initial
investment in AMMLP-II, and
(c) thereafter, in proportion to total invested capital through
completion of the Restructuring Transactions of approximately 41% to
limited partners and 59% to the General Partner; and
(vii) a revision of AMMLP's allocations and distributions such that
Partnership sale or refinancing proceeds are generally allocated as
follows:
(a) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested
capital,
(b) to the General Partner and Class A limited partners, until the
General Partner and the Class A limited partners have received a non-
cumulative, non-compounded annual return of 5% on their initial
investment in AMMLP-II,
(c) to the General Partner, until its Class B invested capital of up
to $75 million has been fully returned, taking into account all
distributions to such Partners following the effective date of the
Restructuring Transactions (other than the approximately $5,000 per
Partnership Unit distributed as part of the Restructuring
Transactions),
(d) to the General Partner and Class A limited partners until they
have received a cumulative, compounded return on their original
invested capital of 5% per annum from the effective date of the
Restructuring Transactions,
(e) to the General Partner and Class A limited partners, until such
partners' original invested capital of $536,000 and $53,000,000,
respectively, has been fully returned, and
(f) thereafter, in proportion to total invested capital through
completion of the Restructuring Transactions of approximately 41% to
limited partners and 59% to the General Partner.
As a result of the approval of the Merger, the AMMLP-II Partnership
Agreement became effective December 31, 1997.
Ivy Partnership Agreement
In conjunction with the Merger transactions, the Ivy partnership agreement
was amended to incorporate the following revisions: (i) provide that the $75
million contributed by the General Partner of the Partnership to Ivy will be
entitled to receive an annual preferred return equal to 13.5% compounding to
the extent unpaid; (ii) provide that the Land, after contribution by the
Partnership to Ivy at an agreed upon value of $26.5 million, will be entitled
to receive an annual compounding preferred return equal to 10%, after payment
of the 13.5% return described above; and (iii) allows the Partnership the
unilateral right, as managing general partner of Ivy, to make most major
decisions on behalf of Ivy, including, without limitation, the sale or other
disposition of the Hotel, except where such disposition is to a party related
to Host Marriott or an affiliate of Host Marriott.
Atlanta Marquis Supp-59
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
HOTEL REVENUES
Rooms....................... $ 26,909 $ 27,710
Food and beverage........... 12,269 13,254
Other....................... 2,779 2,800
--------- ---------
41,957 43,764
--------- ---------
OPERATING COSTS AND EXPENSES
Property-level costs and
expenses
Rooms..................... 5,536 5,752
Food and beverage......... 8,186 8,370
Other departmental costs
and deductions........... 9,175 9,469
--------- ---------
Total property-level
costs and expenses..... 22,897 23,591
--------- ---------
Depreciation................ 2,891 2,349
Property taxes and other.... 1,923 1,707
Base management fees........ 1,259 1,311
Incentive management fees... 90 1,998
--------- ---------
29,060 30,956
--------- ---------
OPERATING PROFIT.............. 12,897 12,808
Interest expense............ (7,964) (10,862)
Interest income............. 154 379
--------- ---------
NET INCOME BEFORE
EXTRAORDINARY ITEMS.......... 5,087 2,325
EXTRAORDINARY ITEMS
Gain on extinguishment of
debt....................... 19 --
Gain on forgiveness of
incentive management fees.. 4,155 --
--------- ---------
NET INCOME.................... $ 9,261 $ 2,325
========= =========
ALLOCATION OF NET INCOME
General Partner............. $ -- $ 23
Class A Limited Partners.... -- 2,302
Class B Limited Partner..... 9,261 --
--------- ---------
$ 9,261 $ 2,325
========= =========
NET INCOME PER CLASS A LIMITED
PARTNER UNIT (530 Units)..... $ -- $ 4,343
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Atlanta Marquis Supp-60
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $164,005 $165,372
Due from Marriott International, Inc.................. 7,434 4,425
Property improvement fund............................. 3,357 2,756
Deferred financing costs, net of accumulated
amortization......................................... 3,174 321
Restricted cash reserves.............................. 25,031 --
Cash and cash equivalents............................. 6,191 21,502
-------- --------
$209,192 $194,376
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt....................................... $163,232 $199,019
Due to Host Marriott Corporation under Original Debt
Service Guarantee and Commitment and Interest
Guarantee.......................................... -- 30,524
Term loan payable to Host Marriott Corporation...... 20,134 --
Due to Marriott International, Inc.................. 133 4,198
Accounts payable and accrued expenses............... 2,190 12,743
-------- --------
Total Liabilities................................. 185,689 246,484
-------- --------
PARTNERS' CAPITAL (DEFICIT)
General Partner..................................... (520) (520)
Class A Limited Partners............................ (60,238) (57,588)
Class B Limited Partner............................. 84,261 6,000
-------- --------
Total Partners' Capital (Deficit)................... 23,503 (52,108)
-------- --------
$209,192 $194,376
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Atlanta Marquis Supp-61
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 9,261 $ 2,325
Net extraordinary items.................................. (4,174) --
--------- -------
Income before extraordinary items........................ 5,087 2,325
Noncash items.......................................... 2,994 3,567
Changes in operating accounts.......................... (12,990) 9,176
--------- -------
Cash (used in) provided by operating activities...... (4,909) 15,068
--------- -------
INVESTING ACTIVITIES
Working capital provided to Marriott International,
Inc..................................................... (2,639) --
Additions to property and equipment, net................. (1,524) (1,109)
Change in property improvement fund...................... (601) (1,201)
--------- -------
Cash used in investing activities.................... (4,764) (2,310)
--------- -------
FINANCING ACTIVITIES
Proceeds from mortgage debt.............................. 164,000 --
Repayment of mortgage debt............................... (199,768) --
Capital contributions from General Partner for Class B
Limited Partnership Interest............................ 69,000 --
Changes in restricted lender reserves.................... (22,873) --
Repayments under Original Debt Service Guarantee and
Commitment and Interest Guarantee to Host Marriott
Corporation............................................. (10,390) --
Payment of financing costs............................... (2,957) --
Capital distributions.................................... (2,650) --
--------- -------
Cash used in financing activities.................... (5,638) --
--------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........... (15,311) 12,758
CASH AND CASH EQUIVALENTS at beginning of period........... 21,502 5,601
--------- -------
CASH AND CASH EQUIVALENTS at end of period................. $ 6,191 $18,359
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................ $ 19,127 $ 662
========= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Atlanta Marquis Supp-62
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by the Atlanta Marriott Marquis II Limited Partnership (the
"Partnership" and "AMMLP-II") without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading. However,
the condensed consolidated financial statements should be read in conjunction
with the Partnership's consolidated financial statements and notes thereto
included in the Partnership's Form 10-K for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998, the results of operations and
cash flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
Through December 31, 1997, for financial reporting purposes the net
income/(loss) of the Partnership was allocated 99% to the limited partners and
1% to Marriott Marquis Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"). As reported in the
Partnership's Form 10-K for the fiscal year ended December 31, 1997, Atlanta
Marriott Marquis Limited Partnership's ("AMMLP") partnership agreement was
amended as a result of the Merger to incorporate a revision of AMMLP's
allocations and distributions such that Partnership net income is generally
allocated (i) to the General Partner, until the General Partner has received a
13.5% cumulative compounded annual return on its Class B invested capital,
(ii) to the General Partner and Class A limited partners, until the General
Partner and the Class A limited partners have received a non-cumulative, non-
compounded annual return of 5% on their initial investment in the Partnership,
and (iii) thereafter, in proportion to total invested capital through
completion of the merger transactions of approximately 41% to limited partners
and 59% to the General Partner. Net losses are generally allocated in
proportion to the partners capital accounts. Significant differences exist
between the net income/(loss) for financial reporting purposes and the net
income/(loss) reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives for the assets, and differences in the
timing of the recognition of 1997 incentive management fee expense.
Through December 31, 1997, AMMLP owned an 80% general partnership interest
in Ivy Street Hotel Limited Partnership ("Ivy") which owned the Atlanta
Marriott Marquis Hotel (the "Hotel"). The Partnership also owned the land (the
"Land") on which the Hotel is located. On December 31, 1997 AMMLP merged (the
"Merger") with and into the Partnership. The Merger of AMMLP and the
Partnership was treated as a reorganization of affiliated entities and AMMLP's
basis in its assets and liabilities were carried over. On January 29, 1998,
the Hotel and the Land were conveyed to a special purpose, bankruptcy remote
entity, HMA Realty Limited Partnership ("HMA"). The sole general partner of
HMA with a 1% interest, is HMA-GP, Inc., a wholly-owned subsidiary of Ivy. The
sole limited partner, with a 99% interest, is Ivy. The Partnership
consolidates Ivy and HMA, and all significant intercompany transactions and
balances between the Partnership, Ivy and HMA have been eliminated. In 1990,
the Partnership determined that the probability of collecting the receivable
from the minority partner in Ivy was remote. Thus, the Partnership wrote off
this receivable and is now recording 100% of the income/(loss) of Ivy until
excess income allocated to the Partnership equals the excess losses previously
recorded by the Partnership.
Atlanta Marquis Supp-63
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
3. The Partnership's revenues represent gross sales generated by the
Partnership's hotel. Hotel property-level costs and expenses reflect all
property-level costs and expenses. Total hotel sales less hotel property-level
costs and expenses equals house profit which reflects the net revenues flowing
to the Partnership as property owner. As discussed below, the Partnership
previously recorded only the house profit generated by the Partnership's hotel
properties as revenues,
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and has determined that EITF 97-2 requires that the Partnership
include property-level revenues and operating costs and expenses of its hotels
in its statement of operations. The Partnership was required to apply EITF 97-
2 on January 3, 1998 to the modified management agreement with Marriott
International, Inc. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying consolidated statement of
operations. The adoption of EITF 97-2 increased both revenues and operating
costs and expenses by $22.9 million and $23.6 million in first two quarters
1998 and 1997, respectively and will have no impact on operating profit or net
income.
The statements of operations for the first and second quarter of 1998
included in the Partnership's Form 10-Q filings did not reflect hotel sale and
property-level expenses. These financial statements have been amended to
conform to the presentation of sales and expenses in the financial statements
included herein.
4. On February 2, 1998, HMA obtained new 12-year first mortgage financing of
$164 million which, together with $35 million from the additional $69 million
capital contributed by the General Partner, was used to pay the mortgage debt.
The mortgage debt is nonrecourse to HMA, bears interest at a fixed rate of
7.4% and requires monthly payments of principal and interest calculated to
fully amortize the loan over 25 years. Annual debt service on the new mortgage
debt is $14.1 million for 1998 and $14.4 million annually until the end of the
12-year term.
5. To facilitate the refinancing, effective January 3, 1998, a new
management agreement was entered into by HMA and the Manager. The new
management agreement expires on July 1, 2010 and is renewable at the Manager's
option for five additional 10-year terms. Pursuant to the terms of the new
management agreement, no incentive management fees are payable to the Manager
with respect to the first $29.7 million of operating profit (the "Owner's
Priority"). Thereafter, the Manager will receive 20% of the profit in excess
of such Owner's Priority. As part of the new management agreement, all accrued
incentive management fees totaling $4.2 million were forgiven by the Manager.
The Partnership recorded an extraordinary gain in conjunction with the
forgiveness in the accompanying condensed consolidated financial statements.
6. Pursuant to the terms of the Mortgage Debt, HMA was required to establish
with the lender a separate reserve account for payments of insurance premiums
and real estate taxes for the mortgaged property as a result of the credit
rating of Marriott International, Inc. Thus, the Partnership has transferred
$2.2 million into the reserve through June 19, 1998. The reserve is included
in restricted cash reserves and the resulting tax and insurance liability is
included in accounts payable and accrued expenses in the accompanying balance
sheet.
Atlanta Marquis Supp-64
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, HMA was required to establish the following reserves which are
classified as restricted cash reserves in the accompanying condensed
consolidated balance sheet and are held by the agent of the lender including:
.$3.6 million debt service reserve--This reserve is equal to three months
of debt service.
. $10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the
facade of the Hotel as well as various renewals and replacements and
site improvements.
. $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
7. On April 17, 1998, Host Marriott, parent company of the General Partner
of the Partnership, announced that its Board of Directors authorized Host
Marriott to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999. As part
of the REIT conversion, Host Marriott formed a new operating Partnership (the
"Operating Partnership") and limited partners in certain Host Marriott full-
service hotel partnerships and joint ventures, including the Atlanta Marriott
Marquis II Limited Partnership, are expected to be given an opportunity to
receive, on a tax-deferred basis, Operating Partnership units in the Operating
Partnership in exchange for their current Partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
the Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission on June 2, 1998. Limited Partners will be
able to vote on this Partnership's participation in the merger later this year
through a consent solicitation.
Atlanta Marquis Supp-65
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
-------------------
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Mutual Benefit Chicago Marriott Suite Hotel
Partners, L.P., a Rhode Island limited partnership ("Chicago Suites" or the
"Partnership"), and up to seven other limited partnerships (the
"Partnerships") that own full-service hotels in which Host or its subsidiaries
are general partners. As more fully described in the Consent Solicitation,
limited partners of those Partnerships that participate in the Mergers will
receive OP Units 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," and with respect to Chicago Suites, the "Chicago Suites
Limited Partners"). Chicago Suites Limited Partners may elect to exchange such
OP Units received in connection with the Merger for either common shares of
beneficial interest, par value $.01 per share, of Host REIT ("Common Shares")
or unsecured 6.56% Callable Notes due December 15, 2005 issued by the
Operating Partnership ("Notes"). Beginning one year after the Mergers, Limited
Partners who retain OP Units will have the right to redeem their OP Units at
any time and receive, at the election of Host REIT, either 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").
The number of OP Units to be allocated to Chicago Suites will be based upon
(i) its Exchange Value (as defined herein) and (ii) the price attributed to an
OP Unit following the Merger, determined as described herein (but in no event
will it be less than $ or greater than $ per OP Unit) and will not be known
at the time of voting. The number of Common Shares a Chicago Suites Limited
Partner may elect to receive in connection with the Merger will equal the
number of OP Units received. The principal amount of Notes that Chicago Suites
Limited Partners may elect to receive in connection with the Merger will be
based upon Chicago Suites' Note Election Amount (as defined herein). See
"Determination of Exchange Value of Chicago Suites and Allocation of OP
Units." The estimated Exchange Value and Note Election Amount set forth herein
may increase or decrease as a result of various adjustments, and will be
finally calculated shortly before the Effective Date. Pursuant to the Merger,
Chicago Suites Limited Partners have an estimated Exchange Value of $33,133
per Partnership Unit and a Note Election Amount of $31,149 per Partnership
Unit.
RISK FACTORS
In deciding whether to approve the Merger, Chicago Suites Limited Partners
should consider certain risks and other factors. The General Partner believes
that Chicago Suites Limited Partners should particularly consider the
following, which should be read in conjunction with the information in the
Consent Solicitation under "Risk Factors" and "Federal Income Tax
Consequences:"
. 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-
Chicago Suites Supp-1
<PAGE>
level income taxes expected as a result of the REIT Conversion. To the
extent that such 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. The benefits to
Host of the REIT Conversion will be materially reduced if one or more of
the Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Chicago Suites Limited Partners or
the other Limited Partners. Although the General Partner has obtained the
Appraisal and the Fairness Opinion from AAA, AAA has not negotiated with
the General Partner 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 Chicago Suites Limited
Partners or the other 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 Partner involve the following conflicts of
interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partner and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including Chicago Suites, participate and Host REIT will benefit if the
value of the OP Units received by the Limited Partners of Chicago Suites
in the Merger is less than the value of their Partnership Interests. In
addition, the terms of the Leases of the Hotels, including Chicago
Suites' Hotel, will be determined by Host and 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, including the
Chicago Suites Limited Partners.
. Adverse Tax Consequences to the General Partner of a Sale of Chicago
Suites' Hotel. In past years, Chicago Suites has disproportionately
allocated tax losses to the General Partner, with the result that if the
Chicago Suites Hotel were to be sold in a taxable transaction, the
General Partner (and thus Host) would incur a disproportionately larger
tax gain than the Chicago Suites Limited Partners. Accordingly, the
General Partner and Host have an additional conflict of interest in
deciding the appropriate course of action for Chicago Suites with respect
to its Hotel.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the Chicago Suites
Limited Partners must vote on the Merger, including (i) the exact
Exchange Value for Chicago Suites (which will be adjusted for changes in
lender and capital expenditures reserves, deferred maintenance and other
items prior to the Effective Date), (ii) the price of the OP Units for
purposes of the Merger, which will be determined by reference to the
post-Merger trading prices of Host REIT's Common Shares (but will not be
less than $ or greater than $ ) and which, together with the Exchange
Value, will determine the number of OP Units the Chicago Suites Limited
Partners 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 Note Election Amount is determined. For these reasons,
the Chicago Suites Limited Partners cannot know at the time they vote on
the Merger these important aspects of the Merger.
. Combined REVPAR for the Operating Partnership's Hotels is Significantly
Less than the REVPAR for the Chicago Suites Hotel. The Operating
Partnership's pro forma REVPAR for the First Two Quarters 1998 is
significantly lower than the REVPAR attributable to Chicago Suites' Hotel
for the same period.
. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
Chicago Suites Supp-2
<PAGE>
. Exchange Value May Not Equal Fair Market Value of Chicago Suites'
Hotel. Each Chicago Suites Limited Partner who retains OP Units or elects
to exchange OP Units for Common Shares will receive consideration with a
deemed value equal to the Exchange Value of such Chicago Suites Limited
Partner's Partnership Interest. The determination of the Exchange Value
of Chicago Suites involves numerous estimates and assumptions. There is
no assurance that the Exchange Value of Chicago Suites will equal the
fair market value of the Hotel and other assets contributed by Chicago
Suites. See "Determination of Exchange Value of Chicago Suites and
Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from Limited Partners who elect
to exchange OP Units for Common Shares in connection with the Mergers)
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. Host REIT's OP Units, in the
aggregate, 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 to Host REIT and the Partnerships 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 Value of
Chicago Suites and Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Chicago Suites Limited Partners' Partnership Interests. The
price of an OP Unit for purposes of the Merger 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 Merger (but in no
event will it be less than $ or greater than $ per OP Unit). This
pricing mechanism has the effect of fixing the minimum and maximum number
of OP Units to be issued in the Mergers. It is likely that, either
initially or 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 Merger. This could
result in the Chicago Suites Limited Partners receiving OP Units or
Common Shares with an actual value that is less than either the price of
the OP Units for purposes of the Merger or the fair market value of their
Partnership Interests.
. Inability of Chicago Suites Limited Partners Who Retain OP Units to
Redeem OP Units for One Year. Chicago Suites Limited Partners who retain
OP Units received in the Merger will be unable to redeem such OP Units
for one year following the Merger. Until then, Chicago Suites Limited
Partners will bear the risk of illiquidity and of not being able to sell
in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection with
the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of Chicago
Suites. Each Chicago Suites Limited Partner may elect to receive in
exchange for OP Units received in the Merger, an unsecured, seven-year
Note of the Operating Partnership with a principal amount equal to the
Note Election Amount of his Partnership Interest, which is based upon
numerous assumptions and estimates. The deemed value of the OP Units to
be received by the Chicago Suites Limited Partners will exceed the
principal amount of the corresponding Notes (because the Exchange Value
will be higher than the Note Election Amount) and there is no assurance
that the Note a Chicago Suites Limited Partner receives will have a value
equal to either (i) the fair market value of the Chicago Suites Limited
Partner's share of the Hotel and other assets owned by Chicago Suites or
(ii) the principal amount of the Note. There will be no public market for
the Notes. If the Notes are sold, they may sell at prices substantially
below their issuance price.
Chicago Suites Supp-3
<PAGE>
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 Chicago Suites 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.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of a Chicago Suites Limited Partner's
investment from holding an interest in Chicago Suites, which is a finite-
life entity, has a fixed portfolio of one Hotel and distributes the cash
flow from the operation of such Hotel to the Chicago Suites Limited
Partners, to holding a direct or indirect interest in the Operating
Partnership, an ongoing real estate company with a portfolio of
approximately 125 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 and (iii) is able to reinvest
proceeds from sales or refinancings of existing Hotels in other hotels.
In addition, each Chicago Suites Limited Partner's investment will change
from one that allows a Chicago Suites Limited Partner to receive a return
of capital in the form of distributions from any net proceeds of a sale
or refinancing of Chicago Suites' assets to an investment in which a
Chicago Suites Limited Partner who retains OP Units likely would realize
a return of capital only through the exercise of the Unit Redemption
Right. Those Chicago Suites Limited Partners who elect to receive Common
Shares in connection with the Merger will hold an equity interest in a
publicly traded REIT that (i) provides immediate liquidity, (ii) intends
to make distributions to its shareholders in an amount equal to at least
95% of its taxable income, (iii) allows shareholders to influence
management by participation in the election of Trustees and (iv) realizes
substantial corporate tax savings as long as certain requirements are
met. A Chicago Suites Limited Partner's share of the liquidation
proceeds, if any, from the sale of the Chicago Suites Hotel could be
higher than the amount realized upon exercise of the Unit Redemption
Right, the sale of Common Shares received in connection with the Mergers
or payments on any Note received by a Chicago Suites Limited Partner who
elects to exchange his OP Units for such Note in connection with the
Merger. An investment in the Operating Partnership or Host REIT may not
outperform an investment in Chicago Suites. 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 Merger, Chicago Suites Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will own
interests in a much larger enterprise with a broader range of assets than
Chicago Suites individually. A material adverse change affecting the
Operating Partnership's assets will affect all Limited Partners,
including Chicago Suites Limited Partners, regardless of whether a
particular Limited Partner previously was an investor in such affected
assets. Chicago Suites owns discrete assets and the Mergers and the REIT
Conversion will significantly diversify the types and geographic
locations of the Hotels in which the Chicago Suites 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 the Hotel previously owned by Chicago Suites.
. Chicago Suites Limited Partners Have No Cash Appraisal Rights. Chicago
Suites Limited Partners who vote against the Merger have no right to
receive cash based upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The Chicago Suites Limited Partners cannot know at the time
they vote on the 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
Chicago Suites Supp-4
<PAGE>
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 Mergers and the
REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term 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. The Operating Partnership also
will not own any of the voting stock of the Non-Controlled Subsidiaries,
which may own up to 20% by value of the Operating Partnership's assets.
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 and the Non-Controlled Subsidiaries to operate and manage
their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the code. 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 relet the Hotels or enter into new
leases with such lessees, which could result in a failure of Host REIT to
qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of Chicago Suites Limited Partners Binds All Chicago
Suites Limited Partners. For Chicago Suites, approval by a majority of
the Partnership Interests of Chicago Suites that are eligible to be voted
is required to approve the Merger and the related amendments to the
partnership agreement, as described in "Voting Procedures--Required Vote
and Other Conditions." Such approval will cause Chicago Suites to
participate in the Merger and will bind all Chicago Suites Limited
Partners, including Chicago Suites Limited Partners who voted against or
abstained from voting with respect to the Merger and the related
amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain such
consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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
Chicago Suites Supp-5
<PAGE>
Operating Partnership had outstanding indebtedness totaling approximately
$5.1 billion, which represents an approximately 53% 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 $15.00). 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 (including Host REIT), (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 Prior 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 (including Host REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural and
other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder Rights
Plan to replace the existing stockholder rights plan of Host. Host REIT
also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest" and "Certain Provisions of Maryland Law and Host REIT's
Declaration of Trust and Bylaws."
. 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 substantial
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
Chicago Suites Limited Partners (other than those who elect to receive
Common Shares or a Note in exchange for OP Units in connection with the
Merger) generally are not expected to recognize significant taxable gain
at the time of the Merger, there are a variety of events and transactions
(including the sale of the Hotel currently
Chicago Suites Supp-6
<PAGE>
owned by Chicago Suites or the reduction of indebtedness securing the
Hotel) that could cause a Chicago Suites 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 Treatment of Chicago
Suites Limited Partners Who Hold OP Units Following the Merger." Certain
Hotels (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. The partnership agreement of the Operating
Partnership, which is substantially in the form attached to the Consent
Solicitation 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."
. Election to Exchange OP Units for Common Shares. A Chicago Suites Limited
Partner who elects to receive Common Shares in exchange for his OP Units
in connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. Such Chicago Suites Limited Partner
may not defer recognition of any part of the gain realized from the
exchange under the "installment sale" rules. See "Federal Income Tax
Consequences--Tax Treatment of Chicago Suites Limited Partners Who
Exercise Their Right to Make the Common Share Election or the Note
Election." A Chicago Suites Limited Partner who elects to receive Common
Shares in connection with the Merger will not receive the Crestline
common stock or any other portion of the E&P distribution made before
they become shareholders of Host REIT.
. Election to Exchange OP Units for Notes. A Chicago Suites Limited Partner
who elects to receive a Note in exchange for his OP Units in connection
with the Merger will be treated as having made a taxable disposition of
his OP Units. A Chicago Suites Limited Partner who receives a Note in
connection with the Merger may be eligible to defer at least a portion of
that gain under the "installment sale" rules until principal on the Note
is paid. See "Federal Income Tax Consequences--Tax Treatment of Chicago
Suites Limited Partners Who Exercise Their Right to Make the Common Share
Election or 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 and Common Shares, 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 the Lease of the Hotel to
the Lessee were to be disregarded for tax purposes (for example, because
the Lease was determined to lack economic substance), Host REIT could
fail to qualify as a REIT and the Operating Partnership might be treated
as a corporation for federal income tax purposes, which would have a
material adverse impact on the Chicago Suites Limited Partners and the
value of the OP Units and the Common Shares.
Chicago Suites Supp-7
<PAGE>
. 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.
. Chicago Suites Limited Partners Need to Consult with Their Own Tax
Advisors. Because the specific tax attributes of a Chicago Suites
Limited Partner and the facts regarding such Chicago Suites Limited
Partner's interest in Chicago Suites could have a material impact on the
tax consequences to such Chicago Suites Limited Partner of the Merger
(including the decision whether to elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger) and the
subsequent ownership and disposition of OP Units, Common Shares or Notes,
it is essential that each Chicago Suites Limited Partner consult with his
own tax advisors regarding the application of federal, foreign and state
and local tax laws to such Chicago Suites 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 Chicago Suites Limited Partners would not be able to use
suspended passive activity losses from other investments (including from
Chicago Suites) to offset income from the Operating Partnership. It is
estimated that each Chicago Suites Limited Partner 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 REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
MOHS CORPORATION (THE "GENERAL PARTNER"), THE GENERAL PARTNER OF CHICAGO
SUITES, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS FAIR TO
THE CHICAGO SUITES LIMITED PARTNERS AND RECOMMENDS THAT ALL CHICAGO SUITES
LIMITED PARTNERS VOTE FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO THE
PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for
Chicago Suites Limited Partners the specific risks, benefits, effects and
fairness of the Merger to them and to provide other information specific to
Chicago Suites. Supplements have also been prepared for each of the other
Partnerships. This Supplement, together with the supplements of the other
Partnerships (collectively, the "Supplements"), are part of the Consent
Solicitation. Upon receipt of a written request by a Limited Partner or his
representative so designated in writing, the General Partner will send a copy
of any Supplement without charge. All requests for a copy of a Supplement
should be directed to: Investor
Chicago Suites Supp-8
<PAGE>
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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the Chicago Suites Limited Partners for the reasons set forth
below. This information is qualified by and should be read in conjunction with
the information in the Consent Solicitation under "Background and Reasons for
the Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of Chicago Suites, are expected to include:
. Exchange Value of Chicago Suites. Chicago Suites Limited Partners who
retain OP Units or elect to receive Common Shares in connection with the
Merger will receive OP Units or Common Shares with an estimated Exchange
Value equal to $33,133 per Partnership Unit.
. Liquidity. The REIT Conversion will offer Chicago Suites Limited Partners
liquidity with respect to their investment in Chicago Suites because
Chicago Suites Limited Partners can receive freely tradeable Host REIT
Common Shares by electing to exchange OP Units for Common Shares in
connection with the Merger or by exercising their Unit Redemption Right
at any time after one year following the Effective Date. Host has
approximately 204 million shares of common stock outstanding and is
expected to have a total common equity market capitalization of
approximately $3.6 billion after giving effect to the earnings and
profits distribution (based on a price of $15.00 per Host REIT Common
Share). The exercise of the election to exchange OP Units for Common
Shares in connection with the Merger or the exercise of the Unit
Redemption Right, however, generally would result in recognition of
taxable income or gain at the time of exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. Host expects that these
distributions will be higher than the estimated cash distributions for
1998 of Chicago Suites, 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 Chicago Suites and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons
for the Mergers."
. Substantial Tax Deferral for Chicago Suites Limited Partners Not Electing
to Exchange OP Units for Common Shares or Notes. The General Partner
expects that Chicago Suites Limited Partners who do not elect to receive
Common Shares or a Note in exchange for OP Units in connection with the
Merger generally should be able to obtain the benefits of the Merger
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 Chicago Suites or a sale or other disposition
of its assets in a taxable transaction. Thereafter, such Chicago Suites
Limited Partners generally should be able to defer at least a substantial
portion of such built-in gain until they elect to exercise their Unit
Redemption Right or the Hotel currently owned by Chicago Suites is sold
or otherwise disposed of in a taxable transaction by the Operating
Partnership or the debt now secured by the Hotel is repaid, prepaid or
substantially reduced. The federal income tax consequences of the Merger
are highly complex and, with respect to each Chicago Suites Limited
Partner, are dependent upon many variables, including the particular
circumstances of such Chicago Suites Limited Partner. See "Federal Income
Tax Consequences--Tax Consequences of the Merger." Each Chicago Suites
Limited Partner is urged to consult with his own tax advisors as to the
consequences of the Merger in light of his particular circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of Chicago Suites Limited Partners upon the performance of,
and the exposure to the risks associated with, Chicago Suites' Hotel and
spread such risk over a broader and more varied portfolio, including more
diverse geographic locations and multiple brands.
Chicago Suites Supp-9
<PAGE>
. Reduction in Leverage and Interest Costs. It is expected that the
Operating Partnership generally will have a significantly lower leverage
to value ratio, approximately 53%, than Chicago Suites currently, which
has a leverage ratio of 66% (calculated as a percentage of Exchange
Value), resulting in significant interest and debt service savings and
greater financial stability.
. Growth Potential. The General Partner believes that the Chicago Suites
Limited Partners, by directly or indirectly 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
Chicago Suites 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 Chicago Suites 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 Chicago Suites individually.
. Public Market Valuation of Assets. The Partnership Units of Chicago
Suites currently trade at a discount to the net asset value of Chicago
Suites' assets. The General Partner believes that by exchanging interests
in Chicago Suites, which is a non-traded, finite-life limited partnership
with a fixed portfolio for interests in an ongoing 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 Chicago Suites 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
(although not currently), has resulted at various times 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 they will not
trade at a discount to private market values. Also, the benefit of Host's
conversion to a REIT will not be shared by the Chicago Suites 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.
If Chicago Suites does not participate in the Merger, its business will
continue in its current manner; however, the Operating Partnership may elect
to contribute some or all of its interest in Chicago Suites to a Non-
Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF CHICAGO SUITES AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of Chicago Suites 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 Partner has retained AAA to
determine the market value of the Hotel as of March 1, 1998 (the
"Appraised Value"). The "Adjusted Appraised Value" of Chicago Suites
equals the Appraised Value of its Hotel, adjusted as of the Final
Valuation Date 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 Chicago Suites represents
AAA's estimate, as adopted by the General Partner, of the discounted
present value, as of January 1, 1998, of the Chicago Suites limited
partners' share of estimated future cash distributions and estimated net
sales proceeds (plus lender reserves), assuming that Chicago Suites
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 Chicago Suites represents
the General Partner's estimate of the net proceeds to Chicago Suites
limited partners resulting from the assumed sale as of December 31, 1998
of the Hotel of Chicago Suites, at its Adjusted Appraised Value (after
eliminating any "mark to market" adjustment and adding back the deduction
for transfer and recordation taxes and
Chicago Suites Supp-10
<PAGE>
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 Chicago Suites 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 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 Chicago Suites after the Initial Valuation
Date to perform deferred maintenance that were previously subtracted in
determining the estimated Adjusted Appraised Value of Chicago Suites and (iii)
to reflect any changes in Chicago Suites' other reserves, such as for
litigation expenses and indemnification costs and any revised estimates of
transfer and recordation taxes and fees. The General Partner does not believe
that any adjustments to the Exchange Value will be material; however, if any
such changes are deemed to be material, the General Partner will provide the
Chicago Suites Limited Partners an opportunity to change their vote on the
Merger.
APPRAISED VALUE. Chicago Suites' Hotel was 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
Chicago Suites' Hotel. The appraisal (the "Appraisal") was reviewed by a
Member Appraisal Institute ("MAI") appraiser and certified by such MAI
appraiser as having been prepared in accordance with the requirements of the
Standards of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
The purpose of the Appraisal is to provide an estimate of the "Market Value"
of the 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 a site visit at Chicago Suites' Hotel for purposes of the Appraisal.
In preparing the Appraisal, 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 Chicago Suites' 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 Hotel. AAA also
prepared a projection of the net operating income prior to incentive
management fees and certain capital expenditures for the 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 Hotel. The resulting gross margin (ratio
of total revenues to NOI prior to incentive management fees) was checked
against AAA's database of the gross margins for similar hotels for
reasonableness.
Chicago Suites Supp-11
<PAGE>
. 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. 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
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
the 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 effective capitalization rates for 1997
and Projected Year's Adjusted NOI resulting from AAA's estimated
Appraised Value of Chicago Suites' Hotel.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISAL OF CHICAGO SUITES'
HOTEL
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.4% 10.3%
</TABLE>
The resulting Appraised Value of Chicago Suites' Hotel, as estimated by
AAA, is $34,300,000.
. Comparison with Comparable Sales. AAA checked the Appraised Value of the
Hotel derived by the foregoing procedures against its database of
comparable sale transactions for reasonableness.
Chicago Suites' Hotel was encumbered by a ground lease as of the date of the
Appraisal. Accordingly, the Appraised Value of the Hotel has been decreased to
reflect the encumbrance of the ground lease and the interest of the ground
lessor in the operating cash flows of the Hotel. The Appraised Value assumes
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 Chicago Suites' Hotel (but estimated deferred maintenance
costs have been deducted in estimating the Adjusted Appraised Value of Chicago
Suites' Hotel). The Appraised Value did not take into account the costs that
might be incurred in selling the Hotel (but estimated costs for transfer and
recordation taxes and fees have been deducted in estimating the Adjusted
Appraised Value of the Hotel).
The Appraisal is not a guarantee of present or future values and no
assurance can be given as to the actual value of Chicago Suites' Hotel. The
Appraisal should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of Chicago Suites.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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
Chicago Suites Supp-12
<PAGE>
and unanticipated events and circumstances will occur subsequent to the date
of the Appraisal. Furthermore, the actual results achieved from Chicago
Suites' Hotel will vary from the results projected in the Appraisal and the
variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of Chicago Suites was
determined by making various adjustments to the Appraised Value of Chicago
Suites' Hotel, as described below.
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Merger) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of Chicago Suites has been
subtracted from the Appraised Value.
. Mark to Market Adjustment. 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 Chicago Suites, the estimated
Adjusted Appraised Value for Chicago Suites has been increased 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 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.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to the
Chicago Suites' Hotel has 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 the Appraised Value.
. Transfer and Recordation Taxes and Fees. The estimated transfer and
recordation taxes and fees required to be paid by Chicago Suites in
connection with the Merger have been subtracted from the Appraised Value.
The following table sets forth the adjustments to the Appraised Value made
to derive the estimated Adjusted Appraised Value for Chicago Suites as of the
Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR CHICAGO SUITES
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value.................................................. $ 34,300
Mortgage debt.................................................... (22,284)
Other debt....................................................... (464)
Mark to market adjustment........................................ 94
Deferred maintenance costs....................................... (46)
Transfer taxes................................................... (274)
--------
Estimated Adjusted Appraised Value............................... $ 11,326
========
General Partner's share(1)....................................... $ 113
Limited partner share of Host subsidiaries(2).................... $ 0
Total Limited partners' share(3)................................. $ 11,213
Per Partnership Unit............................................. $ 33,133
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
Chicago Suites Supp-13
<PAGE>
CONTINUATION VALUE. AAA estimated the Continuation Value of Chicago Suites
using the following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for Chicago Suites 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 Appraisal and for each
subsequent year applying an assumed annual stabilized growth rate (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 Chicago Suites' 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 Chicago Suites FF&E reserve was adequate and understood that
Host determined that there were no reserve shortfalls or surpluses.
. Refinancing Assumptions. AAA assumed that Chicago Suites' first mortgage
loan, which matures in 2001, would be refinanced with interest rate at
7.25% per annum and a 20-year amortization schedule, with estimated
refinancing costs of 2% of the refinanced amount being paid from
operating cash flow.
. Determination of Residual Value. To estimate the residual value of the
Chicago Suites limited partners' interest in Chicago Suites at the end of
the 12-year period, AAA assumed that the Hotel would be sold as of
December 31, 2009 at its then market value. AAA estimated the market
value of the 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% 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 Chicago Suites' partners. AAA then determined what
portion of such estimated net sales proceeds would be distributable to
Chicago Suites' limited partners under the partnership and debt
agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to Chicago Suites
limited partners from operations and estimated net sales proceeds 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for Chicago Suites are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR CHICAGO SUITES
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
EXIT CAPITALIZATION RATE CONTINUATION GENERAL LIMITED CONTINUATION VALUE
GROWTH RATE (2009) VALUE PARTNER'S SHARE PARTNERS' SHARE (PER PARTNERSHIP UNIT)
- ----------- ------------------------- ------------ --------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
3.7% 9.9% $8,962 $558 $8,404 $24,184
</TABLE>
LIQUIDATION VALUE. The Liquidation Value of Chicago Suites was estimated by
the General Partner and represents the estimated value of Chicago Suites if
all of its assets were sold as of December 31, 1998. Such value was based upon
the Adjusted Appraised Value of Chicago Suites, 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
Chicago Suites Supp-14
<PAGE>
debt in fact can be prepaid on December 31, 1998) were deducted from the
Appraised Value and (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 Chicago Suites Hotel was
subtracted from the Appraised Value for estimated liquidation costs, expenses
and contingencies. The General Partner then determined the portion of the
estimated Liquidation Value that would be distributable to Chicago Suites
limited partners under the terms of the partnership agreement and other
contractual arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of Chicago Suites as of the
Initial Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF CHICAGO SUITES
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................. $ 34,300
Mortgage debt................................................... (22,284)
Other debt...................................................... (464)
Deferred maintenance costs...................................... (46)
Sales costs..................................................... (858)
--------
Estimated Liquidation Value..................................... $ 10,648
========
General Partner's share(1)...................................... $ 107
Limited partner share of Host subsidiaries(2)................... $ 0
Total limited partners' share(3)................................ $ 10,541
Per Partnership Unit............................................ $ 31,149
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of Chicago Suites (based upon the greatest of its estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value), the estimated minimum of OP Units to be received (based
upon the maximum price of $ per OP Unit) and the estimated Note Election
Amount for Chicago Suites, all on a per Partnership Unit basis as of the
Initial Valuation Date. The number of Common Shares received in exchange for
OP Units in connection with the Merger will equal the number of OP Units. The
estimated Note Election Amount for Chicago Suites (which will be received by
Chicago Suites Limited Partners electing to receive Notes in exchange for OP
Units) is equal to the Liquidation Value for Chicago Suites. 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 Chicago Suites 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 (but will not be less than $ or greater than $ per OP Unit)
and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUE,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
OF CHICAGO SUITES PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED ESTIMATED ESTIMATED MINIMUM ESTIMATED
ADJUSTED APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NOTE ELECTION
VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
------------------ ------------ ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$33,133 $24,184 $31,149 $33,133 2,209 $31,149
</TABLE>
- --------
(1) A Partnership Unit in Chicago Suites represents an original investment of
$35,000.
(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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Chicago Suites Supp-15
<PAGE>
Price of OP Units to Pay Exchange Value to Chicago Suites Limited
Partners. Each Chicago Suites Limited Partner will receive OP Units with a
deemed value equal to the Exchange Value of such Chicago Suites 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 will it be less than $ or greater than $ per OP Unit). Thus, if the
20-day average trading price is less than $ , the price per OP Unit in the
Merger would be $ , and if such average trading price is greater than $ ,
the price per OP Unit in the Merger would be $ . The OP Units will be
delivered to the Chicago Suites Limited Partners promptly after the twentieth
trading day following the Effective Date of the Merger (which would be
promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998).
Chicago Suites Limited Partners at the Effective Date of the Merger who
retain OP Units will receive cash distributions from Chicago Suites for all of
1998 and, if the Merger does not occur in 1998, any portion of 1999 prior to
the Merger for which period they do not receive a cash distribution from the
Operating Partnership. Cash distributions will be made by Chicago Suites in
accordance with its partnership agreement on or before June 1, 1999 in respect
of 1998 operations and, if the Merger does not occur prior to January 1, 1999,
within 90 days after the Effective Date of the Merger in respect of any 1999
operations. Chicago Suites Limited Partners at the Effective Date of the
Mergers who receive Common Shares in exchange for OP Units in connection with
the Merger will participate in the same distributions from Chicago Suites as
Chicago Suites Limited Partners who retain OP Units and will receive
distributions from Host REIT with respect to periods after the Effective Date
of the Mergers, which distributions are expected to equal the amount
distributed with respect to the OP Units for such periods. Chicago Suites
Limited Partners at the Effective Date of the Merger who receive Notes in
connection with the Merger in exchange for OP Units will participate in the
same distributions from Chicago Suites 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 Merger because they will be
entitled to receive interest on their Notes for such periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S INTEREST IN CHICAGO SUITES AND
ALLOCATION OF OP UNITS TO THE GENERAL PARTNER
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the Chicago Suites Limited Partners'
Partnership Interests, by the same methodologies set forth above and giving
effect to the applicable distribution preferences in the Chicago Suites
partnership agreement. The number of OP Units that will be received by the
General Partner will be equal to the value of its interest in Chicago Suites
divided by the same price per OP Unit used to determine the number of OP Units
to be received by the Chicago Suites Limited Partners.
The following table sets forth the estimated value of the interest of the
General Partner in Chicago Suites based upon the estimated aggregate Exchange
Value of the Chicago Suites Limited Partners' Partnership Interests as of the
Initial Valuation Date and the minimum number of OP Units estimated to be
received by the General Partner in respect thereof.
ESTIMATED VALUES OF THE GENERAL PARTNER'S INTEREST AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value............................................... $11,326
Limited partners' share of aggregate Exchange Value.................... 11,213
-------
Value of General Partner's interest(1)................................. $ 113
-------
Total interest of General Partner...................................... $ 113
=======
Minimum Number of OP Units(2).......................................... 8
</TABLE>
- --------
(1) Excludes limited partner interests owned by the General Partner.
(2) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
Chicago Suites Supp-16
<PAGE>
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of Chicago Suites and recommends that all
Limited Partners of Chicago Suites consent to the Merger. The General Partner
bases this recommendation primarily on (i) its view that the expected benefits
of the Merger for the Chicago Suites Limited Partners outweigh the risks and
potential detriments of the Merger to the Chicago Suites Limited Partners (see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons for
the Mergers" and "Risk Factors"), (ii) its view that the value of the OP Units
allocable to the Chicago Suites Limited Partners on the basis of the Exchange
Value established for Chicago Suites represents fair consideration for the
Partnership Interests held by the Chicago Suites Limited Partners and is fair
to the Chicago Suites Limited Partners from a financial point of view and
(iii) the Appraisal and Fairness Opinion of AAA. See "--Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the Chicago Suites Limited Partners,
individually and as a whole, if it is consummated with any combination of
other Participating Partnerships. The General Partner bases this belief
primarily on the fact that the consideration to be paid to the Chicago Suites
Limited Partners has been established based upon Chicago Suites' Exchange
Value, without regard to any possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for Chicago
Suites, represents fair consideration for the Partnership Interests of
the Chicago Suites Limited Partners in the Merger in relation to Chicago
Suites because the Exchange Value is equal to the greatest of the
Adjusted Appraised Value, Continuation Value and Liquidation Value, each
of which is an acceptable method for determining the fair market value of
a Partnership's assets. The General Partner also has concluded that the
Exchange Value established for the Chicago Suites Limited Partners fairly
reflects the value of the assets held by Chicago Suites. In addition, the
General Partner's own analysis, as well as the Fairness Opinion, support
these conclusions.
. Chicago Suites Limited Partners who retain OP Units will be able to defer
recognition of gain for tax purposes until such time as they choose to
realize such gain based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the Chicago Suites 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
Merger for the Chicago Suites Limited Partners, as described in "Risk
Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
Chicago Suites Limited Partners should consider carefully and does not
conclude that the Exchange Value is the best price that could be
obtained. 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 Merger.
. The General Partner believes that the economic terms of the lease of the
Chicago Suites Hotel are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the Chicago Suites
Limited Partners.
Chicago Suites Supp-17
<PAGE>
. The General Partner believes that the value of the consideration to be
received by the Chicago Suites Limited Partners in the Merger 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 Chicago Suites is equal to its
Adjusted Appraised Value, which is the greatest of the Adjusted Appraised
Value, the Continuation Value and the Liquidation Value and the historic
prices paid for Chicago Suites Partnership Units. The General Partner
does not believe that the sale of Chicago Suites' Hotel and liquidation
of Chicago Suites would obtain for Chicago Suites' Limited Partners as
much value as the value to be received by such Chicago Suites Limited
Partners following the Merger. The General Partner believes that the
following benefits are of the greatest value and importance to the
Chicago Suites Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer Chicago
Suites Limited Partners liquidity with respect to their investment
in Chicago Suites because Chicago Suites Limited Partners can
receive freely tradeable Host REIT Common Shares in connection with
the Mergers, or for Chicago Suites Limited Partners who retain OP
Units, at any time commencing one year following the Effective Date,
by exercising their Unit Redemption Right, 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 $3.6 billion after
giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host REIT Common Share). The election to
exchange OP Units for Common Shares in connection with the Mergers,
or 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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host REIT will make
regular quarterly cash distributions to holders of Common Shares.
Host expects that these distributions will be higher than the
estimated cash distributions for 1998 of Chicago Suites and, in any
event, the ability to receive distributions quarterly and in regular
amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
Chicago Suites Limited Partner's investment will be converted from
an investment in Chicago Suites, which owns one hotel, into an
investment in an enterprise that initially will own or control
approximately 125 Hotels and will have a total market capitalization
of approximately $3.6 billion, thereby reducing the dependence upon
the performance of, and the exposure to the risks associated with,
the Hotel currently owned by Chicago Suites 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 generally will have a significantly lower
leverage to value ratio, approximately 53%, than Chicago Suites
currently, which has a leverage ratio of 66% (calculated as a
percentage of Exchange Value), resulting in significant interest and
debt service savings and greater financial stability.
. Substantial Tax Deferral. The General Partner expects that Chicago
Suites Limited Partners who do not elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 Chicago Suites or a sale or other
disposition of its assets in a taxable transaction.
The General Partner believes that the factors described above, which support
the fairness of the Merger to the Chicago Suites Limited Partners, when
weighed against the factors that may be disadvantageous, taken as a whole,
indicate that the Merger is fair to the Chicago Suites Limited Partners.
Chicago Suites Supp-18
<PAGE>
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 Chicago Suites and
each other 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 Chicago Suites
Limited Partners and the Limited Partners of each other Partnership and
(ii) the methodologies used to determine the value of an OP Unit and to
allocate the equity in the Operating Partnership to be received by the limited
partners of Chicago Suites and the limited partners of each other Partnership
are fair and reasonable to the Chicago Suites Limited Partners and the Limited
Partners of each other Partnership. The Fairness Opinion is addressed to each
Partnership and it may be relied upon by each of the Chicago Suites Limited
Partners and the Limited Partners of the other 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 the Consent Solicitation and should be read in its entirety. The
material assumptions and qualifications to the Fairness Opinion are summarized
below, although this summary does not purport to be a complete description of
the various inquiries and analyses undertaken by AAA in rendering the Fairness
Opinion. Arriving at a fairness opinion is a complex analytical process not
necessarily susceptible to partial analysis or amenable to summary
description. For a more complete description of the assumptions and
qualifications that limit the scope of the Fairness Opinion, see "--
Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 Chicago Suites and the
other Partnerships might not have been more favorable to the Limited Partners
in certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of Chicago Suites' and each other
Partnership's contingent liabilities.
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
Chicago Suites Supp-19
<PAGE>
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partner selected AAA, on
the basis of the proposals, 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.
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 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
Chicago Suites Supp-20
<PAGE>
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 as of March 1, 1998. AAA
did not conduct any subsequent due diligence or valuation procedures.
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 used to determine the
Exchange Value, the Adjusted Appraised Value, the Continuation Value and the
Liquidation Value each Partnership (including, without limitation, the
assumptions used to determine the various adjustments to the Appraised Values
of each of the Hotels) are fair and reasonable, from a financial point of
view, to the Chicago Suites Limited Partners and the Limited Partners of each
other Partnership and (ii) the methodologies used to determine the value of an
OP Unit and to allocate the equity interest in the Operating Partnership to be
received by the Chicago Suites limited partners and the limited partners of
each other Partnership are fair and reasonable to the Chicago Suites Limited
Partners and the Limited Partners of each other Partnership.
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.
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by Chicago Suites. Chicago Suites has not
paid any cash distributions to its Limited Partners in the First Two Quarters
1998 and for the fiscal years 1993 through 1997.
Compensation and Distributions to the General Partner. Under Chicago Suites'
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of Chicago Suites but the
General Partner and its affiliates are reimbursed for certain costs and
expenses incurred on behalf of Chicago Suites. In addition, the General
Partner is entitled to distributions related to its interests in Chicago
Suites. The following information has been prepared to compare the amount of
reimbursements paid and cash distributions made by Chicago Suites to the
General Partner and its affiliates to the amounts that would have been paid if
the reimbursement and distribution structure which will be in effect after the
REIT Conversion had been in effect for the periods presented.
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). Marriott
International receives management fees and other reimbursements from Chicago
Suites under the Management Agreement.
The following table sets forth the reimbursements and distributions paid by
Chicago Suites to its General Partner and the payments made to Marriott
International 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 Partner and the payments made to Marriott International
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 $0.81 per year during such
period, which is the expected minimum distribution for 1999.
Chicago Suites Supp-21
<PAGE>
HISTORICAL AND PRO FORMA REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL
PARTNER AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO FISCAL YEAR
QUARTERS ---------------------------------------
1998 1997 1996 1995
----------------- ----------------- ---------- ----------
PRO PRO
HISTORICAL FORMA HISTORICAL FORMA HISTORICAL HISTORICAL
---------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(1)....... $ 82 $-- $ 59 $-- $ 119 $ --
Distributions(2)........ -- 3 -- 6 -- --
Payments made to
Marriott
International.......... 1,048 1,048 1,822 1,822 1,149 1,000
------ ------ ------ ------ ------ ------
Total .............. $1,130 $1,051 $1,881 $1,828 $1,268 $1,000
====== ====== ====== ====== ====== ======
</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 Partner on a pro forma
basis reflect distributions at a rate of $0.81 per annum per OP Unit
(which is the expected minimum distribution per OP Unit for 1999) with
respect to the estimated number of OP Units that the General Partner will
receive with respect to its general and limited partner interests in
Chicago Suites. Such number does not reflect the aggregate number of OP
Units Host REIT will receive in connection with the REIT Conversion.
CERTAIN INFORMATION REGARDING THE HOTEL OWNED BY CHICAGO SUITES
<TABLE>
<CAPTION>
NUMBER OF DATE
NAME OF HOTEL LOCATION OF HOTEL ROOMS OPENED
- ------------- ----------------- --------- ------
<S> <C> <C> <C>
Marriott Suites O'Hare...................... Chicago, IL 256 1988
</TABLE>
The table below sets forth certain performance information for Chicago
Suites' Hotel for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -------------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average daily rate............. $ 159.98 $ 142.86 $146.83 $128.74 $120.80
Occupancy...................... 82.0% 83.4% 83.2% 84.0% 81.4%
REVPAR......................... $ 131.18 $ 119.15 $122.16 $108.14 $ 98.33
% REVPAR change................ 10.1% -- 13.0% 10.0% --
</TABLE>
Marriott Suites O'Hare Hotel, Chicago, Illinois
The Marriott Suites O'Hare Hotel is a full-service Marriott suites hotel
located approximately ten miles northwest of downtown Chicago and two miles
east of O'Hare International Airport (the "Airport") on approximately four
acres of leased land. The Hotel is part of the 29-acre Riverway office and
retail park developed by Simon/Rosemont Developers.
The Hotel opened in November 1988 with 256 guest suites. The Hotel has
approximately 2,600 square feet of meeting space including a 2,000 square foot
meeting room and 600 square foot board room. There is one food and beverage
outlet available in the Hotel, which includes a 94-seat restaurant, 20-seat
private dining restaurant and 33-seat lounge. Recreational amenities include
an indoor pool, a whirlpool and an exercise room. The Hotel also offers a gift
shop and parking for 272 vehicles on site. Chicago Suites purchased the Hotel
in 1989 for approximately $35 million.
Competition. The following table provides selected data on the Hotel and its
seven main competitors in the vicinity of the Airport:
Chicago Suites Supp-22
<PAGE>
<TABLE>
<CAPTION>
NUMBER YEAR OF MEETING SPACE
PROPERTY OF ROOMS OPENING (SQUARE FOOTAGE)
-------- -------- ------- ----------------
<S> <C> <C> <C>
O'HARE SUITES............................ 256 1988 2,600
Hyatt Regency............................ 1,100 1971 81,600
Hilton................................... 856 1972 33,900
O'Hare Marriott.......................... 681 1968 27,000
Westin................................... 525 1984 38,700
Sofitel.................................. 300 1987 20,300
Sheraton Gateway Suites.................. 297 1986 12,500
Rosemont Suites.......................... 296 1987 6,800
</TABLE>
The O'Hare Marriott is owned by Host and managed by Marriott International,
and other than limited joint marketing efforts, the Hotel and the O'Hare
Marriott are direct competitors. In addition, other hotels in the Chicago area
also compete with the Hotel; however, these differ in terms of size, room
rates, facilities, market orientation and/or location. New competition is
expected to open in the area in the near future; however, it is expected to
have minimal impact on the Hotel as it appeals to a different segment of the
market.
Ground Lease. The Hotel is located on a 4.3-acre site that is leased from an
unrelated third party for an initial term expiring in 2014. The Ground Lease
may be renewed at the option of the Partnership for five successive terms of
ten years each. The lease provides for annual rental during its term equal to
the greater of $300,000 or 3% of annual gross room sales. Under the lease, the
Partnership pays all costs, expenses, taxes and assessments relating to the
land, including real estate taxes. The Partnership has a first right of
negotiation in the event the ground lessor decides to sell the leased
premises. Upon expiration or termination of the Ground Lease, title to the
land and all improvements, including the Hotel, reverts to the ground lessor.
AMENDMENTS TO THE CHICAGO SUITES' PARTNERSHIP AGREEMENT
In order to allow the Hotel of Chicago Suites to be leased to Crestline in
connection with the Merger and the REIT Conversion, Chicago Suites'
partnership agreement must be amended to allow for the lease of Chicago
Suites' Hotel in connection with the REIT Conversion. Therefore, Section 5.02B
of Chicago Suites' partnership agreement will be amended to restate paragraph
5.02B(ii) in its entirety:
(ii) sell, lease or otherwise dispose (or consent to the sale, lease or
other disposition), directly or indirectly, in one transaction or a series
of related transactions, of the Hotel.
Other Amendments. Amendments to certain terms and sections of the Chicago
Suites partnership agreement would be made in order to make any other
amendments to the Chicago Suites partnership agreement deemed necessary or
advisable, in the sole discretion of the General Partner, in connection with
the consummation of the Merger and the REIT Conversion. The form of amendment
to the Chicago Suites partnership agreement is attached as an exhibit to the
Registration Statement of which this Supplement is a part.
VOTING PROCEDURES
Chicago Suites Limited Partners will be asked to vote separately on the
Merger and the proposed amendments to the partnership agreement, but Chicago
Suites will not participate in the Merger unless both proposals are approved.
The consent of Limited Partners holding more than 50% of the outstanding
limited partner interests is required for participation in the Merger and with
respect to the related amendments to the partnership agreement. The General
Partner does not own any limited partner interests.
Chicago Suites Supp-23
<PAGE>
At the time of voting, Chicago Suites Limited Partners will be asked to
indicate whether they wish to retain OP Units or elect to exchange their OP
Units for Common Shares or a Note in connection with the Merger. The OP Units
will be delivered to the Chicago Suites Limited Partners promptly after the
twentieth trading day following the Effective Date of the Merger (which would
be promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998). See "Determination of Exchange Value of Chicago Suites and
Allocation of OP Units."
A Chicago Suites Limited Partner may mark the Consent Form to vote "FOR,"
"AGAINST" or "ABSTAIN" with respect to participation in the Merger by Chicago
Suites and "FOR," "AGAINST" or "ABSTAIN" with respect to the amendments to the
partnership agreement. THE FAILURE OF A LIMITED PARTNER OF CHICAGO SUITES TO
VOTE OR AN ABSTENTION WILL HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER HAD
VOTED HIS PARTNERSHIP INTERESTS "AGAINST" THE MERGER AND "AGAINST" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENT. LIMITED PARTNERS WHO RETURN A SIGNED
CONSENT FORM BUT FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY
MATTER (INCLUDING THE MERGER AND THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT)
WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER. The voting procedures
applicable to Chicago Suites' Limited Partners are set forth in the Consent
Solicitation under the heading "Voting Procedures--Required Vote and Other
Conditions."
As of June 19, 1998, the following persons owned more than 5% of the total
number of Partnership Units of Chicago Suites: Marriott Suite Hotel
Association owned 8.80%; Landmark Capital LLC owned 7.51%; and Michael T.
Sullivan owned 7.46%. No other person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of Partnership
Units of Chicago Suites.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," Chicago Suites Limited Partners
should read carefully the following discussion of federal income tax
consequences applicable specifically to the Chicago Suites Limited Partners.
The information included in this discussion is based upon various factual
assumptions and information which are believed by the Operating Partnership
and the General Partner to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances
will occur. Therefore, there likely will be differences between the
information provided herein, including the numerical data and estimates, and
actual results, and the variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the Chicago Suites' Limited Partners resulting from the
Mergers and the REIT Conversion. The opinion letter is based upon certain
assumptions and certain 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 Hotels contributed to the Operating
Partnership by Host and the Blackstone Entities prior to the Mergers and the
REIT Conversion and of Host REIT, the Operating Partnership and the
Partnerships following the Mergers and the REIT Conversion. In addition, prior
to 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 to the Consent Solicitation) as to the qualification and taxation of Host
REIT as a REIT under the Code following the REIT Conversion. The receipt of
this opinion letter is a condition to the REIT Conversion and each of the
Mergers. See "Federal Income Tax Consequences--Summary of Tax Opinions" in the
Consent Solicitation.
Chicago Suites Supp-24
<PAGE>
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the
Chicago Suites Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to a Chicago Suites Limited Partner (i) who does not elect to
receive Common Shares (the "Common Share Election") or a Note (the "Note
Election") in exchange for his OP Units in connection with the Merger; (ii)
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 Merger; (iii) who does not
receive a cash distribution (or a deemed cash distribution resulting from
relief from liabilities, including as a result of any prepayment of the
Chicago Suites Mortgage Debt) in connection with the Merger or the REIT
Conversion in excess of his aggregate adjusted basis in his Chicago Suites
Partnership Units at the time of the Merger; (iv) who is not required to
recognize gain by reason of the exercise by another Chicago Suites Limited
Partner of his right to make the Common Share Election or the Note Election;
and (v) who does not have his "at risk" amount fall below zero as a result of
the Merger or the REIT Conversion. See "Federal Income Tax Consequences--
Summary of Tax Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) a
Chicago Suites Limited Partner who acquired his Chicago Suites Partnership
Units in the original offering of such Partnership Units and who has held such
Partnership Units at all times since would not be considered to receive, as a
result of the Merger, a distribution (or a deemed cash distribution resulting
from relief from liabilities) that exceeds his aggregate adjusted basis in his
Chicago Suites Partnership Units at the time of the Merger, and would not have
his "at risk" amount fall below zero as a result of the Merger, even if all of
the Chicago Suites Mortgage Debt were to be repaid in connection with the
Merger or the REIT Conversion, and (ii) none of the personal property owned by
Chicago Suites will need to be sold to a Non-Controlled Subsidiary in
connection with the REIT Conversion. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Overview" in the Consent Solicitation.
With respect to the effects of a Chicago Suites Limited Partner's election
to receive Common Shares or a Note in exchange for his OP Units in connection
with the Merger, Hogan & Hartson is of the opinion that although the matter is
not free from doubt, a Chicago Suites Limited Partner who does not make the
Common Share Election or the Note Election should not be required to recognize
gain by reason of another Chicago Suites
Chicago Suites Supp-25
<PAGE>
Limited Partner's exercise of either of such rights. With respect to the
exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion that it
is more likely than not that a Chicago Suites Limited Partner's exercise of
his Unit Redemption Right more than one year after the date of consummation of
the Merger but less than two years after such date will not cause the Merger
itself to be a taxable transaction for the Chicago Suites Limited Partner (or
the other Chicago Suites Limited Partners). See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation. Opinions
of counsel, however, do not bind the IRS or the courts, and no assurances can
be provided that such opinions will not be challenged by the IRS or will be
sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
Chicago Suites Partnership Units, a Chicago Suites Limited Partner will
receive no actual cash distribution in connection with the Merger but would be
deemed to receive a cash distribution in connection with the Merger to the
extent that his share of Operating Partnership liabilities immediately after
the Merger and the REIT Conversion is less than his share of Chicago Suites
liabilities immediately prior to the Merger. For example, any prepayment of
the Chicago Suites Mortgage Debt or debt encumbering other Hotels may result
in a deemed cash distribution to the Chicago Suites Limited Partners. See
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Relief from
Liabilities/Deemed Cash Distribution" in the Consent Solicitation. Even though
the Chicago Suites Mortgage Debt and the debt encumbering other Hotels is not
expected to be repaid or refinanced in connection with the Mergers and the
REIT Conversion (except as described in the Consent Solicitation), a Chicago
Suites Limited Partner's share of indebtedness following the Mergers and the
REIT Conversion may nonetheless decrease in comparison to the Limited
Partner's estimated aggregate share of Chicago Suites indebtedness as
ofDecember 31, 1998 (calculated based on the assumption that the Mergers did
not occur) by reason of themanner in which the debt allocation rules work when
multiple assets with different levels of leverage are consolidated into a
single partnership.
A Chicago Suites Limited Partner, however, would recognize taxable gain as a
result of any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his Chicago Suites
Partnership Units immediately prior to the Merger. As noted above, the
Operating Partnership and the General Partner believe, based upon and subject
to the assumptions and other limitations described below, that a Chicago
Suites Limited Partner who acquired his Chicago Suites Partnership Units in
the original offering of such Partnership Units and has held the Partnership
Units at all times since the offering will have an adjusted tax basis in
excess of the deemed cash distribution that might occur in connection with the
Merger and the REIT Conversion, even if all of the Chicago Suites Mortgage
Debt were to be repaid in connection with the Merger and the REIT Conversion,
and the Chicago Suites Limited Partner were to have no share of any Operating
Partnership indebtedness following the Merger and the REIT Conversion.
Therefore, such a Chicago Suites Limited Partner should not recognize gain due
to such deemed cash distribution resulting from the relief from liabilities in
connection with the Merger and the REIT Conversion in any event.
The adjusted tax basis of a Chicago Suites Limited Partner who did not
acquire his Chicago Suites Partnership Units in the original offering of such
Partnership Units or who has not held his Chicago Suites Partnership Units at
all times since such offering could vary materially from that of a Chicago
Suites Limited Partner who did so. If a Chicago Suites Limited Partner has an
adjusted tax basis in his Chicago Suites Partnership Units (per Chicago Suites
Partnership Unit) that is substantially less than the adjusted tax basis of a
Chicago Suites Limited Partner who acquired his Chicago Suites Partnership
Units in the original offering of such Partnership Units and has held such
Partnership Units at all times since, he could recognize gain due to any
deemed cash distribution resulting from the relief from liabilities in
connection with the Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the Chicago Suites Mortgage Debt or, except as described in the
Consent Solicitation, any of the nonrecourse liabilities encumbering the
Hotels owned by the other Partnerships (other than with the proceeds of
indebtedness that would be considered nonrecourse liabilities allocable to the
Hotel being refinanced). The Operating Partnership, however, will have to
repay mortgage indebtedness securing the Hotels owned by the Partnerships at
the time such
Chicago Suites Supp-26
<PAGE>
indebtedness matures. There can be no assurance that at such time the
Operating Partnership will be able to secure nonrecourse mortgage indebtedness
secured only by those Hotels in an amount sufficient to avoid a deemed cash
distribution to the former Limited Partners in those Partnerships, including
Chicago Suites (although such a deemed distribution of cash may or may not
result in the recognition of taxable income or gain by the former Chicago
Suites Limited Partners). Moreover, 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 debt as 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. 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 (including the
Chicago Suites Mortgage Debt), would be considered to be "secured" by those
Hotels for purposes of allocating the liabilities for tax basis purposes (and
thus would be allocable, at least in substantial part, to the former Limited
Partners in the Partnerships owning those Hotels, including the Chicago Suites
Limited Partners), 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.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner may be required to include in gross income, or
"recapture," losses previously allowed to such partner with respect to his
investment in a partnership if the amount for which the partner is "at risk"
in relation to his investment in the partnership is less than zero at the
close of the taxable year.
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Mergers
and the REIT Conversion could, singularly or in combination, cause a Chicago
Suites Limited Partner's amount at risk in relation to his investment in
Chicago Suites (and, after the Mergers, in the Operating Partnership) to be
reduced below zero, resulting in an income inclusion to the Limited Partner
under Section 465(e) of the Code. Currently, a sufficient portion of the
current debt of Chicago Suites constitutes "qualified nonrecourse financing"
so that the Chicago Suites Limited Partners have positive at risk amounts. The
Operating Partnership and the General Partner believe, based upon and subject
to the assumptions and other limitations described below, that a Chicago
Suites Limited Partner who acquired his Chicago Suites Partnership Units in
the original offering of such Partnership Units and has held the Partnership
Units at all times since will have a positive at risk amount immediately
following the Mergers and the REIT Conversion, even if all of the Chicago
Suites Mortgage Debt were to be repaid in connection with the Mergers and the
REIT Conversion and the Chicago Suites Limited Partners were to have no share
of any other "qualified nonrecourse financing" following the Mergers and the
REIT Conversion.
It is possible, however, that a former Chicago Suites Limited Partner's at
risk amount could decline in the future, either because of the allocation of
losses from the Operating Partnership to that former Chicago Suites Limited
Partner or because of cash distributions by the Operating Partnership to that
former Chicago Suites Limited Partner in excess of the taxable income
allocable to him with respect to his OP Units. In that event, it may be
necessary for the former Chicago Suites Limited Partner to have a share of
"qualified nonrecourse financing" from the Operating Partnership in order to
avoid recognizing income by reason of his at risk amount falling below zero.
Moreover, there can be no assurance that debt incurred by the Operating
Partnership in the future to refinance the Chicago Suites Mortgage Debt or
outstanding mortgage debt of the other Hotel Partnerships or the Hotels
contributed by the Blackstone Entities will qualify as "qualified nonrecourse
Chicago Suites Supp-27
<PAGE>
financing." 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 debt as 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. If,
however, the Operating Partnership were to obtain the requested ruling from
the IRS and were to refinance existing mortgage indebtedness of the
Partnerships with the type of indebtedness described in the ruling, such
indebtedness should constitute "qualified nonrecourse financing" for purposes
of the "at risk" rules.
Impact of Assumption of Chicago Suites Liabilities by the Operating
Partnership. As described in the Consent Solicitation, see "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Disguised Sale Regulations," a
Chicago Suites Limited Partner will recognize gain to the extent he is treated
as having sold all or part of his Chicago Suites Partnership Interest in a
"disguised sale." 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. 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" also will not be treated as part of
a disguised sale. A "qualified liability" in connection with a transfer of
property to a partnership includes (i) any liability incurred more than two
years prior to the earlier of the transfer of the property or the date the
partner agrees in writing to the transfer, as long as the liability has
encumbered the transferred property throughout the two-year period; (ii) a
liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within the
two-year period prior to the earlier of the date the partner agrees in writing
to transfer the property or the date the partner transfers the property to a
partnership and that has encumbered the transferred property since it was
incurred; (iii) a liability that is traceable under the Treasury Regulations
to capital expenditures with respect to the property; and (iv) a liability
that was incurred in the ordinary course of the trade or business in which
property transferred to the partnership was used or held, but only if all the
assets related to that trade or business are transferred, other than assets
that are not material to a continuation of the trade or business. However, a
recourse liability is not a "qualified liability" unless the amount of the
liability does not exceed the fair market value of the transferred property
(less any other liabilities that are senior in priority and encumber such
property or any allocable liabilities described in (iii) or (iv), above) at
the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of Chicago Suites fall
into one of the four categories of "qualified liabilities" described above
and, accordingly, that the mere assumption by the Operating Partnership of the
outstanding liabilities of Chicago Suites will not give rise to a "disguised
sale" by any of the Chicago Suites Limited Partners.
Tax Treatment of Chicago Suites Limited Partners Who Hold OP Units Following
the Merger
Initial Basis in Units. In general, a Chicago Suites Limited Partner will
have an initial tax basis in his OP Units received in the Merger with respect
to his Chicago Suites Partnership Units equal to the basis in his Chicago
Suites Partnership Units at the time of the Merger, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of Chicago
Suites liabilities and increased to reflect his share of other liabilities of
the Operating Partnership and any gain required to be recognized in connection
with the Merger and the REIT Conversion. For a discussion of the federal
income tax consequences for a Chicago Suites Limited Partner from a reduction
in basis that may result from the Merger and the REIT Conversion, see "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--Initial Tax Basis of OP Units" in the Consent
Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of Marriott Suites
O'Hare Hotel. 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
Chicago Suites Supp-28
<PAGE>
contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of contribution. The
amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the
time of contribution and the adjusted tax basis of such property at the time
of contribution (referred to as the "Book-Tax Difference"). The Operating
Partnership and the General Partner estimate, based upon and subject to the
assumptions and other limitations described below, that the Book-Tax
Difference for all Chicago Suited Limited Partners (including the one percent
limited partnership interest held by MB Investment Properties, Inc. but
excluding all of Host's interests) with respect to the Marriott Suites O'Hare
Hotel will be $5,114,829 upon the consummation of the Merger.
If the Operating Partnership were to sell the Marriott Suites O'Hare Hotel,
the former partners of Chicago Suites (including Host REIT with respect to the
interests in Chicago Suites currently held indirectly by Host through the
General Partner) would be specially allocated by the Operating Partnership an
aggregate amount of taxable gain equal to the aggregate Book-Tax Difference
with respect to the Marriott Suites O'Hare Hotel. The share of such gain
allocable to a Chicago Suites Limited Partner who acquired his Chicago Suites
Partnership Units in the original offering of such Partnership Units and held
such Partnership Units at all times since would be $15,655 per Chicago Suites
Partnership Unit. The share of such gain of a Chicago Suites Limited Partner
who did not acquire his Chicago Suites Partnership Units in the original
offering of such Partnership Units or who has not held his Chicago Suites
Partnership Units at all times since such offering could vary materially from
this amount. If the Operating Partnership were to sell the Marriott Suites
O'Hare Hotel, the remaining Book-Tax Difference at the time the Hotel is sold
would be required to be allocated exclusively to the former Chicago Suites
Limited Partners and the General Partner, even though the proceeds of such
sale would be allocated proportionately among all the partners in the
Operating Partnership (and would likely be retained by the Operating
Partnership, rather than distributed to holders of OP Units and Common Shares
of Host REIT). The Chicago Suites Limited Partners would not be entitled to
any special distributions from the Operating Partnership in connection with
such a sale, and thus would not necessarily receive cash distributions from
the Operating Partnership sufficient to pay such additional taxes. Although
the Partnership Agreement does not impose any restrictions upon the Operating
Partnership preventing it from causing the sale of the Marriott Suites O'Hare
Hotel at any time following the Merger, the Operating Partnership does not
have current plans to pursue a sale of the Hotel. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Sale of Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the Chicago Suites Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the Marriott Suites O'Hare Hotel
will be required to be allocated for federal income tax purposes in a manner
such that the Chicago Suites Limited Partners are charged with the Book-Tax
Difference associated with the Marriott Suites O'Hare Hotel at the time of the
consummation of the Merger. Consequently, a Chicago Suites Limited Partner
will be allocated less depreciation with respect to the Marriott Suites O'Hare
Hotel than would be the case if the Mergers had not occurred and the Chicago
Suites Limited Partner had continued to hold his Chicago Suites Partnership
Units. (On the other hand, a former Chicago Suites Limited Partner will be
allocated depreciation with respect to other Hotels acquired by the Operating
Partnership in connection with the Mergers and the REIT Conversion, including
the Hotels owned by the other Hotel Partnerships and the Hotels being
contributed to the Operating Partnership by Host and the Blackstone Entities
in connection with the Mergers and the REIT Conversion.) Second, the Mergers
will cause the technical termination under Section 708(b)(1)(B) of certain of
the Hotel Partnerships that participate in the Mergers. The Operating
Partnership will take certain steps intended to prevent such a termination of
Chicago Suites, but there can be no assurance that the IRS will not determine
that Chicago Suites experienced a termination as a result of the Merger.
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 real estate components of the Hotels held by the Hotel Partnerships that
terminate will be depreciated over 39 years, rather than over the remaining
current lives of such Hotels (which range from less than one year to 39
Chicago Suites Supp-29
<PAGE>
years). See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Effect of Mergers on
Depreciation" in the Consent Solicitation.
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 Merger 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 Partner 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 (and,
consequently, the amount of taxable income) allocable to a Chicago Suites
Limited Partner.
Taxation of Tax-Exempt Limited Partners of Chicago Suites. Chicago Suites
has a number of Limited Partners that qualify as tax-exempt entities pursuant
to the Code. Substantially all of the partnership income allocated by Chicago
Suites to its Limited Partners for tax purposes constitutes unrelated business
taxable income ("UBTI") to those Limited Partners that qualify as tax-exempt
entities. Following the Merger and the REIT Conversion, a substantial portion
of the income derived by the Operating Partnership pursuant to its investments
in the Hotels and allocated to the holders of OP Units would be excluded from
UBTI as "rents from real property," interest or dividends. Some portion of the
Operating Partnership's income, however, inevitably will not qualify for
exclusion from UBTI, and other income that otherwise would qualify for
exclusion from UBTI may constitute "unrelated debt-financed income" to tax-
exempt holders of OP Units. The Operating Partnership and the General Partner
cannot predict at this time the percentage of total income to be allocated by
the Operating Partnership following the Merger and the REIT Conversion to a
tax-exempt Limited Partner that would constitute either UBTI or "unrelated
debt-financed income" to such Limited Partner. The Operating Partnership and
the General Partner believe, however, that, following the Merger, the amount
of taxable income allocated by the Operating Partnership to the former tax-
exempt Chicago Suites Limited Partners will be substantially less than the
amount of taxable income that would be allocated to such Limited Partners by
Chicago Suites if Chicago Suites did not participate in the Merger.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for Chicago Suites Limited
Partners) to the extent that such losses are not in excess of the taxpayer's
income from passive activities or investments. A Chicago Suites Limited
Partner would be able to offset losses from other passive activities 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 Partner
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 limitation rules. In this event, any losses or deductions of
the Operating Partnership allocable to a Chicago Suites Limited Partner after
the Merger could not be used to offset passive income from other passive
activities. Similarly, losses from other passive activities (including losses
attributable to Chicago Suites for periods prior to the Merger) could not be
applied to offset income of the Operating Partnership allocated to a Chicago
Suites Limited Partner. A Chicago Suites Limited Partner, however, would be
able to offset any passive losses from his investment in Chicago Suites (or
other investments) against any gain recognized by the Chicago Suites Limited
Partner as a result of the Merger. The Operating Partnership and the General
Partner estimate that, as of December 31, 1998, a Chicago Suites Limited
Partner who purchased his Partnership Units at the time of the original
offering, has held those Partnership Units continuously since that time, and
whose Partnership Units have been his only investment in a passive activity
would have a passive activity loss carryforward of approximately $4,384, on a
per Partnership Unit basis.
Chicago Suites Supp-30
<PAGE>
State and Local Taxes. Chicago Suites Limited Partners holding OP Units will
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 and the REIT Conversion, the
Operating Partnership expects that it will own properties in 28 states across
the United States and the District of Columbia. Currently, Chicago Suites owns
property in only one state. See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--State
and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular Chicago
Suites Limited Partner, the tax consequences of the Merger to such Chicago
Suites Limited Partner could be substantially different from those reflected
above. ACCORDINGLY, EACH CHICAGO SUITES LIMITED PARTNER IS STRONGLY URGED TO
CONSULT WITH HIS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH CHICAGO
SUITES LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE MERGER.
First, with respect to a Chicago Suites Limited Partner's basis in his
Chicago Suites Partnership Units prior to the Merger, the Operating
Partnership and the General Partner assumed that a Chicago Suites Limited
Partner acquired his Chicago Suites Partnership Units in the original offering
of such Partnership Units and has held such Partnership Units at all times
since the offering (the "Original Limited Partner's Adjusted Basis"). In
general, each Chicago Suites Limited Partner had an initial tax basis in his
Chicago Suites Partnership Units ("Initial Basis") equal to his cash
investment in Chicago Suites (plus his proportionate share of Chicago Suites'
nonrecourse liabilities at the time he acquired his Chicago Suites Partnership
Units). A Chicago Suites Limited Partner's Initial Basis generally has been
increased by (a) such Limited Partner's share of Chicago Suites' taxable
income and (b) any increases in his share of liabilities of Chicago Suites.
Generally, such Limited Partner's Initial Basis has been decreased (but not
below zero) by (i) his share of Chicago Suites cash distributions, (ii) any
decreases in his share of liabilities of Chicago Suites, (iii) his share of
losses of Chicago Suites, and (iv) his share of nondeductible expenditures of
Chicago Suites that are not chargeable to capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for Chicago Suites (i) the Original Limited Partner's Adjusted Basis as of
December 31, 1997 for each such Chicago Suites Limited Partner, and (ii) an
estimate of such Chicago Suites Limited Partner's 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 the Consent
Solicitation). The General Partner also has set forth on Appendix E to the
Consent Solicitation for each Chicago Suites Limited Partner whose adjusted
basis in his Chicago Suites Partnership Interest is the same as the Original
Limited Partner's Adjusted Basis (i) the Chicago Suites liabilities allocable
to such Chicago Suites Limited Partner as of December 31, 1997, and (ii) an
estimate of the Chicago Suites 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 the Consent Solicitation).
The adjusted tax basis of a Chicago Suites Limited Partner who did not
acquire his Chicago Suites Partnership Units in the original offering of such
Partnership Units could vary materially from that of a Chicago Suites Limited
Partner who did so for various reasons. If a Chicago Suites Limited Partner
has an adjusted tax basis in his Chicago Suites Partnership Units that is less
than the Original Limited Partner's Adjusted Tax Basis, the Merger might
result in the receipt by the Chicago Suites Limited Partner of a deemed
distribution of cash in excess of his adjusted tax basis in his Chicago Suites
Partnership Units, which could result in the recognition of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
Chicago Suites Limited Partners of their interests in the Partnership to the
Operating Partnership in exchange for OP Units. There can be no assurance,
however, that the
Chicago Suites Supp-31
<PAGE>
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 Hotel Partnership of its assets to the Operating Partnership in exchange for
OP Units (and possibly Notes and/or Common Shares) and the subsequent
distribution of such OP Units (and possibly Notes and/or Common Shares) to its
partners. If the Merger is recharacterized in the manner described in (ii) in
the preceding sentence, the tax consequences of the Merger to the Chicago
Suites Limited Partners likely would be materially affected.
EACH CHICAGO SUITES LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH CHICAGO SUITES LIMITED
PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF
PARTICIPATING IN THE MERGER. THE TAX CONSEQUENCES OF PARTICIPATING IN THE
MERGER TO A PARTICULAR CHICAGO SUITES LIMITED PARTNER COULD VARY SUBSTANTIALLY
FROM THE CONSEQUENCES DESCRIBED ABOVE.
Tax Treatment of Chicago Suites Limited Partners Who Exercise Their Right to
Make the Common Share Election or the Note Election
A Chicago Suites Limited Partner who exercises his right to make the Common
Share Election or the Note Election and receives Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $33,133 per Chicago Suites
Partnership Unit) plus the portion of Chicago Suites' liabilities allocable to
the Chicago Suites Limited Partner for federal income tax purposes immediately
prior to the disposition of the OP Units (estimated as $35,538 per Chicago
Suites Partnership Unit as of December 31, 1998). Generally, the amount
realized in connection with such disposition made pursuant to the exercise of
the Note Election will equal the sum of the "issue price" of the Notes (i.e.,
the face amount of the Note, currently estimated as $31,467 per Chicago Suites
Partnership Unit) plus the portion of the Chicago Suites liabilities allocable
to the Chicago Suites Limited Partner for federal income tax purposes
immediately prior to the disposition of the OP Units (estimated as $35,538 per
Chicago Suites Partnership Unit as of December 31, 1998). To the extent the
applicable amount realized exceeds the Chicago Suites Limited Partner's
adjusted basis in his Chicago Suites Partnership Units, the Chicago Suites
Limited Partner will recognize gain. The Operating Partnership and the General
Partner estimate (assuming the Chicago Suites Limited Partner acquired his
Chicago Suites Partnership Units at the time of the original offering and has
held such Partnership Units at all times since the offering) that the amount
of gain that would be recognized by a Chicago Suites Limited Partner who made
the Common Share Election would be approximately $11,138 per Chicago Suites
Partnership Unit and that the amount of gain that would be recognized by a
Chicago Suites Limited Partner who made the Note Election would be
approximately $9,472 per Chicago Suites Partnership Unit, as of December 31,
1998. For a discussion of the federal income tax rates applicable to the net
capital gain from the sale of a capital asset, see "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Disposition of OP Units by Limited Partners" in the Consent
Solicitation. In this regard, the General Partner estimates that, as of
December 31, 1998, if Chicago Suites sold the Marriott Suites O'Hare Hotel in
a fully taxable transaction for a net amount, after payment of liabilities,
equal to the Exchange Value of Chicago Suites (with respect to a Limited
Partner who makes the Common Share Election) or Liquidation Value of Chicago
Suites (with respect to a Limited Partner who makes the Note Election), the
"unrecognized Section 1250 gain" per Chicago Suites Partnership Unit would be
$10,176 for a Limited Partnership who makes the Common Share Election and
$8,585 for a Limited Partner who makes the Note Election. The gain subject to
tax as ordinary income under Code Section 1245 per Chicago Suites Partnership
Unit would be $887 for a Limited Partner who makes either Election. A Chicago
Suites Limited Partner who makes the Common Share Election or the Note
Election would be able to treat any per Partnership Unit passive activity loss
carryforwards with respect to the activities of Chicago Suites, to the extent
the sum of such losses exceeds his passive activity income for 1998, as losses
that are not from a passive activity and,
Chicago Suites Supp-32
<PAGE>
therefore, not subject to the passive activity loss limitation rules. For
purposes of determining the gain recognized by a Limited Partner as a result
of making the Common Share Election or the Note Election, an Original Limited
Partner's Adjusted Basis reflects such Limited Partner's share of the
syndication costs incurred by his Partnership at formation. An original
Chicago Suites Limited Partner's share of syndication costs was $4,517 per
Chicago Suites Partnership Unit.
A Chicago Suites Limited Partner who elects to receive Common Shares will
not be eligible to defer any gain under the "installment sale" rules, while a
Chicago Suites Limited Partner who elects to receive a Note may be eligible to
defer at least a portion of that gain under those rules. Those rules, however,
will not permit the Chicago Suites Limited Partner to defer all of the gain,
and, to the extent that the face amount of the Note (and any other installment
obligations received by the taxpayer during the year) outstanding at the end
of the taxable year in which the Merger occur exceeds $5,000,000, will require
that the Chicago Suites Limited Partner who defers gain pay to the IRS
interest on the resulting tax that has been deferred. The Chicago Suites
Limited Partner will not be eligible to defer gain recognized upon the receipt
of the Note to the extent that his share of Chicago Suites liabilities at the
time of the Merger exceeds his adjusted tax basis in his Chicago Suites
Partnership Units immediately prior to the Merger (that is, to the extent that
he has a "negative capital account" for tax purposes). In addition, the
Chicago Suites Limited Partner will not be eligible to defer gain to the
extent that such gain would be taxed as ordinary income under Section 1245 and
1250 of the Code. Lastly, if a Chicago Suites Limited Partner disposes of his
Note, any gain that had been deferred would be recognized in the year of
disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR CHICAGO SUITES LIMITED PARTNER
COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER, AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT
IS ESSENTIAL THAT CHICAGO SUITES LIMITED PARTNERS CONSIDERING ELECTING TO
RECEIVE COMMON SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH CHICAGO SUITES
LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING
JURISDICTION.
Tax Consequences if Chicago Suites Does Not Participate in the Merger
If Chicago Suites does not participate in the Merger, the Chicago Suites
Limited Partners would not have any tax consequences resulting from the
Merger. The consequences of continued ownership of Chicago Suites Partnership
Units will be the same as would have resulted if the Merger had not been
proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
Chicago Suites Limited Partners in light of their particular circumstances.
EACH CHICAGO SUITES LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN
TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH CHICAGO SUITES LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
Chicago Suites Supp-33
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with the audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ---------- ----------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 3,358 $ 2,952 $ 6,568 $ 5,660 $ 4,913 $ 4,509 $ 4,311
Operating profit........ 1,412 1,236 2,673 1,772 788 567 444
Net income (loss)....... 437 266 582 (565) (1,655) (1,920) (2,031)
Distributions:
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:(1)
Net income (loss)...... 1,281 776 1,701 (1,651) (4,839) (5,617) (5,941)
Distributions.......... -- -- -- -- -- -- --
Cash provided by (used
in) operating
activities............. 1,244 1,076 1,881 798 636 881 (739)
Cash used in investing
activities............. (300) (244) (1,052) (517) (486) (343) (315)
Cash used in financing
activities............. (118) (477) (721) (342) -- -- --
Increase (decrease) in
cash and cash
equivalents............ 826 355 108 (61) 150 538 (1,054)
Ratio of earnings to
fixed charges
(unaudited)(2)......... 1.41x 1.25x 1.26x -- -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(2) ........ -- -- -- 565 1,655 1,920 2,031
Total assets at book
value.................. 26,710 26,056 25,962 25,701 25,975 27,002 27,701
Cash and cash
equivalents............ 1,667 1,088 841 733 794 644 106
Total debt.............. 24,885 25,220 25,003 25,361 25,500 25,500 25,500
Total liabilities....... 29,094 29,193 28,783 29,104 28,813 28,185 26,964
Partner's capital
(deficit)(3):
Limited partners....... (2,378) (3,124) (2,811) (3,387) (2,821) (1,200) 682
General partner........ (6) (13) (10) (16) (17) 17 55
Book Value per
Partnership Unit
(unaudited)(1)......... (7,081) (9,287) (8,361) (10,063) (8,421) (3,582) 2,036
Exchange Value per
Partnership Unit
(unaudited)(1)......... 33,133 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $35,000 original investment in Chicago
Suites and excludes MB Investment Properties 1% limited partner interest.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation of $1,234,000, $1,644,000, $1,541,000 and $1,637,000 for
fiscal years ended December 31, 1996, 1995, 1994 and 1993, respectively.
(3) On August 26, 1996, MB Investment Properties, Inc. withdrew as a general
partner of the Partnership and converted its 1% interest to a Limited
Partner interest.
Chicago Suites Supp-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. For the first two quarters 1998, revenues increased 14% or
$406,000, over the same period in 1997 from $3.0 million to $3.4 million.
Revenues and operating profit were impacted primarily by growth in revenue per
available room ("REVPAR") of 10% over the comparable period in 1997 from $119
to $131. REVPAR represents the combination of the average daily room rate
charged and the average daily occupancy achieved and is a commonly used
indicator of hotel performance. REVPAR does not include food and beverage or
other ancillary revenues generated by the property. The increase in REVPAR was
the result of a 12% increase in average room rate from $143 to $160, slightly
offset by a 1.4 percentage point decrease in average occupancy to 82%. The
increase in average room rate for the first two quarters 1998 was primarily
due to the Hotel limiting the sale of discounted rooms, creating a breakfast-
included rate which raised the non-corporate premium rate, and increasing its
corporate room rate $10 to $199, which represents a $30 increase over the
corporate rate charged in the second quarter of 1997. The slight decrease in
occupancy was the result of the Hotel's corporate rate increase.
Operating Costs and Expenses. Operating costs and expenses increased 13% to
$1.9 million for the first two quarters 1998 when compared to the same period
in 1997. The increase in operating costs and expenses was primarily due to the
21% or $82,000 increase in depreciation expense and the 18% or $70,000
increase in incentive management fees. The increase in depreciation expense
was due to the completion of the rooms renovation in 1997. The increase in
incentive management fees was the result of the improvement in revenues
discussed above. As a percentage of revenues, operating costs and expenses
remained stable at 58% for the first two quarters 1998 when compared to the
same period in 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $176,000 to $1.4
million for the first two quarters 1998 from $1.2 million for the same period
in 1997. Operating profit was 42% of revenues during both time periods.
Interest expense. Interest expense increased for the first two quarters 1998
when compared to the same period in 1997 due primarily to interest expense
from the roof and facade loan with a subsidiary of the Manager. The loan,
which matures in June 2000, bears interest at 9% and will be repaid from the
Partnership's cash flow from operations after defined priorities. Payments of
approximately $19,000 per month began in June 1998, following the final
disbursement of loan proceeds.
Net income. For the first two quarters 1998, net income increased $171,000
to $437,000, compared to $266,000 for the same period in 1997. This increase
was primarily due to an increase in hotel revenues, offset by the changes in
expenses discussed above.
1997 Compared to 1996
Revenues. Revenues increased $908,000 or 16%, to $6.6 million in 1997 from
$5.7 million in 1996 as a result of strong growth in REVPAR of 13%. Hotel
sales increased $1.4 million, or 10%, to $14.4 million in 1997 also reflecting
improvements in REVPAR for the year. The increase in REVPAR was the result of
a 14% increase in average room rates from $129 in 1996 to $147 in 1997, while
average occupancy decreased one percentage point to 83%. The decrease in
occupancy was primarily the result of the Hotel's suites refurbishment which
displaced approximately 1,000 roomnights during the First Quarter 1997.
Operating Costs and Expenses. Operating costs and expenses remained stable
at $3.9 million in 1997 compared to 1996. As a percentage of revenues,
operating costs and expenses decreased to 59% of revenues in 1997 from 69% in
1996. Operating costs and expenses remained stable primarily due to the
$399,000 decrease in depreciation expense as a result of the majority of the
Hotel's furniture and equipment becoming fully
Chicago Suites Supp-35
<PAGE>
depreciated in 1996, offset by the $171,000 increase in combined incentive and
base management fees and the $33,000 increase in ground rent due to improved
revenues as discussed above.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $901,000 to $2.7
million, or 41% of total revenues, in 1997 from $1.8 million, or 31% of
revenues in 1996.
Interest Expense. Interest expense decreased to $2.2 million in 1997 from
$2.4 million in 1996 due to regular and additional principal amortization on
the debt totaling $886,000. Additionally, the weighted average interest rate
on the mortgage debt in 1997 decreased to 7.69% from 9.31% in 1996 due to the
1996 refinancing. See "Refinancing."
Net Income. Net income increased $1.1 million to $582,000 in 1997 over 1996
due to the items discussed above.
1996 Compared to 1995
Revenues. Revenues increased $747,000, or 15%, to $5.7 million in 1996 from
$4.9 million in 1995 as a result of strong growth in REVPAR. REVPAR increased
10% to $108 in 1996. Hotel sales increased $1.4 million, or 12%, to $13
million in 1996 also reflecting improvements in REVPAR for the year. The
increase in REVPAR was the result of a 7% increase in average suite rate from
$121 in 1995 to $129 in 1996, combined with a three percentage point increase
in average occupancy to 84%.
Operating Costs and Expenses. Operating costs and expenses decreased
$237,000 to $3.9 million in 1996 from $4.1 million in 1995. As a percentage of
revenues, operating costs and expenses represented 69% of revenues in 1996 and
84% in 1995. The decrease in operating costs and expenses was primarily due to
a $410,000 decrease in depreciation expense due to the majority of the Hotel's
furniture and equipment becoming fully depreciated in early 1996.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $984,000 to $1.8
million, or 31% of total revenues, in 1996 from $788,000, or 16% of revenues
in 1995.
Interest Expense. Interest expense was $2.4 million in 1996 and $2.5 million
in 1995.
Net Loss. Net loss decreased $1.1 million to a net loss of $565,000 in 1996
over the net loss of $1.7 million in 1995 due to the items discussed above.
CAPITAL RESOURCES AND LIQUIDITY
General
The General Partner believes that cash from operations will provide adequate
funds for the operational needs of the Partnership for the foreseeable future.
PRINCIPAL SOURCES AND USES OF CASH
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to fund the property improvement fund of the Hotel and to pay
required principal amortization of the mortgage debt. Additionally, the
Partnership is required to use its excess annual cash flow to pay additional
principal on the mortgage debt.
Total cash provided by operating activities for the first two quarters 1998
and 1997, was $1.2 million and $1.1 million, respectively. The increase was
primarily due to an increase in hotel revenues when compared to 1997. See
"Results of Operations" above.
Chicago Suites Supp-36
<PAGE>
Cash provided by operating activities was $1.9 million in 1997, $798,000 in
1996 and $636,000 in 1995. The $1.1 million increase in cash provided by
operating activities between 1997 and 1996 was due primarily to the $908,000
increase in revenues, offset by $606,000 in incentive management fee paid, and
$1 million in reduced interest payments, due to the debt refinancing discussed
below. The $162,000 increase in cash provided by operating activities between
1996 and 1995 was due primarily to the $747,000 increase in revenues, offset
by $465,000 in increased interest payments. Interest payments increased
primarily as a result of the 1996 debt refinancing which resulted in one
additional debt service payment in 1996 compared to 1995.
For the first two quarters 1998 and 1997, cash used in investing activities
was $300,000 and $244,000, respectively, and consisted of contributions to and
expenditures from the property improvement fund.
Cash used in investing activities was $1.1 million, $517,000 and $486,000 in
1997, 1996 and 1995, respectively. The Partnership's cash investing activities
consist primarily of contributions to the property improvement fund and
capital expenditures for improvements to the Hotel. In 1997, the Hotel
completed a roof and facade restoration project, with funds provided by the
Partnership, for which approximately $528,000 was spent.
For the first two quarters 1998 and 1997, cash used in financing activities
was $118,000 and $477,000, respectively, and consisted primarily of repayments
on the mortgage debt. Additionally, during the second quarter of 1998, the
Partnership made its final draw of $35,000 on the roof and facade loan.
Cash used in financing activities was $721,000 in 1997 and $342,000 in 1996.
In 1997, the Partnership's cash financing activities consisted of repayment of
mortgage debt of $886,000, $528,000 in proceeds from a loan from a subsidiary
of Marriott International, and $363,000 in payments of financing costs related
to the 1996 refinancing. The Partnership made debt principal payments of
$139,000 and paid financing costs of $203,000 in 1996. Financing activity in
1995 consisted entirely of the $164,000 advance from, and subsequent repayment
into the property improvement fund, so that the Partnership could make its
First Quarter debt service payment in 1995. Prior to the debt refinancing in
1996, no repayments of mortgage principal were required prior to maturity. See
"Refinancing."
REFINANCING
On September 24, 1996, the Partnership successfully refinanced its $25.5
million mortgage debt. Proceeds from the new loan were used to repay the
existing mortgage debt and pay refinancing costs. The refinanced debt bears
interest at a floating rate of 200 basis points over the three-month LIBOR
rate, with an option to fix the interest rate during the first two years of
the loan term, and requires quarterly payments of principal and interest based
upon a 20-year amortization schedule for a five-year term expiring on the
maturity date of June 12, 2001. The weighted average interest rate on the
Partnership's debt in 1997, 1996 and 1995 was 7.69%, 9.31% and 9.575%,
respectively. The weighted average interest rate during the first two quarters
1998 was 7.69%, compared to 7.64% during the comparable period in 1997.
PROPERTY IMPROVEMENT FUND
The Partnership is required to maintain the Hotel in good condition. Under
the Management Agreement, the Partnership is required to make annual
contributions to the property improvement fund which provides funding for
capital expenditures and replacement of furniture, fixtures and equipment.
Contributions to the fund equaled 4% of gross Hotel sales in 1997, 1996 and
1995. The contribution amount will remain at 4% of gross Hotel sales in 1998
and 1999. In 2000 and thereafter, the Partnership is required to contribute 5%
of gross Hotel sales to the fund. In 1997, 1996 and 1995, the Partnership
contributed $577,000, $523,000 and $468,000, respectively, to the property
improvement fund. For the first two quarters 1998 and 1997, the Partnership
contributed $284,000 and $260,000, respectively, to the property improvement
fund.
Chicago Suites Supp-37
<PAGE>
The General Partner expects that contributions to the property improvement
fund will provide a sufficient reserve for the future capital repair and
replacement needs of the Hotel's property and equipment.
MANAGEMENT FEES
For 1997, the Partnership paid a base management fee equal to 3% of gross
Hotel sales to the Manager. In addition, the Partnership paid an incentive
management fee of $606,000 payable from cash flow remaining after payment of
ground rent, debt service and an owner's priority return of $1,020,000.
Payment of the incentive management fee is subordinated to the required
principal and interest payments on the Amended and Restated Mortgage Debt,
ground rent and an 8% annual priority return to the Partners. Of the remaining
amount, the Partnership pays 50% of the current year incentive management fee
to the extent of cash available. Fifty percent of any remaining cash is then
applied to 50% of the current year incentive management fee and unpaid
incentive management fees from prior years. Unpaid incentive management fees
are reflected as deferred incentive management fees due to Marriott
International, Inc. in the Partnership's balance sheet. The Manager waived its
right to any unpaid deferred incentive management fees due to Marriott
International which were earned during the period from June 12, 1989 to June
14, 1991. During the first two quarters of 1998 and 1997, the Manager received
$439,000 and $261,000, respectively, of incentive management fees. The
remaining $20,000 and $128,000, respectively, of incentive management fees
earned were accrued as deferred incentive management fees payable to Marriott
International. During 1997 the Manager received $606,000 of incentive
management fee, while the remaining $258,000 of incentive management fee
earned was accrued as a deferred incentive management fee payable to Marriott
International. In 1996 and 1995, incentive management fees earned and accrued
as deferred incentive management fees totaled $734,000 and $591,000,
respectively. No incentive management fees were paid prior to 1997. As of
December 31, 1997 and 1996 and June 19, 1998, the balance of deferred
incentive management fees was $3.6 million, $3.3 million and $3.6 million,
respectively.
INFLATION
For the first two quarters 1998 and the three fiscal years ended December
31, 1997, the rate of inflation has been relatively low and, accordingly, has
not had a significant impact on the Partnership's revenues and net income. The
Manager is generally able to pass through increased costs to customers through
higher room rates. In 1997, the increase in average room rates at the Hotel
exceeded the general level of inflation. The amount of the Partnership's
interest expense under floating rate debt for a particular year will be
affected by changes in short-term interest rates.
SEASONALITY
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of March
through November than during the remainder of the year. This seasonality tends
to affect the results of operations, increasing hotel revenues during these
months. In addition, this seasonality may also increase the liquidity of the
Partnership during these months.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the Manager has 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.
Chicago Suites Supp-38
<PAGE>
FINANCIAL STATEMENTS
Chicago Suites Supp-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.:
We have audited the accompanying balance sheet of Mutual Benefit Chicago
Marriott Suite Hotel Partners, L.P. (a Rhode Island limited partnership) as of
December 31, 1997 and 1996 and the related statements of operations, changes
in partners' capital (deficit) and cash flows for the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mutual Benefit Chicago
Marriott Suite Hotel Partners, L.P. as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
February 23, 1998
Chicago Suites Supp-40
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net................................ $ 23,784 $ 23,640
Property improvement fund.................................. 402 329
Deferred financing costs, net.............................. 428 512
Due from Marriott International, Inc....................... 507 487
Cash and cash equivalents.................................. 841 733
-------- --------
$ 25,962 $ 25,701
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $ 24,475 $ 25,361
Deferred incentive management fees due to Marriott
International, Inc...................................... 3,587 3,329
Note payable to Marriott International, Inc.............. 528 --
Accounts payable and accrued expenses.................... 193 414
-------- --------
Total Liabilities.................................... 28,783 29,104
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution................................... 120 120
Capital distributions.................................. (23) (23)
Cumulative net losses.................................. (107) (113)
-------- --------
(10) (16)
-------- --------
Limited Partners
Capital contribution, net of offering costs of $1,512.. 10,249 10,249
Capital distributions.................................. (2,819) (2,819)
Cumulative net losses.................................. (10,241) (10,817)
-------- --------
(2,811) (3,387)
-------- --------
Total Partners' Deficit.............................. (2,821) (3,403)
-------- --------
$ 25,962 $ 25,701
======== ========
</TABLE>
See Notes to financial statements.
Chicago Suites Supp-41
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Hotel revenues (Note 3)........................... $ 6,568 $ 5,660 $ 4,913
------- ------- -------
OPERATING COSTS AND EXPENSES
Real estate taxes and other....................... 1,295 1,139 1,172
Incentive management fee.......................... 864 734 591
Depreciation...................................... 835 1,234 1,644
Base management fee............................... 433 392 351
Ground rent....................................... 341 308 300
Administrative and other.......................... 127 81 67
------- ------- -------
3,895 3,888 4,125
------- ------- -------
OPERATING PROFIT.................................... 2,673 1,772 788
Interest expense.................................. (2,150) (2,406) (2,526)
Interest income................................... 59 69 83
------- ------- -------
NET INCOME (LOSS)................................... $ 582 $ (565) $(1,655)
------- ------- -------
ALLOCATION OF NET INCOME (LOSS)
General Partner................................... $ 6 $ (6) $ (17)
MBIP Interest..................................... 6 (6) (17)
Limited Partner Unit Holders...................... 570 (553) (1,621)
------- ------- -------
$ 582 $ (565) $(1,655)
------- ------- -------
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
(335 Units)....................................... $ 1,701 $(1,651) $(4,839)
======= ======= =======
</TABLE>
See Notes to financial statements.
Chicago Suites Supp-42
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1994............................ $ 17 $(1,200) $(1,183)
Net loss............................................ (34) (1,621) (1,655)
---- ------- -------
Balance, December 31, 1995............................ (17) (2,821) (2,838)
Transfer of MBIP 1% GP interest to 1% LP interest... 11 (11) --
Net income.......................................... (10) (555) (565)
---- ------- -------
Balance, December 31, 1996............................ (16) (3,387) (3,403)
Net income.......................................... 6 576 582
---- ------- -------
Balance, December 31, 1997............................ $(10) $(2,811) $(2,821)
==== ======= =======
</TABLE>
See Notes to financial statements.
Chicago Suites Supp-43
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 582 $ (565) $ (1,655)
Noncash items:
Depreciation................................... 835 1,234 1,644
Deferred incentive management fees............. 258 734 591
Amortization of deferred financing costs as
interest...................................... 124 33 46
Deferred interest on mortgage loan............. 63 -- --
Changes in operating accounts:
Accounts payable and accrued expenses.......... 39 (607) 30
Due from Marriott International, Inc........... (20) (31) (20)
------- ------- --------
Cash provided by operating activities........ 1,881 798 636
------- ------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net......... (979) (1,013) (492)
Change in property improvement fund.............. (73) 496 6
------- ------- --------
Cash used in investing activities............ (1,052) (517) (486)
------- ------- --------
FINANCING ACTIVITIES
Repayment of mortgage debt....................... (886) (139) --
Proceeds from note payable to Marriott
International, Inc.............................. 528 -- --
Payment of financing costs....................... (363) (203) --
------- ------- --------
Cash used in financing activities............ (721) (342) --
------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 108 (61) 150
CASH AND CASH EQUIVALENTS at beginning of year..... 733 794 644
------- ------- --------
CASH AND CASH EQUIVALENTS at end of year........... $ 841 $ 733 $ 794
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.................. $ 1,947 $ 2,947 $ 2,482
======= ======= ========
</TABLE>
See Notes to financial statements.
Chicago Suites Supp-44
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the
"Partnership"), a Rhode Island limited partnership, was formed in 1988 to
acquire and own the 256 suite Marriott Suites O'Hare Hotel (the "Hotel")
located near the O'Hare International Airport in Rosemont, Illinois. The
Hotel, which opened on November 28, 1988, is managed by Marriott
International, Inc. ("Marriott International") as part of its full service
hotel system.
In 1989, 335 limited partnership interests (the "Units"), representing a 98%
interest in the Partnership, were sold pursuant to a private placement
offering at $35,000 per Unit. Each general partner contributed $119,500 in
cash for their respective 1% general partner interests. Under the purchase and
sale agreement, Host Marriott Corporation ("Host Marriott") agreed to reduce
the purchase price of the Hotel up to an aggregate total of $3,000,000 to the
extent that the Hotel did not provide cash flow, after payment of ground rent
and debt service, equivalent to $1,000,000 for each of the three years ended
June 19, 1992 (the "Cash Flow Guaranty"). A total of $2,476,000 was paid to
the Partnership under the Cash Flow Guaranty. The price adjustments were
allocated as a reduction of the carrying value of the Partnership's property
and equipment in the accompanying balance sheet.
On August 23, 1996, MB Investment Properties, Inc. ("MBIP") withdrew as a
general partner of the Partnership and converted its 1% interest to a limited
partner. At December 31, 1997 the sole general partner is MOHS Corporation
("MOHS"), a Delaware corporation and subsidiary of Host Marriott.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
(a) Cash available for distribution is distributed (i) first, 100% to the
limited partners (excluding MBIP) until they have received an annual 8%
cumulative preferred return on their invested capital; (ii) to Host
Marriott to repay principal and interest on advances made under the Debt
Service Guarantee, as defined in Note 5, if any; and (iii) 100% to the
general partner and MBIP until they have received an annual 8% cumulative
preferred return on their invested capital. The balance, if any, shall be
distributed (i) 1% to the general partner, 1% to MBIP and 98% to the
remaining limited partners until the general partner and the limited
partners (collectively, the "Partners") have received cumulative
distributions of net proceeds from capital transactions and/or refinancing
equal to $5,982,000; (ii) next, 10% to MOHS, 5% to MBIP and 85% to the
remaining limited partners until the Partners have received cumulative
distributions of net proceeds from capital transactions and/or refinancing
equal to $11,964,000; and (iii) thereafter, 20% to MOHS, 10% to MBIP and
70% to the remaining limited partners.
(b) Net proceeds from capital transactions and refinancing are generally
distributed in the following order of priority: (i) first, 1% to the
general partner, 1% to MBIP and 98% to the remaining limited partners until
the Partners have received their initial capital contribution to the extent
not previously distributed; (ii) then, to the limited partners (excluding
MBIP) in an amount equal to their 8% cumulative preferred return on their
invested capital; (iii) then, to the general partner and MBIP in an amount
equal to their 8% cumulative preferred return on their invested capital;
(iv) then, to Host Marriott to repay any advances made under the Debt
Service Guarantee, together with accrued interest thereon; (v) then, to
Marriott International to pay any unpaid deferred incentive management fee;
and (vi) the balance, if any, 20% to MOHS, 10% to MBIP and 70% to the
remaining limited partners.
(c) For financial reporting purposes, profits and losses are allocated
among the Partners based on their ownership interests.
Chicago Suites Supp-45
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Revenues represent house profit from the Hotel because the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit of the Hotel to Marriott International. House
profit reflects the net revenues flowing to the Partnership as property owner
and represents hotel operating results less property-level expenses, excluding
depreciation and amortization, base management fee, real estate taxes, ground
rent, insurance and certain other costs, which are disclosed separately in the
statement of operations (see Note 3).
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that is
should be applied to its hotel. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $7.9 million, $7.4 million and $6.8 million for the year ended
December 31, 1997, 1996 and 1995, respectively, and will have no impact on
operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold improvements.......................................... 40 years
Furniture and equipment......................................... 7 years
</TABLE>
All property and equipment is pledged to secure the Amended and Restated
Mortgage Debt defined in Note 5.
The Partnership assesses impairment of the Hotel based on whether estimated
undiscounted future cash flows from the Hotel will be less than its net book
value. If the Hotel is impaired, its basis is adjusted to fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
mortgage debt (see Note 5) matured on June 12, 1996. Deferred financing costs
associated with that debt, totaling $320,000, were fully amortized at December
31, 1996 and were subsequently written off in 1997. Costs associated with the
mortgage debt refinancing (see Note 5) totaled $566,000 and will be amortized
over the term of the loan. Accumulated amortization of deferred financing
costs at December 31, 1997 and 1996 totaled $138,000 and $334,000,
respectively.
Chicago Suites Supp-46
<PAGE>
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements because the Partnership does not pay income
taxes but rather allocates profits and losses to the Partners in accordance
with the partnership agreement. Significant differences exist between the net
income for financial reporting purposes and the net income as reported on the
Partnership's tax return. These differences are due primarily to the use, for
income tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets. As a result of these differences, the excess
of the tax basis in the net Partnership liabilities over the net Partnership
liabilities reported in the accompanying financial statements was $896,000 and
$969,000, respectively as of December 31, 1997 and 1996.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
Reclassifications
Certain reclassifications were made to prior year financial statements to
conform to the 1997 presentation.
NOTE 3. REVENUES
Hotel revenues consist of Hotel operating results for the three years ended
December 31 (in thousands) are:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $11,336 $10,224 $ 9,100
Food and beverage................................. 2,588 2,337 2,092
Other............................................. 505 509 497
------- ------- -------
14,429 13,070 11,689
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................... 2,541 2,509 2,311
Food and beverage............................... 2,088 1,896 1,722
Other hotel operating expenses.................... 3,232 3,005 2,743
------- ------- -------
7,861 7,410 6,776
------- ------- -------
HOTEL REVENUES...................................... $ 6,568 $ 5,660 $ 4,913
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Leasehold improvements................................... $ 26,453 $ 26,015
Furniture and equipment.................................. 8,768 8,227
-------- --------
35,221 34,242
Less accumulated depreciation............................ (11,437) (10,602)
-------- --------
$ 23,784 $ 23,640
======== ========
</TABLE>
Chicago Suites Supp-47
<PAGE>
NOTE 5. DEBT
Mortgage Debt
The Partnership entered into a loan agreement on June 12, 1989 with a bank
to provide non-recourse mortgage debt of $25.5 million (the "Mortgage Debt")
to finance the acquisition of the Hotel. The Mortgage Debt initially bore
interest at a floating interest rate. On August 11, 1989 the Partnership
exercised its option to fix the interest rate at 9.575% until maturity on June
12, 1996. Interest on the Mortgage Debt was payable on the last day of March,
June, September and December of each year. No amortization of principal was
required prior to maturity or the sale or refinancing of the Hotel.
The Mortgage Debt matured on June 12, 1996 (the "Maturity Date"). On
September 24, 1996 (the "Closing Date"), the Partnership completed a
refinancing of the Mortgage Debt (the "Amended and Restated Mortgage Debt").
The lender granted the Partnership a forbearance of the loan for the period
between the Maturity Date and the Closing Date. During the forbearance period
from the Maturity Date until August 15, 1996 the Partnership continued to pay
interest at the contract rate of 9.575%. Thereafter, until the Closing Date,
the Partnership paid interest at a rate of 10.575%. The Amended and Restated
Mortgage Debt matures on June 12, 2001 and carries a floating interest rate of
200 basis points over the three-month London Interbank Offered Rate ("LIBOR"),
with an option to fix the interest rate during the first two years of the loan
term. The weighted average interest rate from the Closing Date through
December 31, 1996, was 7.62%. The weighted average interest rate for 1997 was
7.69%. The restructured loan requires minimum quarterly amortization payments
based on a 20-year schedule. Additionally, all excess cash flow after payment
of ground rent, required principal and interest payments, incentive management
fee, partnership administrative expenses and refinancing costs is to be
applied toward principal amortization. On June 24, 1997 the Partnership paid
$305,000 from excess cash flow generated during 1996 toward additional
principal amortization. The Partnership made a $766,000 principal payment in
June 1998 from excess cash flow generated during 1997.
As of the Closing Date, the lender deferred a $128,000 restructuring fee and
$302,000 of expenses incurred by the lender in connection with restructuring
the Mortgage Debt. On December 24, 1996, the Partnership paid $107,000 of
lender's expenses. A total of $323,000 was accrued as deferred financing costs
which is included in accounts payable and accrued expenses on the balance
sheet for the year ended December 31, 1996. This accrued liability was paid in
April 1997.
Scheduled debt maturities under the Amended and Restated Mortgage Debt are
as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 627
1999............................................................. 676
2000............................................................. 728
2001............................................................. 22,444
-------
$24,475
=======
</TABLE>
The Amended and Restated Mortgage Debt is secured by the Hotel, an
assignment of the Partnership's interest under the Ground Lease (as defined in
Note 6), an assignment of the Hotel management agreement, and by the grant of
a security interest in the Partnership's cash accounts and the personal
property and fixtures of the Hotel.
Debt Guarantees
No debt service guarantee was provided on the Amended and Restated Mortgage
Debt. However, MOHS reaffirmed its guarantee to the lender, that in the event
of a foreclosure, proceeds payable to the lender would be at least $5,000,000.
Chicago Suites Supp-48
<PAGE>
Roof and Facade Loan
Marriott International Capital Corporation ("MICC"), a subsidiary of
Marriott International, provided $605,000 in available loan proceeds for the
completion of the facade and roof restoration project at the Hotel. As of
December 31, 1997, $528,000 has been disbursed under the loan. The loan
matures in June 2000, bears interest at 9% and will be repaid from the
Partnership's cash flow from operations after defined priorities. Payments of
approximately $19,000 in principal and interest per month began in June 1998
following the final loan disbursement.
Simultaneous with the execution of the loan agreement between the
Partnership and MICC, Host Marriott purchased a 50% participation interest in
the loan from MICC. Pursuant to the participation agreement, Host Marriott
reimbursed MICC for 50% of the loan advances made to-date and will continue to
reimburse MICC for 50% of any additional advances. Upon the final loan
disbursement, Host Marriott will be reimbursed by MICC for 50% of the loan
repayments as they are made by the Partnership to MICC.
NOTE 6. GROUND LEASE
In 1989, the leasehold interest in the land upon which the Hotel is located
was assigned to the Partnership by Host Marriott. The lease was created on
June 16, 1986 pursuant to a ground lease (the "Ground Lease") from the
landlord to Host Marriott. The initial term of the Ground Lease expires in
2014. The Ground Lease may be renewed at the option of the Partnership for
five successive terms of ten years each. Upon expiration or termination of the
Ground Lease, title to the Hotel and all improvements revert to the lessor.
Rent expense under the Ground Lease is calculated at an amount equal to the
greater of a minimum rental of $300,000 per year or a percentage rental equal
to 3% of annual gross room sales. Ground rent expense for 1997, 1996 and 1995
was $341,000, $308,000 and $300,000, respectively.
NOTE 7. MANAGEMENT AGREEMENT
The Partnership entered into a hotel management agreement (the "Management
Agreement") with Marriott International (the "Manager") to manage the Hotel as
part of Marriott International's full service hotel system. The Management
Agreement has an initial term expiring in 2008. The Manager may renew the
Management Agreement, at its option, for five successive ten-year terms. The
Partnership may terminate the Management Agreement if specified minimum
operating results are not achieved. However, the Manager may prevent
termination by paying the Partnership the amount by which the minimum
operating results were not achieved.
The Management Agreement provides for annual payments of (i) the base
management fee equal to 3% of gross sales from the Hotel, and (ii) the
incentive management fee equal to 20% of net house profit, as defined. Payment
of the incentive management fee is subordinated to the prior payment of
required principal and interest payments, ground rent and an 8% annual
priority return to the Partners. Unpaid incentive management fees are
reflected as deferred incentive management fees payable to Marriott
International in the accompanying balance sheet. The incentive management fee
earned in 1997 was $864,000. Of this amount $606,000 was paid to the Manager
and $258,000 was accrued as unpaid deferred incentive management fees. Unpaid
incentive management fees earned in 1996 and 1995 were $734,000 and $591,000,
respectively. The balance of deferred incentive management fees at December
31, 1997 and 1996 was $3.6 million and $3.3 million, respectively.
Pursuant to the terms of the Management Agreement, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotel. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Management
Agreement, the working capital and supplies will be returned to the
Partnership. The individual components of working capital and supplies
controlled by the Manager are not reflected in the Partnership's balance
sheet. As of December 31, 1997 and 1996, $357,000 has been advanced to the
Manager for working capital and supplies and is reflected in Due from Marriott
International, Inc. on the accompanying balance sheet.
Chicago Suites Supp-49
<PAGE>
Pursuant to the terms of the Management Agreement, the Manager is required
to furnish the Hotel with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in Marriott
International's full service hotel system. Chain Services include central
training, advertising and promotion, a national reservation system 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 full service hotels managed, owned or leased by
Marriott International or its subsidiaries. In addition, the Hotel also
participates in Marriott International's Marriott's Rewards Program ("MRP"),
which was formerly called Marriott International's Honored Guest Awards
Program. The cost of this program is charged to all hotels in Marriott
International's hotel system based upon the MRP sales at each hotel. The total
amount of Chain Services and MRP costs charged to the Partnership was
$783,000, $757,000 and $649,000 for 1997, 1996 and 1995, respectively.
The Management Agreement provides for the establishment of a property
improvement fund for the Hotel which provides for the replacement of
furniture, fixtures and equipment. Contributions to the property improvement
fund are based on a percentage of gross Hotel sales equal to 4% for 1995
through 1999 and 5% thereafter. Contributions to the property improvement fund
for 1997, 1996 and 1995 were $577,000, $523,000 and $468,000, respectively.
NOTE 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage Debt............ $ 24,475 $ 24,700 $ 25,361 $ 25,200
</TABLE>
The estimated fair value of the Mortgage Debt is based on the expected
future debt service payments discounted at estimated market rates.
Chicago Suites Supp-50
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- ------
<S> <C> <C>
HOTEL REVENUES (Note 2)........................................ $ 3,358 $2,952
------- ------
OPERATING COSTS AND EXPENSES
Real estate taxes and other.................................. 594 579
Depreciation................................................. 467 385
Incentive management fees.................................... 459 389
Base management fees......................................... 213 195
Ground rent and administrative............................... 213 168
------- ------
1,946 1,716
------- ------
OPERATING PROFIT............................................... 1,412 1,236
Interest expense............................................. (1,006) (999)
Interest income.............................................. 31 29
------- ------
NET INCOME..................................................... $ 437 $ 266
======= ======
ALLOCATION OF NET INCOME
General Partner.............................................. $ 4 $ 3
MBIP Limited Partner Interest................................ 4 3
Limited Partner Unit Holders................................. 429 260
------- ------
$ 437 $ 266
======= ======
NET INCOME PER LIMITED PARTNER UNIT (335 Units)................ $ 1,281 $ 776
======= ======
</TABLE>
See Notes to Condensed Financial Statements.
Chicago Suites Supp-51
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net.......................... $23,733 $23,784
Due from Marriott International, Inc................. 652 507
Other assets......................................... 658 830
Cash and cash equivalents............................ 1,667 841
------- -------
$26,710 $25,962
======= =======
LIABILITIES AND PARTNERS' DEFICIT
Mortgage debt........................................ $24,322 $24,475
Deferred incentive management fees due to Marriott
International, Inc.................................. 3,607 3,587
Accounts payable and accrued expenses................ 602 193
Note payable to Marriott International, Inc.......... 563 528
------- -------
Total Liabilities................................ 29,094 28,783
------- -------
PARTNERS' DEFICIT
General Partner.................................... (6) (10)
MBIP Limited Partner Interest...................... (6) (10)
Limited Partner Unit Holders....................... (2,372) (2,801)
------- -------
Total Partners' Deficit.......................... (2,384) (2,821)
------- -------
$26,710 $25,962
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
Chicago Suites Supp-52
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
--------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 437 $ 266
Noncash items................................................. 572 597
Changes in operating accounts................................. 235 213
------ ------
Cash provided by operating activities....................... 1,244 1,076
------ ------
INVESTING ACTIVITIES
Additions to property and equipment........................... (416) (440)
Change in property improvement fund........................... 116 196
------ ------
Cash used in investing activities........................... (300) (244)
------ ------
FINANCING ACTIVITIES
Principal repayments of mortgage debt......................... (153) (336)
Proceeds from note payable to Marriott International, Inc..... 35 --
Payment of financing costs.................................... -- (141)
------ ------
Cash used in financing activities........................... (118) (477)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS........................... 826 355
CASH AND CASH EQUIVALENTS at beginning of period................ 841 733
------ ------
CASH AND CASH EQUIVALENTS at end of period...................... $1,667 $1,088
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest............................... $ 484 $ 481
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
Chicago Suites Supp-53
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the "Partnership")
without audit. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included in the Partnership's Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998, and the results of operations and cash
flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
For financial reporting purposes, net profits and net losses of the
Partnership are allocated 1% to MOHS Corporation (the "General Partner"), a
wholly owned subsidiary of Host Marriott Corporation ("Host Marriott"), 1% to
Mutual Benefit Investment Properties ("MBIP"), a limited partner, and 98% to
the remaining limited partners. Significant differences exist between the net
profits and net losses for financial reporting purposes and the net profits
and net losses reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives of the assets, differences in the timing of
the recognition of management fee expense and the deduction of certain costs
incurred during construction which have been capitalized in the accompanying
condensed financial statements.
2. Hotel revenues represent house profit from the Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotel to Marriott International, Inc.
(the "Manager"). House profit reflects hotel operating results which flow to
the Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base and
incentive management fees, property taxes and certain other costs, which are
disclosed separately in the condensed statement of operations.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $3.7 million and $3.6 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
Chicago Suites Supp-54
<PAGE>
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Hotel revenues consist of hotel operating results as follows (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-------------
1998 1997
------ ------
<S> <C> <C>
HOTEL SALES
Rooms....................................................... $5,642 $5,106
Food and beverage........................................... 1,222 1,171
Other....................................................... 242 232
------ ------
7,106 6,509
------ ------
HOTEL EXPENSES
Departmental Direct Costs
Rooms..................................................... 1,198 1,145
Food and beverage......................................... 1,001 946
Other hotel operating expenses.............................. 1,549 1,466
------ ------
3,748 3,557
------ ------
HOTEL REVENUES................................................ $3,358 $2,952
====== ======
</TABLE>
3. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), parent
company of the General Partner of the Partnership, announced that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P., are
expected to be given an opportunity to receive, on a tax-deferred basis,
Operating Partnership units in the Operating Partnership in exchange for their
current limited partnership interests. The Operating Partnership units would
be redeemable by the limited partner for freely traded Host Marriott shares
(or the cash equivalent thereof) at any time after one year from the closing
of the merger. In connection with the REIT conversion, on June 2, 1998, the
Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission. Limited partners will be able to vote on
this Partnership's participation in the merger later this year through a
consent solicitation.
Chicago Suites Supp-55
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Desert Springs Marriott Limited Partnership,
a Delaware limited partnership ("Desert Springs" or the "Partnership"), and up
to seven other limited partnerships (the "Partnerships") that own full-service
hotels in which Host or its subsidiaries are general partners. As more fully
described in the Consent Solicitation, limited partners of those Partnerships
that participate in the Mergers will receive OP Units 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," and with respect to Desert
Springs, the "Desert Springs Limited Partners"). Desert Springs Limited
Partners may elect to exchange such OP Units received in connection with the
Merger for either common shares of beneficial interest, par value $.01 per
share, of Host REIT ("Common Shares") or unsecured 6.56% Callable Notes due
December 15, 2005 issued by the Operating Partnership ("Notes"). Beginning one
year after the Mergers, Limited Partners who retain OP Units will have the
right to redeem their OP Units at any time and receive, at the election of
Host REIT, either 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").
The number of OP Units to be allocated to Desert Springs will be based upon
(i) its Exchange Value (as defined herein) and (ii) the price attributed to an
OP Unit following the Merger, determined as described herein (but in no event
will it be less than $ or greater than $ per OP Unit) and will not be
known at the time of voting. The number of Common Shares a Desert Springs
Limited Partner may elect to receive in connection with the Merger will equal
the number of OP Units received. The principal amount of Notes that Desert
Springs Limited Partners may elect to receive in connection with the Merger
will be based upon Desert Springs' Note Election Amount (as defined herein).
See "Determination of Exchange Value of Desert Springs and Allocation of OP
Units." The estimated Exchange Value and Note Election Amount set forth herein
may increase or decrease as a result of various adjustments, and will be
finally calculated shortly before the Effective Date. Pursuant to the Merger,
Desert Springs Limited Partners have an estimated Exchange Value of $40,880
per Partnership Unit and a Note Election Amount of $32,704 per Partnership
Unit.
RISK FACTORS
In deciding whether to approve the Merger, Desert Springs Limited Partners
should consider certain risks and other factors. The General Partner believes
that Desert Springs Limited Partners should particularly consider the
following, which should be read in conjunction with the information in the
Consent Solicitation under "Risk Factors" and "Federal Income Tax
Consequences:"
. 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-
Desert Springs Supp-1
<PAGE>
level income taxes expected as a result of the REIT Conversion. To the
extent that such 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. The benefits to
Host of the REIT Conversion will be materially reduced if one or more of
the Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Desert Springs Limited Partners or
the other Limited Partners. Although the General Partner has obtained the
Appraisal and the Fairness Opinion from AAA, AAA has not negotiated with
the General Partner 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 Desert Springs Limited
Partners or the other 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 Partner involve the following conflicts of
interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partner and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including Desert Springs, participate and Host REIT will benefit if the
value of the OP Units received by the Limited Partners of Desert Springs
is less than the value of their Partnership Interests. In addition, the
terms of the Leases of the Hotels, including Desert Springs' Hotel, will
be determined by Host and 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, including the Desert Springs
Limited Partners.
. Adverse Tax Consequences to the General Partner of a Sale of Desert
Springs' Hotel. In past years, Desert Springs has disproportionately
allocated tax losses to the General Partner, with the result that if the
Desert Springs Hotel were to be sold in a taxable transaction, the
General Partner (and thus Host) would incur a disproportionately larger
tax gain than the Desert Springs Limited Partners. Accordingly, the
General Partner and Host have an additional conflict of interest in
deciding the appropriate course of action for Desert Springs with respect
to its Hotel.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the Desert Springs
Limited Partners must vote on the Merger, including (i) the exact
Exchange Value for Desert Springs (which will be adjusted for changes in
lender and capital expenditures reserves, deferred maintenance and other
items prior to the Effective Date), (ii) the price of the OP Units for
purposes of the Merger, 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 Desert Springs Limited Partners 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 Note Election Amount is
determined. For these reasons, the Desert Springs Limited Partners cannot
know at the time they vote on the Merger these important aspects of the
Merger.
. Combined REVPAR for the Operating Partnership's Hotels is Significantly
Less than the REVPAR for the Desert Springs Hotel. The Operating
Partnership's pro forma REVPAR for the First Two Quarters 1998 is
significantly lower than the REVPAR attributable to Desert Springs' Hotel
for the same period.
. Exchange Value May Not Equal Fair Market Value of Desert Springs' Hotel.
Each Desert Springs Limited Partner who retains OP Units or elects to
exchange OP Units for Common Shares will receive consideration with a
deemed value equal to the Exchange Value of such Desert Springs Limited
Partner's Partnership Interest. The determination of the Exchange Value
of Desert Springs involves numerous
Desert Springs Supp-2
<PAGE>
estimates and assumptions. There is no assurance that the Exchange Value of
Desert Springs will equal the fair market value of the Hotel and other
assets contributed by Desert Springs. See "Determination of Exchange Value
of Desert Springs and Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from Desert Springs Limited
Partners and the other Limited Partners who elect to exchange OP Units
for Common Shares in connection with the Mergers) 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. Host REIT's OP Units, in the aggregate, 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
to Host REIT and Desert Springs Limited Partners and the other Limited
Partners may result in such 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 of Desert Springs and Allocation of OP
Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Desert Springs Limited Partners' Partnership Interests. The
price of an OP Unit for purposes of the Merger, 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 Merger (but in no
event will it be less than $ or greater than $ per OP Unit). This
pricing mechanism has the effect of fixing the minimum and maximum number
of OP Units to be issued in the Mergers. It is likely that, either
initially or 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 Merger. This could
result in the Desert Springs Limited Partners receiving OP Units or
Common Shares with an actual value that is less than either the price of
the OP Units for purposes of the Merger or the fair market value of their
Partnership Interests.
. Inability of Desert Springs Limited Partners Who Retain OP Units to
Redeem OP Units for One Year. Desert Springs Limited Partners who retain
OP Units received in the Merger will be unable to redeem such OP Units
for one year following the Merger. Until then, Desert Springs Limited
Partners will bear the risk of illiquidity and of not being able to sell
in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection with
the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of Desert
Springs. Each Desert Springs Limited Partner may elect to receive in
exchange for OP Units received in the Merger an unsecured, seven-year
Note of the Operating Partnership with a principal amount equal to the
Note Election Amount of his Partnership Interest, which is based upon
numerous assumptions and estimates. The deemed value of the OP Units to
be received by the Desert Springs Limited Partners will exceed the
principal amount of the corresponding Notes (because the Exchange Value
will be higher than the Note Election Amount) and there is no assurance
that the Note a Desert Springs Limited Partner receives will have a value
equal to either (i) the fair market value of the Desert Springs Limited
Partner's share of the Hotel and other assets owned by Desert Springs or
(ii) the principal amount of the Note. 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
Desert Springs Supp-3
<PAGE>
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 Desert Springs 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
ranks equally with such Notes.
. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
. Fundamental Change in Nature of Investment; Potential Underperformance.
The Merger and the REIT Conversion involve a fundamental change in the
nature of a Desert Springs Limited Partner's investment from holding an
interest in Desert Springs, which was structured as a tax shelter
investment, is a finite-life entity, has a fixed portfolio of one Hotel
and distributes the cash flow from the operation of the Hotel to the
Desert Springs Limited Partners, to holding a direct or indirect interest
in the Operating Partnership, an ongoing real estate company with a
portfolio of approximately 125 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 and (iii) is able to
reinvest proceeds from sales or refinancings of existing Hotels in other
hotels. In addition, each Desert Springs Limited Partner's investment
will change from one that allows a Desert Springs Limited Partner to
receive a return of capital in the form of distributions from any net
proceeds of a sale or refinancing of Desert Springs' assets to an
investment in which a Desert Springs Limited Partner who retains OP Units
likely would realize a return of capital only through the exercise of the
Unit Redemption Right. Those Desert Springs Limited Partners who elect to
receive Common Shares in connection with the Merger will hold an equity
interest in a publicly traded REIT that (i) provides immediate liquidity,
(ii) intends to make distributions to its shareholders in an amount equal
to at least 95% of its taxable income, (iii) allows shareholders to
influence management by participation in the election of Trustees and
(iv) realizes substantial corporate tax savings as long as certain
requirements are met. A Desert Springs Limited Partner's share of the
liquidation proceeds, if any, from the sale of the Desert Springs Hotel
could be higher than the amount realized upon exercise of the Unit
Redemption Right, the sale of Common Shares received in connection with
the Merger or payments on any Note received by a Desert Springs Limited
Partner who elects to exchange his OP Units for such Note in connection
with the Merger. An investment in the Operating Partnership or Host REIT
may not outperform an investment in Desert Springs. 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 Merger, Desert Springs Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will own
interests in a much larger enterprise with a broader range of assets than
Desert Springs individually. A material adverse change affecting the
Operating Partnership's assets will affect all Limited Partners,
including Desert Springs Limited Partners, regardless of whether a
particular Limited Partner previously was an investor in such affected
assets. Desert Springs owns discrete assets and the Mergers and the REIT
Conversion will significantly diversify the types and geographic
locations of the Hotels in which the Desert Springs 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 the Hotel previously owned by Desert Springs.
. Desert Springs Limited Partners Have No Cash Appraisal Rights. Desert
Springs Limited Partners who vote against the Merger have no right to
receive cash based upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The Desert Springs Limited Partners cannot know at the time
they vote on the Merger the exact size and amount of leverage of the
Operating Partnership. Host is an existing operating company that
regularly issues and repays debt,
Desert Springs Supp-4
<PAGE>
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, 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 Mergers and the REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term 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. The Operating Partnership also
will not own any of the voting stock of the Non-Controlled Subsidiaries,
which may own up to 20% by value of the Operating Partnership's assets.
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 and the Non-Controlled Subsidiaries to operate and manage
their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into new
leases with such lessees, which could result in a failure of Host REIT to
qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of Desert Springs Limited Partners Binds All Desert
Springs Limited Partners. For Desert Springs, approval by a majority of
the Partnership Interests of Desert Springs that are eligible to be voted
is required to approve the Merger and the related amendments to the
partnership agreement, as described in "Voting Procedures--Required Vote
and Other Conditions." Such approval will cause Desert Springs to
participate in the Merger and will bind all Desert Springs Limited
Partners, including Desert Springs Limited Partners who voted against or
abstained from voting with respect to the Merger and the related
amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain such
consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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.
Desert Springs Supp-5
<PAGE>
. 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 would have had outstanding indebtedness totaling
approximately $5.1 billion, which represents an approximately 53% 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 $15.00). 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 (including Host REIT), (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 Prior 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 (including Host REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural and
other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder Rights
Plan to replace the existing stockholder rights plan of Host. Host REIT
also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest" and "Certain Provisions of Maryland Law and Host REIT's
Declaration of Trust and Bylaws."
. 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 substantial
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
Desert Springs Limited Partners (other than those who elect to receive
Common Shares or a Note in exchange for OP Units in
Desert Springs Supp-6
<PAGE>
connection with the Merger) generally are not expected to recognize
significant taxable gain at the time of the Merger, there are a variety of
events and transactions (including the sale of the Hotel currently owned by
Desert Springs or the reduction of indebtedness securing the Hotel) that
could cause a Desert Springs 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 Treatment of Desert Springs Limited
Partners Who Hold OP Units Following the Merger." Certain Hotels (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. The partnership agreement of the Operating Partnership, which
is substantially in the form attached to the Consent Solicitation 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 any 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 any such transaction) and the limited
partners have no right to approve or disapprove such transactions. See
"Description of OP Units--Sales of Assets."
. Election to Exchange OP Units for Common Shares. A Desert Springs Limited
Partner who elects to receive Common Shares in exchange for his OP Units
in connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. If he has a "negative capital
account" with respect to his Partnership Interest he will recognize
"phantom income" (i.e., the income recognized would exceed the value of
the Common Shares by the amount of his negative capital account). Such
Desert Springs Limited Partner may not defer recognition of any part of
the gain realized from the exchange under the "installment sale" rules.
See "Federal Income Tax Consequences--Tax Treatment of Desert Springs
Limited Partners Who Exercise Their Right to Make the Common Share
Election or the Note Election." Desert Springs Limited Partners who elect
to receive Common Shares in connection with the Merger will not receive
the Crestline common stock or any portion of the E&P distribution made
before they become shareholders of Host REIT.
. Election to Exchange OP Units for Notes. A Desert Springs Limited Partner
who elects to receive a Note in exchange for his OP Units in connection
with the Merger will be treated as having made a taxable disposition of
his OP Units. A Desert Springs Limited Partner who receives a Note may be
eligible to defer at least a small portion, but not all, of that gain
under the "installment sale" rules until principal on the Note is paid. A
Desert Springs Limited Partner with a "negative capital account" with
respect to his Partnership Interest who elects to receive a Note in
connection with the Merger will recognize "phantom income" in that amount
in any event. See "Federal Income Tax Consequences--Tax Treatment of
Desert Springs Limited Partners Who Exercise Their Right to Make the
Common Share Election or 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 and Common Shares,
Desert Springs Supp-7
<PAGE>
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 the lease of the Hotel to
the Lessee were to be disregarded for tax purposes (for example, because
the Lease was determined to lack economic substance), Host REIT could
fail to qualify as a REIT and the Operating Partnership might be treated
as a corporation for federal income tax purposes, which could have a
material adverse impact on the Desert Springs Limited Partners and the
value of the OP Units and the Common Shares.
. 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.
. Desert Springs Limited Partners Need to Consult with Their Own Tax
Advisors. Because the specific tax attributes of a Desert Springs
Limited Partner and the facts regarding such Desert Springs Limited
Partner's interest in Desert Springs could have a material impact on the
tax consequences to such Desert Springs Limited Partner of the Merger
(including the decision whether to elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger) and the
subsequent ownership and disposition of OP Units, Common Shares or Notes,
it is essential that each Desert Springs Limited Partner consult with his
own tax advisors regarding the application of federal, foreign and state
and local tax laws to such Desert Springs 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 Desert Springs Limited Partners would not be able to use
suspended passive activity losses from other investments (including from
Desert Springs) to offset income from the Operating Partnership. It is
estimated that each Desert Springs Limited Partner 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 REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
Desert Springs Supp-8
<PAGE>
MARRIOTT DESERT SPRINGS CORPORATION (THE "GENERAL PARTNER"), THE GENERAL
PARTNER OF DESERT SPRINGS, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL
BENEFITS AND IS FAIR TO THE DESERT SPRINGS LIMITED PARTNERS AND RECOMMENDS
THAT ALL DESERT SPRINGS LIMITED PARTNERS VOTE FOR THE MERGER AND FOR THE
RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for
Desert Springs Limited Partners the specific risks, benefits, effects and
fairness of the Merger to them and to provide other information specific to
Desert Springs. Supplements have also been prepared for each of the other
Partnerships. This Supplement, together with the supplements of the other
Partnerships (collectively, the "Supplements"), are part of the Consent
Solicitation. Upon receipt of a written request by a Limited Partner or his
representative so designated in writing, the General Partner will send a copy
of any Supplement without charge. All requests for a copy of a Supplement
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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the Desert Springs Limited Partners for the reasons set forth
below. This information is qualified by and should be read in conjunction with
the information in the Consent Solicitation under "Background and Reasons for
the Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of Desert Springs, are expected to include:
. Exchange Value of Desert Springs. Desert Springs Limited Partners who
retain OP Units or elect to receive Common Shares in connection with the
Merger will receive OP Units or Common Shares with an estimated Exchange
Value equal to $40,880 per Partnership Unit.
. Liquidity. The REIT Conversion will offer Desert Springs Limited
Partners liquidity with respect to their investments in Desert Springs
because Desert Springs Limited Partners can receive freely tradeable
Host REIT Common Shares by electing to exchange OP Units for Common
Shares in connection with the Merger or by exercising their Unit
Redemption Right, at any time after one year following the Effective
Date. Host has approximately 204 million shares of common stock
outstanding and is expected to have a total common equity market
capitalization of approximately $3.6 billion after giving effect to the
earnings and profits distribution (based on a price of $15.00 per Host
REIT Common Share). The exercise of the election to exchange OP Units
for Common Shares in connection with the Merger or the exercise of the
Unit Redemption Right, however, generally would result in recognition of
taxable income or gain at the time of exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that these distributions will be higher than the estimated cash
distributions for 1998 of Desert Springs 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 Desert Springs and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion --
Reasons for the Mergers."
. Substantial Tax Deferral for Desert Springs Limited Partners Not
Electing to Exchange OP Units for Common Shares or Notes. The General
Partner expects that Desert Springs Limited Partners who do not elect to
receive Common Shares or a Note in exchange of OP Units in connection
with the Merger
Desert Springs Supp-9
<PAGE>
generally should be able to obtain the benefits of the Merger 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 Desert Springs or a sale or other disposition
of its assets in a taxable transaction. Thereafter, such Desert Springs
Limited Partners generally should be able to defer at least a
substantial portion of such built-in gain until they elect to exercise
their Unit Redemption Right or the Hotel currently owned by Desert
Springs is sold or otherwise disposed of in a taxable transaction by the
Operating Partnership or the debt now secured by such Hotel is repaid,
prepaid or substantially reduced. The federal income tax consequences of
the Merger are highly complex and, with respect to each Desert Springs
Limited Partner, are dependent upon many variables, including the
particular circumstances of such Desert Springs Limited Partner. See
"Federal Income Tax Consequences--Tax Consequences of the Merger." Each
Desert Springs Limited Partner is urged to consult with his own tax
advisors as to the consequences of the Merger in light of his particular
circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of Desert Springs Limited Partners upon the performance of,
and the exposure to the risks associated with, Desert Springs' Hotel 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 generally will have a significantly lower leverage
to value ratio, approximately 53%, than Desert Springs currently, which
has a leverage ratio of 81% (calculated as a percentage of Exchange
Value), resulting in significant interest and debt service savings and
greater financial stability.
. Growth Potential. The General Partner believes that the Desert Springs
Limited Partners, by directly or indirectly 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
Desert Springs 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 Desert Springs 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 Desert Springs individually.
. Public Market Valuation of Assets. The Partnership Units of Desert
Springs currently trade at a discount to the net asset value of Desert
Springs' assets. The General Partner believes that by exchanging
interests in Desert Springs, which is a non-traded, finite-life limited
partnership with a fixed portfolio for interests in an ongoing 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 Desert Springs 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 (although not currently), has resulted at various times
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 they will not trade at a discount to private market
values. Also, the benefit of Host's conversion to a REIT will not be
shared by the Desert Springs 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.
If Desert Springs does not participate in the Merger, its business will
continue in its current manner; however, the Operating Partnership may elect to
contribute some or all of its interests in Desert Springs to a Non-Controlled
Subsidiary.
Desert Springs Supp-10
<PAGE>
DETERMINATION OF EXCHANGE VALUE OF DESERT SPRINGS AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of Desert Springs 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 Partner has retained AAA to
determine the market value of the Hotel as of March 1, 1998 (the
"Appraised Value"). The "Adjusted Appraised Value" of Desert Springs
equals the Appraised Value of its Hotel, adjusted as of the Final
Valuation Date 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 Desert Springs
represents AAA's estimate, as adopted by the General Partner, of the
discounted present value, as of January 1, 1998, of the Desert Springs
limited partners' share of estimated future cash distributions and
estimated net sales proceeds (plus lender reserves), assuming that
Desert Springs 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 Desert Springs represents
the General Partner's estimate of the net proceeds to Desert Springs
limited partners resulting from the assumed sale as of December 31, 1998
of the Hotel of Desert Springs, 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 Desert Springs 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 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 Desert Springs after the Initial Valuation
Date to perform deferred maintenance that were previously subtracted in
determining the estimated Adjusted Appraised Value of Desert Springs and (iii)
to reflect any changes in Desert Springs' other reserves, such as for
litigation expenses and indemnification costs and any revised estimates of
transfer and recordation taxes and fees. The General Partner does not believe
that any adjustments to the Exchange Value will be material; however, if any
such changes are deemed to be material, the General Partner will provide the
Desert Springs Limited Partners an opportunity to change their vote on the
Merger.
APPRAISED VALUE. Desert Springs' Hotel was 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
Desert Springs' Hotel. The appraisal (an "Appraisal") was reviewed by a Member
Appraisal Institute ("MAI") appraiser and certified by such MAI appraiser as
having been prepared in accordance with the requirements of the Standards of
Professional Practice of the Appraisal Institute and the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation.
The purpose of the Appraisal is to provide an estimate of the "Market Value"
of the 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
Desert Springs Supp-11
<PAGE>
granted by anyone associated with the sale. AAA made a site visit at Desert
Springs' Hotel for purposes of the Appraisal.
In preparing the Appraisal, 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 Desert Springs' 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 Hotel. AAA also
prepared a projection of the net operating income prior to incentive
management fees and certain capital expenditures for the 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 Hotel.
The resulting gross margin (ratio of total revenues to NOI 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 Desert Springs, 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
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 the 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 effective capitalization
rates for 1997 and Projected Year's Adjusted NOI resulting from AAA's
estimated Appraised Value of Desert Springs' Hotel.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISAL OF DESERT SPRINGS'
HOTEL
<TABLE>
<CAPTION>
1997 PROJECTED YEAR (ENDING FEBRUARY 28, 1999)
---- -----------------------------------------
<S> <C>
8.9% 9.3%
</TABLE>
The resulting Appraised Value of Desert Springs' Hotel, as estimated by AAA,
is $223,800,000.
Desert Springs Supp-12
<PAGE>
. Comparison with Comparable Sales. AAA checked the Appraised Value of the
Hotel derived by the foregoing procedures against its database of
comparable sale transactions for reasonableness.
The Appraised Value assumes 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 Desert Springs' Hotel (but
estimated deferred maintenance costs have been deducted in estimating the
Adjusted Appraised Value of Desert Springs' Hotel). The Appraised Value did
not take into account the costs that might be incurred in selling the Hotel
(but estimated costs for transfer and recordation taxes and fees have been
deducted in estimating the Adjusted Appraised Value of the Hotel).
The Appraisal is not a guarantee of present or future values and no
assurance can be given as to the actual value of Desert Springs' Hotel. The
Appraisal should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of Desert Springs.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 Desert Springs' Hotel will vary
from the results projected in the Appraisal and the variations may be
material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of Desert Springs was
determined by making various adjustments to the Appraised Value of Desert
Springs' Hotel, as described below.
. Lender Reserves. Desert Springs' 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 Value of the
Hotel. A final determination of the lender reserves of Desert Springs
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 Reserve. For Desert Springs, 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 (including participating interest that would accrue as a result
of the Mergers) as of the Effective Date (assumed to be December 31,
1998) of all mortgage and other debt of Desert Springs has been
subtracted from the Appraised Value. With regard to Host's participating
subordinated loan to Desert Springs, the accrued interest subtracted in
determining the Exchange Value included an amount equal to the
participating interest that would be payable to Host under the loan if
it were repaid on December 31, 1998.
. Mark to Market Adjustment. The third-party loans of the Partnerships
have various interest rates and terms to maturity. In order to reflect
the fair value of the third-party loans of Desert Springs, the estimated
Adjusted Appraised Value for Desert Springs has been increased 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 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 Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to Desert
Springs' Hotel have been subtracted from the
Desert Springs Supp-13
<PAGE>
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
Value.
The following table sets forth the adjustments to the Appraised Value made
to derive the estimated Adjusted Appraised Value for Desert Springs' Hotel as
of the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR DESERT SPRINGSAS OF THE
INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................ $ 223,800
Lender reserves................................................ 6,173
Capital expenditure reserve.................................... 1,500
Mortgage debt.................................................. (101,632)
Other debt..................................................... (92,438)
Mark to market adjustment...................................... 411
Deferred maintenance costs..................................... (650)
---------
Estimated Adjusted Appraised Value............................. $ 37,164
=========
General Partner's share(1)..................................... $ 372(2)
Limited partner share of Host subsidiaries(3).................. $ 0
Total limited partners' share(4)............................... $ 36,792
Per Partnership Unit........................................... $ 40,880
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Does not include $73.2 million attributable to the participating
subordinated loan held by Host.
(3) Includes limited partner interests held by the General Partner.
(4) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of Desert Springs
using the following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for Desert Springs 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 Appraisal and for each
subsequent year applying an assumed annual stabilized growth rate (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 Desert Springs' 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 Desert Springs' FF&E reserve was adequate
and understood that Host determined that there were no reserve
shortfalls or surpluses.
. Determination of Residual Value. To estimate the residual value of the
Desert Springs limited partners' interest in Desert Springs at the end
of the 12-year period, AAA assumed that the Desert Springs Hotel would
be sold as of December 31, 2009 at its then market value. AAA estimated
the market value of the 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% 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 Desert Springs' limited partners under the partnership and debt
agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to Desert Springs'
limited partners from operations and estimated net sales proceeds
Desert Springs Supp-14
<PAGE>
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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for Desert Springs are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR DESERT SPRINGS
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
EXIT CAPITALIZATION CONTINUATION GENERAL LIMITED CONTINUATION VALUE
GROWTH RATE RATE (2009) VALUE PARTNER'S SHARE PARTNERS' SHARE (PER PARTNERSHIP UNIT)
----------- ------------------- ------------ --------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
4.50% 9.66% $31,007 $824 $30,183 $33,536
</TABLE>
LIQUIDATION VALUE. The Liquidation Value of Desert Springs was estimated by
the General Partner and represents the estimated value of Desert Springs if
all of its assets were sold as of December 31, 1998. Such value was based upon
the Adjusted Appraised Value of Desert Springs, 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 Desert Springs' Hotel 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 Desert
Springs. The General Partner then determined the portion of the estimated
Liquidation Value that would be distributable to Desert Springs' limited
partners under the terms of the partnership agreement and other contractual
arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of Desert Springs as of the
Initial Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF DESERT SPRINGS AS OF THE INITIAL
VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................ $ 223,800
Lender reserves................................................ 6,173
Capital expenditure reserve.................................... 1,500
Mortgage debt.................................................. (101,632)
Other debt..................................................... (89,669)
Prepayment/defeasance costs.................................... (8,821)
Deferred maintenance costs..................................... (650)
Sales costs.................................................... (5,595)
---------
Estimated Liquidation Value.................................... $ 25,106
=========
General Partner's share(1)..................................... $ 251(2)
Limited partner share of Host subsidiaries(3).................. $ 0
Total limited partners' share(4)............................... $ 24,855
Per Partnership Unit........................................... $ 27,617
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Excludes $70.5 million attributable to the participating subordinated loan
held by Host.
(3) Includes limited partner interests held by the General Partner.
(4) Includes limited partner share of Host subsidiaries.
Desert Springs Supp-15
<PAGE>
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of Desert Springs (based upon the greatest of its estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value), the estimated minimum number of OP Units to be received
(based upon the maximum price of $ per OP Unit) and the estimated Note
Election Amount for Desert Springs, all on a per Partnership Unit basis as of
the Initial Valuation Date. The number of Common Shares received in exchange
for OP Units in connection with the Merger will equal the number of OP Units.
The estimated Note Election Amount for Desert Springs (which will be received
by Desert Springs Limited Partners electing to receive Notes in exchange for
OP Units) is equal to 80% of the estimated Exchange Value for Desert Springs.
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 Desert Springs 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 (but will not be less than $ or greater than $
per OP Unit) and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUE,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
OF DESERT SPRINGS PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED ESTIMATED ESTIMATED MINIMUM ESTIMATED
ADJUSTED APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NOTE ELECTION
VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
------------------ ------------ ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$40,880 $33,536 $27,617 $40,880 2,725 $32,704
</TABLE>
- --------
(1) A Partnership Unit in Desert Springs 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units to Pay Exchange Value to Desert Springs Limited
Partners. Each Desert Springs Limited Partner will receive OP Units with a
deemed value equal to the Exchange Value of such Desert Springs 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 will it be less than $ or greater than $ per OP Unit). Thus, if the
20-day average trading price is less than $ , the price per OP Unit in the
Merger would be $ , and if such average trading price is greater than $ ,
the price per OP Unit in the Merger would be $ . The OP Units will be
delivered to the Desert Springs Limited Partners promptly after the twentieth
trading day following the Effective Date of the Merger (which would be
promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998).
Desert Springs Limited Partners at the Effective Date of the Merger who
retain OP Units will receive cash distributions from Desert Springs for all of
1998 and, if the Merger does not occur in 1998, any portion of 1999 prior to
the Merger for which period they do not receive a cash distribution from the
Operating Partnership. Cash distributions will be made by Desert Springs in
accordance with its partnership agreement on or before June 1, 1999 in respect
of 1998 operations and, if the Merger does not occur prior to January 1, 1999,
within 90 days after the Effective Date of the Merger in respect of any 1999
operations. Desert Springs Limited Partners at the Effective Date of the
Mergers who elect to receive Common Shares in exchange for OP Units in
connection with the Merger will participate in the same distributions from
Desert Springs as Desert Springs Limited Partners who retain OP Units and will
receive distributions from Host REIT with respect to periods after the
Effective Date of the Mergers, which distributions are expected to equal the
amount distributed with respect to the OP Units for such periods. Desert
Springs Limited Partners at the Effective Date of the Merger who elect to
receive Notes in connection with the Merger in exchange for OP Units will
participate in the same distributions from
Desert Springs Supp-16
<PAGE>
Desert Springs 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 Merger because they will be entitled to receive
interest on their Notes for such periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S INTEREST IN DESERT SPRINGS AND
ALLOCATION OF OP UNITS TO THE GENERAL PARTNER
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the Desert Springs Limited Partners'
Partnership Interests, by the same methodologies set forth above and giving
effect to the applicable distribution preferences in the Desert Springs
partnership agreement. The number of OP Units that will be received by the
General Partner will be equal to the value of its interest in Desert Springs
divided by the same price per OP Unit used to determine the number of OP Units
to be received by the Desert Springs Limited Partners.
The following table sets forth the estimated value of the interest of the
General Partner in Desert Springs based upon the estimated aggregate Exchange
Value of the Desert Springs Limited Partners' Partnership Interests as of the
Initial Valuation Date and the minimum number of OP Units estimated to be
received by the General Partner in respect thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S
INTEREST AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value........................................... $37,164
Limited partners' share of aggregate Exchange Value................ 36,792
-------
Value of General Partner's interest(1)............................. 372 (2)
Total interest of General Partner.................................. $ 372 (2)
=======
Number of OP Units:
Minimum(3)........................................................ 25
</TABLE>
- --------
(1) Excludes limited partner interests owned by the General Partner.
(2) Does not include $73.2 million attributable to the participating
subordinated loan held by Host.
(3) Assumes the price of an OP Unit is $ which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of Desert Springs and recommends that all
Limited Partners of Desert Springs consent to the Merger. The General Partner
bases this recommendation primarily on (i) its view that the expected benefits
of the Merger for the Desert Springs Limited Partners outweigh the risks and
potential detriments of the Merger to the Desert Springs Limited Partners (see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons for
the Mergers" and "Risk Factors"), (ii) its view that the value of the OP Units
allocable to the Desert Springs Limited Partners on the basis of the Exchange
Value established for Desert Springs represents fair consideration for the
Partnership Interests held by the Desert Springs Limited Partners and is fair
to the Desert Springs Limited Partners from a financial point of view and
(iii) the Appraisal and Fairness Opinion of AAA.
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the Desert Springs Limited Partners,
individually and as a whole, if it is consummated with any combination of
other Participating
Desert Springs Supp-17
<PAGE>
Partnerships. The General Partner bases this belief primarily on the fact that
the consideration to be paid to the Desert Springs Limited Partners has been
established based upon Desert Springs' Exchange Value, without regard to any
possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for Desert
Springs represents fair consideration for the Partnership Interests of
the Desert Springs Limited Partners in the Merger in relation to Desert
Springs because the Exchange Value is equal to the greatest of the
Adjusted Appraised Value, Continuation Value and Liquidation Value, each
of which is an acceptable method for determining the fair market value
of a Partnership's assets. The General Partner also has concluded that
the Exchange Value established for the Desert Springs Limited Partners
fairly reflects the value of the assets held by Desert Springs. In
addition, the General Partner's own analysis, as well as the Fairness
Opinion, support these conclusions.
. Desert Springs Limited Partners who retain OP Units will be able to
defer recognition of gain for tax purposes until such time as they
choose to realize such gain based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the Desert Springs 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
Merger for the Desert Springs Limited Partners, as described in "Risk
Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
Desert Springs Limited Partners should consider carefully and does not
conclude that the Exchange Value is the best price that could be
obtained. 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 Merger.
. The General Partner believes that the economic terms of the lease of the
Desert Springs Hotel are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the Desert Springs
Limited Partners.
. The General Partner believes that the value of the consideration to be
received by the Desert Springs Limited Partners in the Merger 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 Desert Springs is equal to its
Adjusted Appraised Value, which is the greatest of the Adjusted
Appraised Value, the Continuation Value and the Liquidation Value. The
General Partner does not believe that the sale of Desert Springs' Hotel
and liquidation of Desert Springs would obtain for Desert Springs'
Limited Partners as much value as the value to be received by such
Desert Springs Limited Partners following the Merger. The General
Partner believes that the following benefits are of the greatest value
and importance to the Desert Springs Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer Desert
Springs Limited Partners liquidity with respect to their investment
in Desert Springs because Desert Springs Limited Partners can
receive freely tradeable Host REIT Common Shares in connection with
the Merger or for Desert Springs Limited Partners who retain OP
Units, at any time commencing one year following the Effective Date,
by exercising their Unit Redemption Right, 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 $3.6 billion after
giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host REIT Common Share). The election to
exchange OP Units for Common Shares in connection with the
Desert Springs Supp-18
<PAGE>
Merger or 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. The General Partner expects
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 Desert Springs and, in any event, the ability to receive
distributions quarterly and in regular amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
Desert Springs Limited Partner's investment will be converted from
an investment in Desert Springs, which owns one hotel into an
investment in an enterprise that initially will own or control
approximately 125 Hotels and will have a total market capitalization
of approximately $3.6 billion, thereby reducing the dependence upon
the performance of, and the exposure to the risks associated with,
the Hotel currently owned by Desert Springs 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 generally will have a significantly lower
leverage to value ratio, approximately 53%, than Desert Springs
currently, which has a leverage ratio of 81% (calculated as a
percentage of Exchange Value), resulting in significant interest and
debt service savings and greater financial stability.
. Substantial Tax Deferral for Desert Springs Limited Partners Not
Electing to Exchange OP Units for Common Shares or Notes. The
General Partner expects that Desert Springs Limited Partners who do
not elect to receive Common Shares or Notes in exchange for OP Units
generally should be able to obtain the benefits of the Merger 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 Desert Springs or a sale or other
disposition of its assets in a taxable transaction.
The General Partner believes that the factors described above, which support
the fairness of the Merger to the Desert Springs Limited Partners, when
weighed against the factors that may be disadvantageous, taken as a whole,
indicate that the Merger is fair to the Desert Springs Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 Desert Springs and
each other 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 Desert Springs
Limited Partners and the Limited Partners of each other Partnership and
(ii) the methodologies used to determine the value of an OP Unit and to
allocate the equity in the Operating Partnership to be received by the Desert
Springs limited partners and the limited partners of each other Partnership
are fair and reasonable to the Desert Springs Limited Partners and the Limited
Partners of each other Partnership. The Fairness Opinion is addressed to each
Partnership and it may be relied upon by each of the Desert Springs Limited
Partners and the Limited Partners of each of the other 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 the 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.
Desert Springs Supp-19
<PAGE>
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 Desert Springs and the
other Partnerships might not have been more favorable to the Limited Partners
in certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of Desert Springs' and each other
Partnership's contingent liabilities.
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partner selected AAA, on
the basis of the proposals, 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
Desert Springs Supp-20
<PAGE>
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.
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 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 as of March 1, 1998 AAA did not conduct
any subsequent due diligence or valuation procedures.
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 used to
determine the Exchange Value, the Adjusted Appraised Value, the Continuation
Value and the Liquidation Value each Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of each of the Hotels) are fair and reasonable, from a
financial point of view, to the Desert Springs Limited Partners and the
Limited Partners of each other Partnership and (ii) the methodologies used to
determine the value of an OP Unit and to allocate the equity interest in the
Operating Partnership to be received by the Desert Springs limited partners
and the limited partners of each other Partnership are fair and reasonable to
the Desert Springs Limited Partners and the Limited Partners of each other
Partnership.
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.
Desert Springs Supp-21
<PAGE>
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by Desert Springs. The following table
sets forth the distributions paid to Desert Springs Limited Partners (per
Partnership Unit) during the periods indicated. The information below should
be read in conjunction with the information in this Supplement under the
caption "Selected Financial Data."
HISTORICAL CASH DISTRIBUTIONS PAID BY DESERT SPRINGS(PER PARTNERSHIP UNIT)(1)
<TABLE>
<CAPTION>
FISCAL YEAR
FIRST TWO QUARTERS ---------------------------------------
1998 1997 1996 1995 1994 1993
------------------ -------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
From net income......... $2,500 $ -- $ 464 $ 2,436 $ 4,364 $ 5,189
Representing return of
capital(2)............. -- 25,000 1,238 3,141 40 309
------ -------- ------ ------- ------- -------
Total................. $2,500 $ 25,000 $1,702 $ 5,577 $ 4,404 $ 5,498
====== ======== ====== ======= ======= =======
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in Desert
Springs.
(2) Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the General Partner. Under Desert
Springs' partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of Desert Springs but the
General Partner and its affiliates are reimbursed for certain costs and
expenses incurred on behalf of Desert Springs. In addition, the General
Partner is entitled to distributions related to its interests in Desert
Springs. The following information has been prepared to compare the amount of
reimbursements paid and cash distributions made by Desert Springs to the
General Partner and its affiliates to the amounts that would have been paid if
the reimbursement and distribution structure which will be in effect after the
REIT Conversion had been in effect for the periods presented.
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). Marriott
International receives management fees and other reimbursements from Desert
Springs under the Management Agreement.
Desert Springs Supp-22
<PAGE>
The following table sets forth the reimbursements and distributions paid by
Desert Springs to its General Partner and its affiliates and the payments made
to Marriott International Inc. and its Affiliates 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 Partner and its
affiliates and the payments made to Marriott International Inc. and its
Affiliates 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 of $0.81 per OP Unit per year during
such period, which is the expected minimum distribution for 1999.
HISTORICAL AND PRO FORMA REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL
PARTNER AND ITS AFFILIATES
AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR FISCAL YEAR
1998 1997 1996 1995
----------------- ---------------- ---------- ----------
PRO PRO
HISTORICAL FORMA HISTORICAL FORMA HISTORICAL HISTORICAL
---------- ------ ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(1)....... $ 281 $ -- $ 273 $ -- $250 $ 67
Interest on Host Junior
Loan................... 776 -- -- -- -- --
Distributions(2)........ 23 10 227 20 15 51
Payments made to
Marriott International
Inc. and its
Affiliates............. 2,714 2,714 621 621 148 100
------ ------ ------ ----- ---- ----
Total .............. $3,794 $2,724 $1,121 $ 641 $413 $218
====== ====== ====== ===== ==== ====
</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 Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $0.81
per annum per OP Unit (which is the expected minimum distribution per OP
Unit for 1999) with respect to the estimated number of OP Units that the
General Partner and its affiliates will receive with respect to their
general and limited partner interests in Desert Springs. Such number does
not reflect the aggregate number of OP Units Host REIT will receive in
connection with the REIT Conversion.
(3) Subsequent to November 25, 1997 (the date of conversion from an operating
agreement to a management agreement), payments made to Marriott
International Inc. and its affiliates ("MII") includes base and incentive
management fees, chain and central office services, Marriott Rewards
Program costs and rental payments for the golf course. Prior to this date,
payments to MII included rental payments for the golf course and interest
on note payable to MII.
CERTAIN INFORMATION REGARDING THE HOTEL OWNED BY DESERT SPRINGS
<TABLE>
<CAPTION>
NAME OF HOTEL LOCATION OF HOTEL NUMBER OF ROOMS DATE OPENED
- ------------- ----------------- --------------- -----------
<S> <C> <C> <C>
Marriott's Desert Springs Resort
and Spa........................ Palm Desert, CA 884 1987
</TABLE>
The table below sets forth certain performance information for Desert
Springs' Hotel for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------
1998 1997 1997 1996 1995
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average daily rate........... $214.47 $197.55 $ 169.55 $ 158.15 $ 150.34
Occupancy.................... 79.7% 78.6% 73.00% 71.40% 68.90%
REVPAR....................... $170.93 $155.27 $ 123.77 $ 112.92 $ 103.58
% REVPAR change.............. 10.00% -- 9.60% 9.00% --
</TABLE>
Marriott's Desert Springs Resort and Spa is a full-service Marriott hotel
and, including the second golf course, is located on approximately 185 acres
of land. It is located approximately 11 miles from the Palm Springs Airport
and two hours east of Los Angeles.
The Hotel opened on February 2, 1987. The Hotel consists of 884 large guest
rooms including 65 luxury suites. Each room has a private balcony, mini-bar
and other deluxe accommodations. The Hotel has an 18-hole championship golf
course owned by the Partnership, with an additional 18-hole course which is
leased by the
Desert Springs Supp-23
<PAGE>
Partnership. Twenty-three acres of man-made lakes are interspersed throughout
the resort grounds and lower level of the Hotel's main lobby. Boats depart
from inside the main lobby and carry guests to the various resort functions.
There are a total of five outdoor pools divided between three guest areas. The
main guest pool area, the Oasis, was expanded during 1995 and now has three
pools and two spas, and the Spring Pool and Health Spa areas each have one
pool and one spa. The tennis complex includes a separate tennis pro shop
building, 20 tennis courts of various surfaces and badminton and volleyball
courts. The health spa is housed in a separate one-story building. Within the
health spa are separate men's and women's facilities, lap pool, hot and cold
plunge pools, saunas, steam rooms, aerobics and exercise rooms, lounge and
locker rooms. Food and beverage services within the resort include four fine
dining restaurants that range from casual American to Japanese sushi and
overlook the water. Additionally, there are two grille/snack bars at the
outdoor pools, two golf club snack bars, lobby lounge, coffee bar and
entertainment lounge. The 40,000 square foot lobby has an eight-story high
view of the nearby mountains. The Hotel has a three-story garage with parking
for approximately 1,500 vehicles. The meeting and exhibit spaces total 51,300
square feet of flexible space with 33 meeting rooms, including the 25,000
square foot "Desert" ballroom and the 21,000 square foot "Springs" ballroom.
LEGAL PROCEEDINGS
The Partnership and the Hotel are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
conditions or results of operations of the Partnership.
On March 16, 1998, limited partners in several partnerships, including
Desert Springs, sponsored by Host Marriott Corporation ("Host Marriott") filed
a lawsuit, styled 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, among other things, 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 in the
lawsuit, the partnership agreements relating to the partnerships include an
indemnity provision which requires the partnerships, under certain
circumstances, to indemnify the general partners against losses, judgments,
expenses and fees. The defendants filed answers and defenses to the petition.
AMENDMENTS TO DESERT SPRINGS' PARTNERSHIP AGREEMENT
In order to allow the Hotel of Desert Springs to be leased to Crestline in
connection with the Merger and the REIT Conversion, Desert Springs'
partnership agreement must be amended. Currently, there is no provision in
Desert Springs' partnership agreement to allow Desert Springs' Hotel to be
leased. Therefore, Section 5.02B of Desert Springs' partnership agreement must
be amended to add a new paragraph 5.02B(x) to read as follows:
(x) lease (or consent to the lease), directly or indirectly, in one
transaction or a series of related transactions, of the Hotel.
Other Amendments. Amendments to certain terms and sections of the Desert
Springs partnership agreement would be made in order to (i) reduce to one the
number of appraisals of the fair market value of Desert Springs' Hotel that
Desert Springs must provide to the Desert Springs Limited Partners before the
General Partner can cause Desert Springs to sell its assets to the General
Partner or an affiliate and (ii) make any other amendments to the Desert
Springs partnership agreement deemed necessary or advisable, in the sole
discretion of the General Partner, in connection with the consummation of the
Merger and the REIT Conversion. The form of amendment to the Desert Springs
partnership agreement is attached as an exhibit to the Registration Statement
of which this Supplement is a part.
Desert Springs Supp-24
<PAGE>
VOTING PROCEDURES
Desert Springs Limited Partners will be asked to vote separately on the
Merger and the proposed amendments to the partnership agreement, but Desert
Springs will not participate in the Merger unless both proposals are approved.
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 the consent of
a majority of the limited partner interests actually voting on the Merger is
required for participation in the Merger and with respect to the amendments to
the partnership agreement. The General Partner does not own any limited
partner interests.
At the time of voting, Desert Springs Limited Partners will be asked to
indicate whether they wish to retain OP Units or elect to exchange their OP
Units for Common Shares or a Note in connection with the Merger. The OP Units
will be delivered to the Desert Springs Limited Partners promptly after the
twentieth trading day following the Effective Date of the Merger (which would
be promptly after January 29, 1999 if the Effective Date of the Merger is
December 30, 1998). See "Determination of Exchange Value of Desert Springs and
Allocation of OP Units."
A Desert Springs Limited Partner may mark the Consent Form to vote "FOR,"
"AGAINST" or "ABSTAIN" with respect to participation in the Merger by Desert
Springs and "FOR," "AGAINST" or "ABSTAIN" with respect to the amendments to
the partnership agreement. THE FAILURE OF A LIMITED PARTNER OF DESERT SPRINGS
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 OF A DESERT
SPRINGS LIMITED PARTNER WILL BE COUNTED FOR PURPOSES OF ESTABLISHING THE
NUMBER OF LIMITED PARTNER INTERESTS REQUIRED TO RECOGNIZE THE VOTE BUT WILL BE
EFFECTIVELY COUNTED AS A VOTE "AGAINST" THE MERGER AND "AGAINST" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENT. A CONSENT FORM THAT IS PROPERLY
SIGNED BUT NOT MARKED WILL BE VOTED "FOR" THE MERGER AND "FOR" THE AMENDMENTS
TO THE PARTNERSHIP AGREEMENT. The voting procedures applicable to Desert
Springs Limited Partners are set forth in the Consent Solicitation under the
heading "Voting Procedures--Required Vote and Other Conditions."
As of June 19, 1998, no person owned of record, or to the Partnership's
knowledge owns beneficially, more than 5% of the total number of limited
Partner Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," Desert Springs Limited Partners
should read carefully the following discussion of federal income tax
consequences applicable specifically to the Desert Springs Limited Partners.
The information included in this discussion is based upon various factual
assumptions and information which are believed by the Operating Partnership
and the General Partner to be reliable. However, some of these assumptions
inevitably will not materialize, and unanticipated events and circumstances
will occur. Therefore, there likely will be differences between the
information provided herein, including the numerical data and estimates, and
actual results, and the variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the Desert Springs Limited Partners resulting from the Mergers
and the REIT Conversion. The opinion letter is based upon certain assumptions
and certain 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 Hotels contributed to the Operating Partnership by Host and
the Blackstone Entities prior to the Mergers and the REIT
Desert Springs Supp-25
<PAGE>
Conversion and of Host REIT, the Operating Partnership and the Partnerships
following the Mergers and the REIT Conversion. In addition, prior to 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 to the Consent Solicitation) as to the qualification and taxation of Host
REIT as a REIT under the Code following the REIT Conversion. The receipt of
this opinion letter is a condition to the REIT Conversion and each of the
Mergers. See "Federal Income Tax Consequences--Summary of Tax Opinions" in the
Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the Desert
Springs Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to a Desert Springs Limited Partner; (i) who does not elect to
receive Common Shares (the "Common Share Election") or a Note (the "Note
Election") in exchange for his OP Units in connection with the Merger; (ii)
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 Merger; (iii) who does not
receive a cash distribution (or a deemed cash distribution resulting from
relief from liabilities, including as a result of any repayment of the GMAC
Senior Loan or the Goldman Sachs Mezzanine Loan) in connection with the Merger
or the REIT Conversion in excess of his aggregate adjusted basis in his Desert
Springs Partnership Units at the time of the Merger; (iv) who is not required
to recognize gain by reason of the exercise by another Desert Springs Limited
Partner of his right to make the Common Share Election or the Note Election
(which, in counsel's opinion, described below, should not be the result of
such election); and (v) who does not have his "at risk" amount fall below zero
as a result of the Merger or the REIT Conversion. See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) a Desert
Springs Limited Partner who acquired his Desert Springs Partnership Units in
the original offering of such Partnership Units and who has held such
Partnership Units at all times since would not be considered to receive, as a
result of the Merger, a distribution (or a deemed cash distribution resulting
from relief from liabilities) that exceeds his aggregate adjusted basis in his
Desert Springs Partnership Units at the time of the Merger, and would not have
his "at risk" amount fall below zero as a result of the Merger (in this
regard, the Operating Partnership has no plan to prepay or repay either the
GMAC Senior Loan or the Goldman Sachs Mezzanine Loan in connection with the
REIT Conversion), and (ii) none of the personal property owned by Desert
Springs will need to be sold to a Non-Controlled Subsidiary in connection
Desert Springs Supp-26
<PAGE>
with the REIT Conversion. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Overview" in the Consent Solicitation.
With respect to the effects of a Desert Springs Limited Partner's election
to receive Common Shares or a Note in exchange for his OP Units in connection
with the Merger, Hogan & Hartson is of the opinion that, although the matter
is not free from doubt, a Desert Springs Limited Partner who does not make the
Common Share Election or the Note Election should not be required to recognize
gain by reason of another Desert Springs Limited Partner's exercise of either
of such rights. With respect to the exercise of a Unit Redemption Right, Hogan
& Hartson is of the opinion that it is more likely than not that a Desert
Springs Limited Partner's exercise of his Unit Redemption Right more than one
year after the date of consummation of the Merger but less than two years
after such date will not cause the Merger itself to be a taxable transaction
for the Desert Springs Limited Partner (or the other Desert Springs Limited
Partners). See "Federal Income Tax Consequences--Summary of Tax Opinions" in
the Consent Solicitation. Opinions of counsel, however, do not bind the IRS or
the courts, and no assurances can be provided that such opinions will not be
challenged by the IRS or will be sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
Desert Springs Partnership Units, a Desert Springs Limited Partner will
receive no actual cash distribution in connection with the Merger but would be
deemed to receive a cash distribution in connection with the Merger to the
extent that his share of Operating Partnership liabilities immediately after
the Merger and the REIT Conversion is less than his share of Desert Springs
liabilities immediately prior to the Merger. For example, any repayment of the
GMAC Senior Loan or the Goldman Sachs Mezzanine Loan or debt encumbering other
Hotels may result in a deemed cash distribution to the Desert Springs Limited
Partners. See "Federal Income Tax Consequences--Tax Consequences of the
Mergers--Relief from Liabilities/Deemed Cash Distribution" in the Consent
Solicitation. Even though the GMAC Senior Loan, the Goldman Sachs Mezzanine
Loan and the debt encumbering other Hotels is not expected to be repaid or
refinanced in connection with the Mergers and the REIT Conversion (except as
described in the Consent Solicitation), a Desert Springs Limited Partner's
share of indebtedness following the Mergers and the REIT Conversion may
nonetheless decrease in comparison to the Limited Partner's estimated
aggregate share of Desert Springs indebtedness as of December 31, 1998
(calculated based on the assumption that the Mergers did not occur) by reason
of the manner in which the debt allocation rules work when multiple assets
with different levels of leverage are consolidated into a single partnership.
A Desert Springs Limited Partner, however, would recognize taxable gain as a
result of any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his Desert Springs
Partnership Units immediately prior to the Merger. As noted above, the
Operating Partnership and the General Partner believe, based upon and subject
to the assumptions and other limitations described below, that a Desert
Springs Limited Partner who acquired his Desert Springs Partnership Units in
the original offering of such Partnership Units and has held the Partnership
Units at all times since the offering will have an adjusted tax basis in
excess of the deemed cash distribution that might occur in connection with the
Merger and the REIT Conversion. Therefore, such a Desert Springs Limited
Partner should not recognize gain due to such deemed cash distribution
resulting from the relief from liabilities in connection with the Merger and
the REIT Conversion.
The adjusted tax basis of a Desert Springs Limited Partner who did not
acquire his Desert Springs Partnership Units in the original offering of such
Partnership Units or who has not held his Desert Springs Partnership Units at
all times since such offering could vary materially from that of a Desert
Springs Limited Partner who did so. If a Desert Springs Limited Partner has an
adjusted tax basis in his Desert Springs Partnership Units (per Desert Springs
Partnership Unit) that is substantially less than the adjusted tax basis of a
Desert Springs Limited Partner who acquired his Desert Springs Partnership
Units in the original offering of such Partnership Units and has held such
Partnership Units at all times since, he could recognize gain due to any
deemed cash distribution resulting from the relief from liabilities in
connection with the Merger and the REIT Conversion.
Desert Springs Supp-27
<PAGE>
The Operating Partnership has no current plan or intention to cause the
prepayment of the GMAC Senior Loan or the Goldman Sachs Mezzanine Loan or,
except as described in the Consent Solicitation, any of the nonrecourse
liabilities encumbering the Hotels owned by the other Partnerships (other than
with the proceeds of indebtedness that would be considered nonrecourse
liabilities allocable to the Hotel being refinanced). 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 secure nonrecourse mortgage indebtedness secured only by those Hotels in an
amount sufficient to avoid a deemed cash distribution to the former Limited
Partners in those Partnerships, including Desert Springs. Moreover, 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 debt as 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. In view of these
considerations and the potential adverse consequences to Limited Partners in
certain Partnerships, including the Desert Springs Limited Partners, 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 (including the
GMAC Senior Loan or the Goldman Sachs Mezzanine Loan), would be considered to
be "secured" by those Hotels for purposes of allocating the liabilities for
tax basis purposes (and thus would be allocable, at least in substantial part,
to the former Limited Partners in the Partnerships owning those Hotels,
including the Desert Springs Limited Partners), 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.
Each Desert Springs Limited Partner will gradually begin to recognize income
over the term of his ownership of OP Units (beginning, perhaps, in his first
year of ownership of OP Units) attributable to deemed cash distributions
resulting from the relief from liabilities, as the aggregate principal amount
of nonrecourse indebtedness encumbering (or deemed to encumber) the Hotel
amortizes in accordance with its terms. The Operating Partnership will make
regular quarterly cash distributions to the Desert Springs Limited Partners
that may or may not be sufficient to allow the Desert Springs Limited Partners
to pay the federal and state income tax owed on the income allocated to such
Limited Partners by reason of the amortization of the debt secured by the
Desert Springs Hotel.
Even if Desert Springs does not participate in the Merger, the General
Partner has estimated that the Desert Springs Limited Partners will be
required to recognize in taxable year 1998 income of approximately $1,700 per
Desert Springs Partnership Unit, as of December 31, 1998, resulting, in part,
from the amortization of the GMAC Senior Loan and the Goldman Sachs Mezzanine
Loan.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner may be required to include in gross income, or
"recapture," losses previously allowed to such partner with respect to his
investment in a partnership if the amount for which the partner is "at risk"
in relation to his investment in the partnership is less than zero at the
close of the taxable year.
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Mergers
and the REIT Conversion could, singularly or in combination, cause a Desert
Springs Limited Partner's amount at risk in relation to his investment in
Desert Springs (and, after the Mergers, in the Operating Partnership) to be
reduced below zero, resulting in an income inclusion to the Limited Partner
under Section 465(e) of the Code. Currently,
Desert Springs Supp-28
<PAGE>
a sufficient portion of the current debt of Desert Springs constitutes
"qualified nonrecourse financing" so that the Desert Springs Limited Partners
have positive at risk amounts. The Operating Partnership and the General
Partner believe, based upon and subject to the assumptions and other
limitations described below, that a Desert Springs Limited Partner who
acquired his Desert Springs Partnership Units in the original offering of such
Partnership Units and has held the Partnership Units at all times since will
have a positive at risk amount immediately following the Mergers and the REIT
Conversion.
It is possible, however, that a former Desert Springs Limited Partner's at
risk amount could decline in the future, either because of the allocation of
losses from the Operating Partnership to that former Desert Springs Limited
Partner or because of cash distributions by the Operating Partnership to that
former Desert Springs Limited Partner in excess of the taxable income
allocable to him with respect to his OP Units. Moreover, there can be no
assurance that debt incurred by the Operating Partnership in the future to
refinance the GMAC Senior Loan, the Goldman Sachs Mezzanine Loan or
outstanding mortgage debt of the other Hotel Partnerships or the Hotels
contributed by the Blackstone Entities will qualify as "qualified nonrecourse
financing." If, however, the Operating Partnership were to obtain the
requested ruling from the IRS, and were to refinance existing mortgage
indebtedness of the Partnerships with the type of indebtedness described in
the ruling, such indebtedness should constitute "qualified nonrecourse
financing" for purposes of the "at risk" rules.
Impact of Assumption of Desert Springs Liabilities by the Operating
Partnership. As described in the Consent Solicitation, see "Federal Income
Tax Consequences--Tax Consequences of the Mergers--Disguised Sale
Regulations," a Desert Springs Limited Partner will recognize gain to the
extent he is treated as having sold all or part of his Desert Springs
Partnership Interest in a "disguised sale." 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. 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" also will not be treated as part of a disguised sale. A
"qualified liability" in connection with a transfer of property to a
partnership includes (i) any liability incurred more than two years prior to
the earlier of the transfer of the property or the date the partner agrees in
writing to the transfer, as long as the liability has encumbered the
transferred property throughout the two-year period; (ii) a liability that was
not incurred in anticipation of the transfer of the property to a partnership,
but that was incurred by the partner within the two-year period prior to the
earlier of the date the partner agrees in writing to transfer the property or
the date the partner transfers the property to a partnership and that has
encumbered the transferred property since it was incurred; (iii) a liability
that is traceable under the Treasury Regulations to capital expenditures with
respect to the property; and (iv) a liability that was incurred in the
ordinary course of the trade or business in which property transferred to the
partnership was used or held, but only if all the assets related to that trade
or business are transferred, other than assets that are not material to a
continuation of the trade or business. However, a recourse liability is not a
"qualified liability" unless the amount of the liability does not exceed the
fair market value of the transferred property (less any other liabilities that
are senior in priority and encumber such property or any allocable liabilities
described in (iii) or (iv), above) at the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of Desert Springs fall
into one of the four categories of "qualified liabilities" described in the
preceding paragraph. Based on the aforementioned representations and certain
numerical estimates provided by the Operating Partnership and the General
Partner, however, approximately $19.3 million of Desert Springs indebtedness
($22,000 per $100,000 original investment in Desert Springs), 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
Merger but not in anticipation of the Merger) and, thus, Desert Springs and
the Desert Springs Limited Partners will be required to disclose such
indebtedness on a completed IRS Form 8275 or on a statement attached to their
tax returns for the taxable year in which the Merger occur. There can be no
assurance, however, that the IRS will not challenge the position of Desert
Springs that this indebtedness is a "qualified liability."
Desert Springs Supp-29
<PAGE>
Tax Treatment of Desert Springs Limited Partners Who Hold OP Units Following
the Merger
Initial Basis in Units. In general, a Desert Springs Limited Partner will
have an initial tax basis in his OP Units received in the Merger with respect
to his Desert Springs Partnership Units equal to the basis in his Desert
Springs Partnership Units at the time of the Merger, reduced to reflect any
deemed cash distributions resulting from a reduction in his share of Desert
Springs liabilities and increased to reflect his share of other liabilities of
the Operating Partnership and any gain required to be recognized in connection
with the Merger and the REIT Conversion. For a discussion of the federal
income tax consequences for a Desert Springs Limited Partner from a reduction
in basis that may result from the Merger and the REIT Conversion, see "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--Initial Tax Basis of OP Units" in the Consent
Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of Desert Springs
Hotel. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all Desert Springs Limited Partners
(but excluding all of Host's interests) with respect to the Desert Springs
Hotel will be $51,842,186 upon the consummation of the Merger.
If the Operating Partnership were to sell the Desert Springs Hotel, the
former partners of Desert Springs (including Host REIT with respect to Host's
interest in Desert Springs held through the General Partner) would be
specially allocated by the Operating Partnership an aggregate amount of
taxable gain equal to the aggregate Book-Tax Difference with respect to the
Desert Springs Hotel. The share of such gain allocable to a Desert Springs
Limited Partner who acquired his Desert Springs Partnership Units in the
original offering of such Partnership Units and held such Partnership Units at
all times since would be $57,753 per Desert Springs Partnership Unit for a
Limited Partner who acquired his Partnership Units for cash, and $57,552 per
Desert Springs Partnership Unit for a Limited Partner who acquired his
Partnership Units pursuant to the installment purchase plan. The share of such
gain of a Desert Springs Limited Partner who did not acquire his Desert
Springs Partnership Units in the original offering of such Partnership Units
or who has not held his Desert Springs Partnership Units at all times since
such offering could vary materially from this amount. If the Operating
Partnership were to sell the Desert Springs Hotel, the remaining Book-Tax
Difference at the time the Hotel is sold would be required to be allocated
exclusively to the former Desert Springs Limited Partners and the General
Partner, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Operating Partnership (and would
likely be retained by the Operating Partnership, rather than distributed to
holders of OP Units and Common Shares of Host REIT). The Desert Springs
Limited Partners would not be entitled to any special distributions from the
Operating Partnership in connection with such a sale, and thus would not
necessarily receive cash distributions from the Operating Partnership
sufficient to pay such additional taxes. Although the Partnership Agreement
does not impose any restrictions upon the Operating Partnership preventing it
from causing the sale of the Desert Springs Hotel at any time following the
Merger, the Operating Partnership does not have current plans to pursue a sale
of the Desert Springs Hotel. See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Sale of
Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotel Generally. The tax
allocations of depreciation to the Desert Springs Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the Desert Springs Hotel will be
required to be allocated for federal income tax purposes in a manner such that
the Desert Springs Limited Partners are charged with the Book-Tax Difference
associated with
Desert Springs Supp-30
<PAGE>
the Desert Springs Hotel at the time of the consummation of the Merger.
Consequently, a Desert Springs Limited Partner will be allocated less
depreciation with respect to the Desert Springs Hotel than would be the case
if the Mergers had not occurred and the Desert Springs Limited Partner had
continued to hold his Desert Springs Partnership Units. (On the other hand, a
former Desert Springs Limited Partner will be allocated depreciation with
respect to other Hotels acquired by the Operating Partnership in connection
with the Mergers and the REIT Conversion, including the Hotels owned by the
other Hotel Partnerships and the Hotels being contributed to the Operating
Partnership by Host and the Blackstone Entities in connection with the Mergers
and the REIT Conversion.) Second, the Mergers will cause the technical
termination under Section 708(b)(1)(B) of the Code of Desert Springs and
certain of the other Hotel Partnerships that participate in the Mergers and
the REIT Conversion. 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 real estate components of the Desert Springs Hotel
and the Hotels held by the other Hotel Partnerships that terminate will be
depreciated over 39 years, rather than over the remaining current lives of
such Hotels (which range from less than one year to 39 years). See "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--Effect of Mergers on Depreciation" in the Consent
Solicitation.
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to a Desert Springs
Limited Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for Desert Springs Limited
Partners) to the extent that such losses are not in excess of the taxpayer's
income from passive activities or investments. A Desert Springs Limited
Partner would be able to offset losses from other passive activities 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 Partner
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 limitation rules. In this event, any losses or deductions of
the Operating Partnership allocable to a Desert Springs Limited Partner after
the Merger could not be used to offset passive income from other passive
activities. Similarly, losses from other passive activities (including losses
attributable to Desert Springs for periods prior to the Merger) could not be
applied to offset income of the Operating Partnership allocated to a Desert
Springs Limited Partner. A Desert Springs Limited Partner, however, would be
able to offset any passive losses from his investment in Desert Springs (or
other investments) against any gain recognized by the Desert Springs Limited
Partner as a result of the Merger. The Operating Partnership and the Desert
Springs General Partner estimate that, as of December 31, 1998, a Desert
Springs Limited Partner who purchased his Desert Springs Partnership Units at
the time of the original offering, has held those Partnership Units
continuously since that time, and whose Partnership Units have been his only
investment in a passive activity would have a passive activity loss
carryforward of approximately $2,110, on a per Unit basis, if such Partnership
Units were acquired for cash, and $9,179, on a per Unit basis, if such
Partnership Units were acquired on the installment purchase plan.
State and Local Taxes. Desert Springs Limited Partners holding OP Units will
be subject to state and local taxation in a number of jurisdictions in which
the Operating Partnership directly or indirectly holds real property
Desert Springs Supp-31
<PAGE>
and would be required to file periodic tax returns in those jurisdictions. In
this regard, immediately following the Mergers and the REIT Conversion, the
Operating Partnership expects that it will own properties in 28 states across
the United States and the District of Columbia. Currently, Desert Springs owns
property in only one state. See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--State
and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular Desert
Springs Limited Partner, the tax consequences of the Merger to such Desert
Springs Limited Partner could be substantially different from those reflected
above. ACCORDINGLY, EACH DESERT SPRINGS LIMITED PARTNER IS STRONGLY URGED TO
CONSULT WITH HIS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH DESERT
SPRINGS LIMITED PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES OF PARTICIPATING IN THE MERGER.
First, with respect to a Desert Springs Limited Partner's basis in his
Desert Springs Partnership Units prior to the Merger, the Operating
Partnership and the Desert Springs General Partner assumed that a Desert
Springs Limited Partner acquired his Desert Springs Partnership Units in the
original offering of such Partnership Units and has held such Partnership
Units at all times since the offering (the "Original Limited Partner's
Adjusted Basis"). In general, each Desert Springs Limited Partner had an
initial tax basis in his Desert Springs Partnership Units ("Initial Basis")
equal to his cash investment in Desert Springs (plus his proportionate share
of Desert Spring's nonrecourse liabilities at the time he acquired his Desert
Springs Partnership Units). A Desert Springs Limited Partner's Initial Basis
generally has been increased by (a) such Limited Partner's share of Desert
Springs taxable income and (b) any increases in his or her share of
liabilities of Desert Springs. Generally, such Limited Partner's Initial Basis
has been decreased (but not below zero) by (i) his share of Desert Springs
cash distributions, (ii) any decreases in his share of liabilities of Desert
Springs, (iii) his share of losses of Desert Springs and (iv) his share of
nondeductible expenditures of Desert Springs that are not chargeable to
capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for Desert Springs (i) the Original Limited Partner's Adjusted Basis as of
December 31, 1997 for each such Desert Springs Limited Partner, and (ii) an
estimate of such Desert Springs Limited Partner's 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 the Consent
Solicitation). The General Partner also has set forth on Appendix E to the
Consent Solicitation for each Desert Springs Limited Partner whose adjusted
basis in his Desert Springs Partnership Interest is the same as the Original
Limited Partner's Adjusted Basis (i) the Desert Springs liabilities allocable
to such Desert Springs Limited Partner as of December 31, 1997, and (ii) an
estimate of the Desert Springs 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 the Consent Solicitation). Each of
these estimates is shown separately for those Desert Springs Limited Partners
who acquired their Partnership Units at the time of the original offering
pursuant to the installment purchase plan.
The adjusted tax basis of a Desert Springs Limited Partner who did not
acquire his Desert Springs Partnership Units in the original offering of such
Partnership Units could vary materially from that of a Desert Springs Limited
Partner who did so for various reasons. If a Desert Springs Limited Partner
has an adjusted tax basis in his Desert Springs Partnership Units that is less
than the Original Limited Partner's Adjusted Tax Basis, the Merger might
result in the receipt by the Desert Springs Limited Partner of a deemed
distribution of cash in excess of his adjusted tax basis in his Desert Springs
Partnership Units, which could result in the recognition of income or gain.
Second, the Operating Partnership and the General Partner assumed that the
method expected to be used by the Operating Partnership to allocate
liabilities among the partners will be respected for federal income tax
Desert Springs Supp-32
<PAGE>
purposes. The Operating Partnership will allocate liabilities associated with
the Desert Springs Hotel as described in "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash Distribution"
in the Consent Solicitation. If the method used by the Operating Partnership
were not respected for federal income tax purposes and the nonrecourse
liabilities actually allocable to a Desert Springs Limited Partner are less
than the amount assumed by the Operating Partnership and the General Partner,
the Merger might result in the receipt by such Desert Springs Limited Partner
of a deemed distribution of cash that is greater than the deemed distribution
of cash expected to be received by such Desert Springs Limited Partner as
described above in "Tax Consequences of the Merger--Deemed Cash Distribution
and Resulting Taxable Gain." For a Desert Springs Limited Partner who did not
acquire his Desert Springs Partnership Units in the original offering of such
Partnership Units or who did not hold such Partnership Units at all times
since, this deemed distribution of cash could exceed his adjusted tax basis in
his Desert Springs Partnership Units, which could result in the recognition of
income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
Desert Springs Limited Partners of their interests in Partnership 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 possibly Notes and/or Common Shares)
and the subsequent distribution of such OP Units (and possibly Notes and/or
Common Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the Desert Springs Limited Partners likely would be materially
affected.
EACH DESERT SPRINGS LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH DESERT SPRINGS LIMITED
PARTNER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF
PARTICIPATING IN THE MERGER. THE TAX CONSEQUENCES OF PARTICIPATING IN THE
MERGER TO A PARTICULAR DESERT SPRINGS LIMITED PARTNER COULD VARY SUBSTANTIALLY
FROM THE CONSEQUENCES DESCRIBED ABOVE.
Tax Treatment of Desert Springs Limited Partners Who Exercise Their Right to
Make the Common Share Election or the Note Election
A Desert Springs Limited Partner who exercises his right to make the Common
Share Election or the Note Election and receives Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $40,880 per Desert Springs
Partnership Unit) plus the portion of Desert Springs' liabilities allocable to
the Desert Springs Limited Partner for federal income tax purposes immediately
prior to the disposition of the OP Units (estimated as $123,059 per Desert
Springs Partnership Unit as of December 31, 1998). Generally, the amount
realized in connection with such disposition made pursuant to the exercise of
the Note Election will equal the sum of the "issue price" of the Note (i.e.,
the face amount of the Note, currently estimated as $32,704 per Desert Springs
Partnership Unit) plus the portion of Desert Springs liabilities allocable to
the Desert Springs Limited Partner for federal income tax purposes immediately
prior to the disposition of the OP Units (estimated as $123,059 per Desert
Springs Partnership Unit as of December 31, 1998). To the extent the
applicable amount realized exceeds the Desert Springs Limited Partner's
adjusted basis in his Desert Springs Partnership Units, the Desert Springs
Limited Partner will recognize gain. The Operating Partnership and the Desert
Springs General Partner estimate (assuming the Desert Springs Limited Partner
acquired his Desert Springs Partnership Units at the time of the original
offering and has held such Partnership Units at all times since the offering)
that the amount of gain that
Desert Springs Supp-33
<PAGE>
would be recognized by a Desert Springs Limited Partner who made the Common
Share Election would be approximately $47,738 per Desert Springs Partnership
Unit, as of December 31, 1998, if such Partnership Unit were acquired for
cash, and $47,537 per Partnership Unit if such Partnership Unit were acquired
pursuant to an installment purchase plan. The amount of gain that would be
recognized by a Desert Springs Limited Partner who made the Note Election
would be approximately $39,562 per Desert Springs Partnership Unit, as of
December 31, 1998, if such Partnership Unit were acquired for cash, and
$39,361 per Partnership Unit if such Partnership Unit were acquired pursuant
to an installment purchase plan. For a discussion of the federal income tax
rates applicable to the net capital gain from the sale of a capital asset, see
"Federal Income Tax Consequences--Tax Treatment of Limited Partners Who Hold
OP Units Following the Mergers--Disposition of OP Units by Limited Partners"
in the Consent Solicitation. In this regard, the General Partner estimates
that, as of December 31, 1998, if Desert Springs sold its Hotel in a fully
taxable transaction for a net amount, after payment of liabilities, equal to
the Exchange Value of Desert Springs (with respect to a Limited Partner who
makes the Common Share Election) or by reference to the Note Election Amount
of Desert Springs (with respect to a Limited Partner who makes the Note
Election), the "unrecognized Section 1250 gain" per Desert Springs Partnership
Unit would be $19,008 if the Desert Springs Partnership Unit were acquired for
cash, and $19,008 if such Partnership Unit were acquired pursuant to the
installment purchase plan. The gain subject to tax as ordinary income under
Code Section 1245 per Desert Springs Partnership Unit would be $1,252 if the
Desert Springs Partnership Unit were acquired for cash, and $1,252 if such
Partnership Unit were acquired pursuant to the installment purchase plan. A
Desert Springs Limited Partner who makes the Common Share Election or the Note
Election would be able to treat any per Partnership Unit passive activity loss
carryforwards with respect to the activities of Desert Springs, to the extent
the sum of such losses exceeds his passive activity income for 1998, as losses
that are not from a passive activity and, therefore, not subject to the
passive activity loss limitation rules. For purposes of determining the gain
recognized by the Limited Partner as a result of making the Common Share
Election or the Note Election, an Original Limited Partner's Adjusted Basis
reflects such Limited Partner's share of the syndication costs incurred by his
Partnership at formation. An original Desert Springs Limited Partner's share
of syndication costs was $10,015 per Desert Springs Partnership Unit.
A Desert Springs Limited Partner who elects to receive Common Shares will
not be eligible to defer any gain under the "installment sale" rules, while a
Desert Springs Limited Partner who elects to receive a Note may be eligible to
defer at least a small portion of that gain under those rules. Those rules,
however, will not permit the Desert Springs Limited Partner to defer all of
the gain, and, to the extent that the face amount of the Note (and any other
installment obligations received by the taxpayer during the year) outstanding
at the end of the taxable year in which the Merger occurs exceeds $5,000,000,
will require that the Desert Springs Limited Partner who defers gain pay to
the IRS interest on the resulting tax that has been deferred. The Desert
Springs Limited Partner will not be eligible to defer gain recognized upon the
receipt of the Note to the extent that its share of Desert Springs liabilities
at the time of the Merger exceeds his adjusted tax basis in his Desert Springs
Partnership Units immediately prior to the Merger (that is, to the extent that
he has a "negative capital account" for tax purposes). In addition, the Desert
Springs Limited Partner will not be eligible to defer gain to the extent that
such gain would be taxed as ordinary income under Sections 1245 and 1250 of
the Code. Lastly, if a Desert Springs Limited Partner disposes of its Note,
any gain that had been deferred would be recognized in the year of
disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR DESERT SPRINGS LIMITED PARTNER
COULD HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER, AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT
IS ESSENTIAL THAT DESERT SPRINGS LIMITED PARTNERS CONSIDERING ELECTING TO
RECEIVE COMMON SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD
TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH DESERT SPRINGS
LIMITED PARTNERS' RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION.
Desert Springs Supp-34
<PAGE>
Tax Consequences if Desert Springs Does Not Participate in the Merger
If Desert Springs does not participate in the Merger, the Desert Springs
Limited Partners would not have any tax consequences resulting from the
Merger. The consequences of continued ownership of Desert Springs Partnership
Units will be the same as would have resulted if the Merger had not been
proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
Desert Springs Limited Partners in light of their particular circumstances.
EACH DESERT SPRINGS LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN
TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH DESERT SPRINGS LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
Desert Springs Supp-35
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited financial statements for the
First Two Quarters 1998 and First Two Quarters 1997. The following data should
be read in conjunction with the financial statements and the notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(3)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)............. $ 65,051 $ 12,488 $ 33,976 $ 24,681 $ 22,688 $ 21,407 $ 21,289
Operating profit........ 18,545 7,756 16,381 14,510 13,293 9,873 9,990
Income (loss) before
extraordinary item(2).. 10,196 1,199 2,161 109 1,585 (2,264) (3,099)
Net income (loss)....... 10,196 1,199 29,699 109 1,585 (2,264) (3,099)
Distributions:
General partner....... 23 -- 227 15 51 40 50
Limited partners...... 2,248 -- 22,500 1,532 5,020 3,964 4,948
--------- --------- ---------- ---------- ---------- ---------- ----------
Total................. 2,271 -- 22,727 1,547 5,071 4,004 4,998
Per Partnership Unit:(3)
Net income (loss)..... 11,216 1,319 32,669 120 1,743 (2,490) (3,409)
Distributions......... 2,500 -- 25,000 1,702 5,577 4,404 5,498
Cash provided by
operating activities... 14,881 14,862 12,441 7,017 6,724 5,859 5,541
Cash used in investing
activities............. (3,948) (1,787) (3,862) (3,096) (2,050) (4,437) (3,760)
Cash used in financing
activities............. (1,842) (11,921) (9,781) (8,379) (1,399) (740) (2,855)
Increase (decrease) in
cash and cash
equivalents............ 9,091 1,154 (1,202) (4,458) 3,275 682 (1,074)
Ratio of earnings to
fixed charges(4)
(unaudited)............ 2.16x 1.18x 1.14x 1.01x 1.12x -- --
Deficiency of earnings
to fixed charges(4)
(unaudited)............ -- -- -- -- -- 2,264 3,099
Total assets at book
value.................. 181,624 175,567 172,156 164,882 173,742 172,238 175,451
Cash and cash
equivalents............ 13,644 6,909 4,553 5,755 10,213 6,938 6,256
Total debt(5)........... 181,644 187,136 182,727 185,913 190,087 186,415 183,196
Total liabilities....... 188,364 196,005 186,821 186,519 193,941 188,951 185,941
Partner's capital
(deficit):
Limited partners...... (6,798) (20,359) (14,644) (21,546) (20,122) (16,671) (10,511)
General partner....... 58 (79) (21) (91) (77) (42) 21
Book Value per
Partnership Unit
(unaudited)(3)......... (7,553) (22,621) (16,271) (23,940) (22,358) (18,523) (11,679)
Exchange Value per
Partnership Unit
(unaudited)(3)......... 40,880 -- -- -- -- -- --
</TABLE>
- --------
(1) On November 25, 1997, the Partnership converted its Operating Lease with
Marriott Hotel Services, Inc. to a management agreement.
(2) In 1997, Desert Springs Marriott Limited Partnership recognized an
extraordinary gain of $27,538,000 on the forgiveness of additional rental
paid by hotel lessee at the conversion of the Operating Lease to a
management agreement.
(3) A Partnership Unit represents a $100,000 original investment in Desert
Springs.
(4) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings of fixed charges is largely the result of
depreciation and amortization of $8,932,000 and $8,502,000 as of December
31, 1994 and 1993, respectively.
(5) Total debt includes amounts due Host Marriott under the Junior Loan of
$59,727,000 as of June 19, 1998 and December 31, 1997.
Desert Springs Supp-36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis addresses the results of operations of
the Partnership for the First Two Quarters 1998 and the fiscal years ended
December 31, 1997, 1996 and 1995.
Growth in the Partnership's total Hotel room sales, and thus rental income
and hotel revenue, is primarily a function of average occupancy and average
room rates, as well as control of hotel operating costs. In addition, due to
the amount of meeting/convention business at the Hotel, food and beverage and
golf and spa operations have a direct effect on the Partnership's rental
income and hotel revenue. REVPAR, or revenue per available room, represents
the combination of the average daily room rate charged and the average daily
occupancy achieved and is a commonly used indicator of hotel performance.
REVPAR does not include food and beverage or other ancillary revenues
generated by the Hotel. REVPAR for the years ended December 31, 1997, 1996 and
1995 was $124, $113 and $104, respectively. Food and beverage sales increased
to $40.4 million in 1997 from $38.4 million in 1996 from $33.5 million in 1995
due to increased group sales.
Hotel revenue for the period of November 25 through December 31, 1997 and
net rental income from the Hotel rental and the airline equipment lease with
Trans World Airline, Inc. (the "Equipment") are applied to debt service,
property taxes, partnership administrative costs, Partnership funded capital
expenditures and cash distributions to the partners.
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Hotel revenues. As discussed in Note 3 to the Condensed Consolidated
Financial Statements, the Partnership converted its operating lease to a
management aggreement in conncetion with its debt refinancing. Revenues
reflect hotel sales in 1998. Revenues reported for the first two quarters 1998
are not comparable to the Hotel Rentals reported for the first two quarters
1997. Prior to the Conversion, the Partnership recognized estimated annual
hotel rental income on a straight-line basis throughout the year. The profits
from the Hotel are seasonal and first and second quarter results are generally
higher than the last two quarters of the year. Lease payments in excess of the
income recognized by the Partnership were deferred and, to the extent not
subject to possible future repayment to the Hotel lessee, were recognized as
income during the remainder of the year. Pursuant to the terms of the
Operating Lease, Annual Rental, as defined, was equal to the greater of Basic
Rental (80% of Operating Profit, as defined) and Owner's Priority, as defined.
Additionally, the Hotel tenant was required to pay taxes, make contributions
equal to a percentage of Hotel sales to a property improvement fund (4.5% in
1997 and 5.5% thereafter) and pay rental on the second golf course.
Subsequent to the Conversion, the Partnership records revenues which
represent gross sales generated by the Partnership's hotel. Hotel property-
level costs and expenses reflect all property-level costs and expenses.
For the first two quarters 1998, on a comparative basis, revenues increased
$5.7 million or 9.6% from $59.4 million in the first two quarters 1998 to
$65.0 million in the first two quarters 1997 primarily due to the Conversion
discussed above and to increases in rooms revenues. For the year, REVPAR
increased 10% over the same period of the prior year to approximately $171 due
primarily to a 9% increase in the average room rate to approximately $214
coupled with a 1.1 percentage point increase in average occupancy to
approximately 80%. Room sales and profit increased 10% and 9% respectively,
due to strong demand in the leisure transient segment and improvements in the
Hotel's rooms amenity package and guest services. With the increase in
transient demand, the hotel increased its group average room rate by
approximately 12% for the first two quarters 1998 compared to the same period
in 1997.
Operating Costs and Expenses. On a comparative basis, operating costs and
expenses increased $7.1 million from $39.4 million for the first two quarters
1997 to $46.5 million for the first two quarters 1998. The increase is
primarily due to the impact of the Conversion. Prior to the Conversion, hotel
property-level costs and
Desert Springs Supp-37
<PAGE>
expenses and incentive management fee expense was not a component of operating
expense. Rather, hotel property-level costs and expenses was a deduction to
arrive at hotel rental and accrued incentive management fee expense was
deducted from the additional lease payments in excess of rental income that
were deferred by the Partnership. Additionally, base management fees, though a
component in the calculation of Operating Profit prior to the Conversion, were
not a component of the Partnership's operating costs.
Depreciation. For the first two quarters 1998, depreciation decreased
$254,000, or 7%, when compared to the same quarters in 1997 as the
Partnership's original 10-year equipment became fully depreciated during 1997.
Interest Expense. On November 25, 1997 the Partnership refinanced its $160
million mortgage debt with $182.7 million of debt. The increase in debt along
with an increase in the weighted average interest rate from 8.3% in the first
two quarters 1997 to 9.8% in the first two quarters 1998 resulted in an
increase in interest expense of approximately $2.0 million, or 30%, from $6.8
million to $8.8 million. For the first two quarters 1998, the weighted average
interest rate increased from 8.3% in 1997 to 9.8% in 1998.
Interest Income and Other. Interest income and other includes $132,000 for
the first two quarters which represents payments made to the Partnership by
Marriott Vacation Club International ("MVCI") for the rental of a gallery and
marketing desk in the Hotel's lobby. For the first two quarters 1997, $140,000
was recognized and included in the $12.5 million of Hotel rental income.
Net Income. Net income increased $9.0 million for the first two quarters
1998 to $10.2 million for the first two quarters 1997 as a result of the
changes discussed above, primarily the Conversion, and improved hotel
operating results.
1997 Compared to 1996
Hotel Rental Income. On November 25, 1997, in connection with the
refinancing, the General Partner and the Tenant/Manager converted the
Operating Lease to a management agreement (the "Management Agreement"). As a
result of this conversion, full year 1997 hotel rental income is not
comparable to full year 1996 hotel rental income. Hotel rental income for the
period January 1 through November 25, 1997 was $24 million. For the year,
total Hotel sales increased 6% due primarily to a 7.6% increase in rooms
revenue. REVPAR improved 10% to $124 due to a 7% increase in average room rate
to approximately $170 and a 2.0 percentage point increase in average daily
occupancy to approximately 73%.
Hotel Revenues. Effective November 25, 1997, the Partnership records hotel
operations as revenues. As a result of the conversion from an Operating Lease
to a Management Agreement, Partnership hotel revenues were $9.4 million. This
consists of the Hotel's operating results for the period of November 25
through December 31, 1997.
Airline Equipment Rental Income. Airline equipment rental income was $1.2
million in 1996. The airline equipment lease was terminated in April 1996. On
April 24, 1996, Trans World Airlines, Inc. ("TWA"), the lessee, terminated the
lease and purchased the equipment, as permitted under the lease agreement.
Depreciation. Depreciation and amortization decreased by $550,000 due to the
retirement of $7 million of equipment in 1997.
Property Taxes. Property taxes were unchanged at $2.0 million for both 1997
and 1996.
Partnership Administration and Other. Partnership administration and other
decreased from $474,000 in 1996 to $445,000 in 1997 due to a slight decrease
in administrative costs related to the refinancing.
Base Management Fee. As a result of the conversion to a management
agreement, the Partnership recorded base management fees from November 26
through December 31, 1997. Base management fees are calculated as 3% of sales
or $281,000 for 1997.
Desert Springs Supp-38
<PAGE>
Insurance and Other. As a result of the conversion to a management
agreement, insurance and other expense was $256,000. This expense includes a
loss of $163,000 on the retirement of fixed assets, $65,000 of insurance
expense and $28,000 in equipment rental and permits and licenses.
Incentive Management Fee. As a result of the conversion to a management
agreement, the Partnership's incentive management fee expense from November 26
through December 31, 1997 was $123,000. As further explained in Note 7 to the
financial statements, Marriott International is entitled to a total of $2
million in fees for 1997, $123,000 of which is incentive management fee
expense.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $1.9 million or 13%
to $16.4 million for 1997 when compared to 1996.
Interest Expense. Interest expense decreased 5% from $15.5 million in 1996
to $14.8 million in 1997 due to a decrease in the Partnership's weighted
average interest rate from 9.0% to 8.4%. The Partnership's $160 million Bridge
Loan accrued interest at LIBOR plus 2.75 percentage points from January 1
through November 25, 1997, the closing date of the Bridge Loan refinancing.
The weighted average interest rate for the Bridge Loan (see "--Debt
financing") for this period was 8.4% compared to 9.0% in 1996. The refinancing
of the Bridge Loan consists of three tiers of debt: a senior loan which bears
interest at a fixed rate of 7.8%; a mezzanine loan, which bears interest at a
fixed rate of 10.365%; and a Host Marriott junior loan which bears interest at
a fixed rate of 13%.
Interest Income and Other. Interest income and other decreased 45% from $1.1
million in 1996 to $607,000 in 1997. The decrease is primarily due to the
Partnership utilizing $8.2 million of cash and cash equivalents to reduce the
balance of its outstanding mortgage debt combined with paying $2.7 million in
refinancing costs which decreased the cash balance on which interest income is
earned.
Extraordinary Items. The Partnership recognized an extraordinary gain in
1997 of $27.5 million representing the forgiveness of additional rental by the
Tenant/Manager.
1996 Compared to 1995
Hotel Rental Income. Hotel rental income for 1996 increased 18% from $19.9
million in 1995 to $23.4 million in 1996. For the year, total Hotel revenues
increased 15% due to increases in all areas of the Hotel including rooms, food
and beverage, golf and spa and other ancillary revenues. REVPAR improved 9% to
$113 due to a 5% increase in average room rate to approximately $158 and a 2.5
percentage point increase in average daily occupancy to approximately 71%.
Food and beverage revenues increased 15% from $33.5 million in 1995 to $38.4
million in 1996.
Airline Equipment Rental Income. Airline equipment rental income decreased
56% from $2.8 million in 1995 to $1.2 million in 1996 due to the termination
of the airline equipment lease in April 1996. On April 24, 1996, TWA, the
lessee, terminated the lease and purchased the equipment, as permitted under
the lease agreement.
Depreciation. Depreciation and amortization decreased by $91,000 due to the
write-off in 1995 of the airline equipment partially offset by an increase in
building and equipment depreciation due to the $9.1 million rooms renovation.
Property Taxes. Property tax expense increased 61% to $2.0 million in 1996
from $1.2 million in 1995 primarily due to a nonrecurring $600,000 refund
received in 1995 related to property taxes paid in prior years.
Partnership administration and other. Partnership administration and other
increased 34% primarily due to an increase in administrative costs due to the
refinancing of the mortgage debt.
Desert Springs Supp-39
<PAGE>
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $1.2 million or 9.2%,
to $14.5 million for 1996 when compared to 1995.
Interest Expense. Interest expense increased 16% from $13.4 million in 1995
to $15.5 million in 1996 due to an increase in the weighted average interest
rate. The mortgage debt matured on July 27, 1996 and went into default on the
maturity date. Pursuant to the loan documents, the mortgage debt accrued
interest at the default rate of 10.75% until the refinancing on December 23,
1996. The weighted average interest rate on the first mortgage debt was 9.0%
in 1996 and 7.8% in 1995.
Interest Income and Other. Interest income and other decreased 34% from $1.6
million in 1995 to $1.1 million in 1996. The decrease is primarily due to
$692,000 of income recognized in 1995 on the funding of the pool expansion by
Marriott Vacation Club International ("MVCI") offset by a $108,000 increase in
interest income earned in 1996 on the Partnership's cash held for refinancing.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded primarily
through loan agreements with independent financial institutions. The General
Partner believes that the Partnership will have sufficient capital resources
and liquidity to continue to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel operations. Its
principal uses of cash are to make debt service payments, fund the Hotel's
property improvement fund and establish reserves required by the lender.
Cash provided by operating activities for the first two quarters 1998 and
1997 was $14.9 million. Cash provided by operating activities increased
$19,000 primarily due to the Conversion, as discussed in Note 3, combined with
improved hotel operations. Prior to the Conversion, the Partnership recognized
estimated annual hotel rental income on a straight-line basis throughout the
year. This charge combined with an overall improvement in hotel operations, an
increase in accounts payable of $2.8 million due to increased accrued interest
liability, offset by the payment of $2.0 million of accrued incentive
management fees to MHS in second quarter 1998 resulted in the increase in cash
from operations. Additionally, through June 19, 1998, an additional $1.5
million was transferred into the tax and insurance reserve account and
$984,000 was disbursed to pay accrued real estate taxes. The tax and insurance
reserve is included in restricted cash reserves and the resulting tax and
insurance liability is included in accounts payable and accrued expenses in
the accompanying balance sheet.
Cash used in investing activities for the first two quarters 1998 and 1997
was $3.9 million and $1.8 million, respectively. The Partnership's cash used
in investing activities consists primarily of contributions to the property
improvement fund and capital expenditures for improvements at the hotel.
Contributions to the property improvement fund for the first two quarters 1998
were $3.6 million and $2.7 million for the first two quarters 1997.
Contributions in 1998 increased due to a $5.7 million increase in gross hotel
sales and an increase in the contribution rate from 4.5% in 1997 to 5.5% in
1998. Capital expenditures from the property improvement fund were $2.3
million and $1.3 million for the first two quarters 1998 and 1997,
respectively.
Cash used in financing activities for the first two quarters 1998 and 1997
was $1.8 million and $11.9 million, respectively. The Partnership's cash used
in financing activities consists primarily of payments of the mortgage debt,
contributions to the restricted cash reserves and cash distributions.
Contributions for the first two quarters 1998 to the restricted cash reserves
consist of $500,000 for the replacement of the Hotel's air conditioning system
and interest income earned for the first two quarters 1998 of $153,000.
Disbursements from the reserves include $270,000 for the air conditioning work
and $2.0 million for accrued incentive management fees payable to MHS.
Contributions for the first two quarters 1998 to the restricted cash reserves
in 1997 consisted of $10.9 million of excess cash from Hotel operations held
for future debt service. During the second quarter of 1998, the Partnership
Desert Springs Supp-40
<PAGE>
distributed $2.3 million to the partners ($2,500 per limited partner unit)
from 1997 operations. Additionally, for the first two quarters 1998 and 1997,
the Partnership made $900,000 of loan repayments from the property improvement
fund on the rooms refurbishment loan from Marriott International, Inc.
The Partnership's principal source of cash was from the Hotel Operating
Lease up until November 25, 1997, at which time the Operating Lease was
converted to the Management Agreement. Prior to the Equipment Lease
termination, the Partnership's principal sources of cash included rents
received under the Equipment Lease and proceeds from Equipment sales. Its
principal uses of cash are to fund the property improvement fund, pay debt
service and cash distributions to the partners. Additionally, during 1996 and
1997, the Partnership utilized cash to pay financing costs incurred in
connection with the refinancing of the mortgage debt.
The Hotel Operating Lease provided for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equaled 80% of Operating Profit, as
defined in the Hotel Operating Lease. Owner's Priority equaled the greater of
(i) $20 million plus debt service on certain additional debt to expand the
Hotel or (ii) Debt Service, as defined.
Pursuant to an agreement reached with Marriott International, for fiscal
year 1997, the $20 million Owner's Priority was increased to $20.5 million.
Marriott International was entitled only to the next $2 million of Operating
Profit. Any additional Operating Profit in excess of $22.5 million was
remitted entirely to the Partnership. For 1997, Operating Profit was $23.7
million, Marriott International earned $2.0 million and the remaining $1.2
million was remitted to the Partnership. In connection with the long-term
financing, Marriott International agreed to waive any and all claims to
Additional Rental (as defined in the Operating Lease) that accrued prior to
the consummation of the loan ($27.5 million).
On November 25, 1997, in connection with the refinancing, the General
Partner also negotiated with the Tenant/Manager to convert the Operating Lease
to a management agreement (the "Management Agreement"). The Tenant/Manager
would become manager of the Hotel (the "Manager"). The initial term of the
Management Agreement continues through 2022 with four successive renewal
options of ten years each.
Beginning with fiscal year 1998 forward, the Management Agreement provides
that no incentive fee will be paid to the Manager with respect to the first
$21.5 million of Operating Profit (the "Owner's Priority"). Thereafter the
Manager will receive the next $1.8 million of Operating Profit as an incentive
management fee and any Operating Profit in excess of the $23.3 million will be
divided 75% to the Partnership and 25% to the Manager. Any such payments will
be made annually after completion of the audit of the Partnership's books.
Total cash provided by operations of the Hotel was $12.4 million, $7.0
million and $6.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Proceeds from the sale of airline equipment were $2.5 million
for the year ended December 31, 1996, and $4.0 million for the year ended
December 31, 1995 due to the sale of the equipment in 1996. Cash contributed
to the property improvement fund of the Hotel was $4.6 million, $4.4 million
and $3.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Cash distributed to the partners was $22.7 million, $1.5 million
and $5.1 million during the years ended December 31, 1997, 1996 and 1995,
respectively. Financing costs related to refinancing the mortgage debt were
$1.2 million in 1997 and $2.7 million in 1996. There were no refinancing costs
in 1995.
The General Partner expects that contributions to the property improvement
fund will be a sufficient reserve for the future capital repair and
replacement needs of the Hotel's property and equipment.
Pursuant to the terms of the Hotel Operating Lease and Management Agreement,
the Partnership is obligated to fund major improvements for the Hotel's
mechanical and heating systems. During 1998, the Partnership expects to fund
approximately $2.0 million for improvements to the Hotel's HVAC system
(heating, ventilating and air conditioning). Also, during 1998, the
Partnership expects to fund approximately $350,000 on roof repair projects.
The Partnership has established a reserve to pay for these improvements which
is expected to be sufficient. This reserve is being held by the mortgage loan
lender. There are currently no additional Partnership funded capital
expenditure items expected for 1998.
Desert Springs Supp-41
<PAGE>
DEBT FINANCING
On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
Commercial Mortgage Corporation ("GMAC") purchased the existing mortgage debt
of the Partnership and amended and restated certain terms thereof (as amended
and restated, the "Bridge Loan"). The Bridge Loan consisted of a $160 million
nonrecourse mortgage loan. The Partnership utilized $8.2 million from its
refinancing reserve to reduce the outstanding principal balance of the
existing mortgage debt to the $160 million outstanding under the Bridge Loan.
In addition, the Partnership utilized $2.6 million from the refinancing
reserve to pay costs associated with the financing including lender's fees,
property appraisals, environmental studies and legal fees. Approximately half
of the $2.6 million was for fees related to the long-term financing. The
Bridge Loan was originated by Goldman Sachs Mortgage Company ("GSMC"), matured
on October 31, 1997 and bore interest at the London Interbank Offered Rate
("LIBOR") plus 2.75 percentage points and required that all excess cash from
Hotel operations, if any, be held in a debt service reserve for future debt
service or to reduce the outstanding principal balance of the Bridge Loan upon
maturity. For the year ended December 31, 1996, the weighted-average interest
rate on the Partnership's mortgage debt was 9.0%. For the period of January 1
through November 25, 1997 the weighted average interest rate was 8.4%.
The Bridge Loan was secured by the Partnership's fee interest in the Hotel,
a security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles and
a security interest in the Partnership's rights under the Hotel operating
lease, the Hotel purchase agreement and other related agreements.
Pursuant to the terms of the debt refinancing, there are no continuing
requirements for a debt service guarantee. Host and the General Partner were
released from their obligations to the Partnership under their original debt
service guarantee with the refinancing of the Partnership's mortgage debt.
In conjunction with the refinancing of the mortgage debt, the General
Partner reaffirmed a foreclosure guarantee to the lender in the amount of $50
million. Pursuant to the terms of the foreclosure guarantee, amounts would be
payable only upon a foreclosure of the Hotel and only to the extent that the
gross proceeds from a foreclosure sale were less than $50 million. The
foreclosure guarantee was not reaffirmed with the refinancing of the Bridge
Loan.
On September 26, 1997, the General Partner received unrevoked consents
approving a new loan structure and certain amendments to the Partnership
Agreement which were necessary to refinancing negotiations of the Bridge Loan.
An extension agreement was signed with the current lender on October 30, 1997,
extending the maturity date and loan terms of the Bridge Loan from October 31,
1997 until December 31, 1997, without penalty.
On November 25, 1997, the Partnership secured long-term refinancing for its
$160 million Bridge Loan. The new financing consists of three tranches: 1) a
$103 million senior loan, 2) a $20 million loan and 3) a $59.7 million junior
loan. The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of
the Partnership, DS Hotel LLC, which owns the Hotel and related assets. The
Senior Loan matures in December, 2022 and is secured by a first mortgage lien
on the Hotel. The loan bears interest at a fixed rate of 7.8% and requires
monthly payments of interest and principal with amortization over its twenty-
five year term. On June 11, 2010 the interest rate increases to 200 basis
points over the then current yield on 12 year U.S. treasuries and also
additional principal payments will be required as defined in the loan
agreement.
The second tranche of debt consists of a $20 million loan (the "Mezzanine
Loan") from Goldman Sachs Mortgage Company ("GSMC") to a newly formed
bankruptcy remote subsidiary of the Partnership, Marriott DSM LLC, which
secures the loan. Marriott DSM LLC owns a 100% interest in DS Hotel LLC. The
Mezzanine Loan consists of a fully amortizing $20 million loan maturing in
December, 2010. The loan bears interest at a fixed rate of 10.365% and
requires monthly payments of interest and principal with amortization over a
twelve and one-half year term.
Desert Springs Supp-42
<PAGE>
The third tranche of debt consists of a junior loan, (the "HM Junior Loan")
to the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary
of the General Partner. The HM Junior Loan has a term of thirty years and
requires no principal amortization for the first twelve and one-half years
with a seventeen and one-half year amortization schedule thereafter. Security
for the HM Junior Loan is the Partnership's 100% interest in Marriott DSM LLC.
If remaining cash flow is insufficient to pay interest on the HM Junior Loan,
interest is deferred and will accrue and compound and be payable from future
cash flow. The HM Junior Loan also entitles MDSM to receive 30% of any excess
cash flow, as defined, available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan.
In conjunction with the refinancing of the mortgage debt, the Partnership
was required to establish cash reserves which are held by an agent of the
lender including:
. $6.2 million debt service reserve
. $1.5 million reserve for capital expenditures
. $2.0 million reserve for payment of fees to the Tenant/Manager
The reserves were established from the Partnership's restricted cash related
to the Bridge Loan in addition to Partnership operating cash.
In addition, the Partnership is required to establish with the lender a
separate escrow account for payments of insurance premiums and real estate
taxes for the Hotel if the credit rating of Marriott International is
downgraded by Standard and Poor's Rating Services. The Manager is a wholly-
owned subsidiary of Marriott International. In March 1997, Marriott
International acquired the Renaissance Hotel Group N.V., adding greater
geographic diversity and growth potential to its lodging portfolio. The
assumption of additional debt associated with this transaction resulted in a
single downgrade of Marriott International's long-term senior unsecured debt
effective April, 1997. Therefore, the Partnership was required to establish a
reserve account for insurance and real estate tax. As of December 31, 1997,
$581,000 remains available to pay insurance and real estate taxes. The escrow
reserve is included in restricted cash and the resulting tax and insurance
liability is included in accounts payable and accrued liabilities in the
accompanying balance sheet.
The Partnership utilized $1.2 million from the refinancing reserve to pay
costs associated with the financing including lender or subsidiary fees,
property appraisals, environmental studies and legal fees.
Debt to Marriott International
On April 30, 1996, the Partnership entered into a short-term loan with
Marriott International in the amount of $1,700,000 to fund a portion of the
Hotel's rooms refurbishment project. The loan's stated maturity was June 13,
1997, bore interest at 8.5% and was to be repaid from the property improvement
fund as contributions were made during the year. At December 31, 1996, the
loan balance was $900,000. The loan was fully repaid on March 28, 1997.
Property Improvement Fund
The Partnership is required to maintain the Hotel in good repair and
condition. The Hotel Operating Lease agreement and Management Agreement
require the Tenant/Manager to make annual contributions to the property
improvement fund for the Hotel on behalf of the Partnership. Contributions to
the fund are equal to 4.5% of Hotel gross revenues through 1997 increasing to
5.5% thereafter. Total contributions to the fund were $3.8 million in 1995,
$4.4 million in 1996 and $4.6 million in 1997. The balance of the Hotel's
property improvement fund was $1.6 million as of December 31, 1997.
During the summer of 1996, a $9.1 million rooms refurbishment was completed
at the Hotel. The property improvement fund was not sufficient to fund the
refurbishment. The Partnership arranged a short-term loan from Marriott
International of up to $1.7 million at a fixed rate of 8.5% to finance the
anticipated shortfall. The loan
Desert Springs Supp-43
<PAGE>
was repaid from the property improvement fund prior to its maturity on June
13, 1997. The General Partner believes that funds available from the property
improvement fund will be adequate for anticipated renewal and replacement
expenditures.
During 1995, the Hotel's main swimming pool was expanded. This $2.1 million
expansion was funded partially with $692,000 in proceeds received from
Marriott Vacation Club International ("MVCI") pursuant to an agreement between
the Partnership and MVCI for the development of additional time share units on
land adjacent to the Hotel. The Partnership funded the remaining $1.4 million
from cash reserves.
Equipment Lease
The Partnership leased airline equipment to TWA under an operating lease
which expired in April 1995. On April 20, 1995, the Partnership reached an
agreement with TWA whereby TWA was obligated to pay quarterly payments of
$780,000 plus interest in arrears at 17%. At the end of the lease in July 1996
(or earlier if a termination option was exercised), TWA had the option to
purchase the equipment for one dollar ($1). The lease generated $5.4 million
in cash flow during the 1995 fiscal year. As a result of the lease renewal
terms, the Partnership recorded a receivable for the future lease payments due
from TWA and deferred the gain on the transaction. The deferred gain was
recognized as income as lease payments were received. Total rental income
recognized in 1995 and 1996 on the lease was $2.8 million and $1.2 million,
respectively. The original cost of the airline equipment was depreciated over
the life of the operating lease. Depreciation expense on the airline equipment
was $526,000 for the year ended December 31, 1995.
On April 24, 1996, TWA exercised its early termination option under the
airline equipment lease and paid the rent due on that date of $847,000 along
with the termination value of $780,000 plus the $1 purchase option. Rental
income of $1,248,000 was generated by the lease in 1996.
Golf Course Lease
The Second Golf Course is located near the Hotel on approximately 100 acres
of land and is leased to the Partnership by a subsidiary of Marriott
International. The Second Golf Course and related facilities were subleased by
the Partnership to the Tenant/Manager pursuant to an operating lease with
annual rental equal to $100,000. The term of the lease for the Second Golf
Course expires on December 31, 2011, with five 10-year renewal periods at the
option of the Partnership. Under the terms of the lease for the Second Golf
Course, the Partnership pays annual rent equal to $100,000 and is responsible
for all costs of operating and maintaining the Second Golf Course. Upon
termination of the lease for the Second Golf Course, the Second Golf Course
and all facilities and improvements thereon will become the property of
Marriott's Desert Springs Development Corporation. All costs of operating and
maintaining the course are deductions from gross revenues and all revenues
from operation of the course are items of gross revenues of the Hotel. In
conjunction with the refinancing of the mortgage debt, the golf course is no
longer subleased to the Operating Tenant. The Manager manages the golf course
for the Partnership pursuant to the terms of the Golf Course Lease.
Homeowners Agreement
A subsidiary of Marriott International, MVCI has been developing a portion
of land adjacent to the golf courses for time shares. The Partnership,
Marriott International, Marriott's Desert Springs Development Corporation and
MVCI entered into an Agreement (the "Homeowners Agreement") whereby it was
agreed that each purchaser of a time share unit will receive certain golf
course and other privileges (including preferred tee times at the golf courses
equal to one tee time per week per time share unit) at the Hotel. Time share
purchasers will not pay membership fees, but rather will pay regular green
fees for use of the golf courses, and do not receive preferred tennis court
times or free access to the health spa. Time share purchasers will have use of
the latter facilities and other Hotel facilities, if they are available, on
the same basis as regular Hotel guests and will pay the same fees as regular
Hotel guests.
Desert Springs Supp-44
<PAGE>
Office Space Rental Agreement
On January 27, 1995, the Partnership entered into an agreement with MVCI
whereby MVCI occupies the space of eleven guest rooms and built a vacation
gallery. The initial term of the agreement is April 1, 1995 to March 31, 1999,
with initial annual rental of $150,000. The annual rental may be increased in
the second, third and fourth year of the lease by the local area Consumer
Price Index plus 1% subject to a maximum of 10%.
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact on the Partnership's gross income and net
income. The Operating Tenant/Manager is generally able to pass through
increased costs to customers through higher room rates. In 1997, the increase
in average room rates at the Hotel exceeded those of direct competitors as
well as the general level of inflation.
SEASONALITY
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its property to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
Desert Springs Supp-45
<PAGE>
FINANCIAL STATEMENTS
Desert Springs Supp-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Desert Springs Marriott
Limited Partnership and subsidiaries (a Delaware limited partnership) as of
December 31, 1997 and 1996, and the related statements of operations, changes
in partners' (deficit) capital and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Desert Springs Marriott
Limited Partnership and subsidiaries as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 18, 1998
Desert Springs Supp-47
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $151,401 $155,441
Due from Marriott International, Inc...................... 1,368 8
Property improvement fund................................. 1,598 1,041
Deferred financing, net of accumulated amortization....... 3,000 2,637
Restricted cash........................................... 10,236 --
Cash and cash equivalents................................. 4,553 5,755
-------- --------
$172,156 $164,882
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................. $103,000 $160,000
Note payable.............................................. 20,000 --
Due to Host Marriott and affiliates....................... 59,727 --
Additional rental paid by hotel lessee.................... -- 25,013
Due to Marriott International, Inc........................ 2,122 1,022
Accounts payable and accrued expenses..................... 1,972 484
-------- --------
Total Liabilities....................................... 186,821 186,519
======== ========
PARTNERS' DEFICIT
General Partner
Capital contribution..................................... 909 909
Capital distributions.................................... (829) (602)
Cumulative net losses.................................... (101) (398)
-------- --------
(21) (91)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $10,576.. 77,444 77,444
Investor notes receivable................................ (22) (22)
Capital distributions.................................... (82,084) (59,584)
Cumulative net losses.................................... (9,982) (39,384)
-------- --------
(14,644) (21,546)
-------- --------
Total Partners'
Deficit................................................ (14,665) (21,637)
-------- --------
$172,156 $164,882
======== ========
</TABLE>
See Notes to financial statements.
Desert Springs Supp-48
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INCOME
Rentals
Hotel............................................ $24,016 $23,433 $19,851
Airline equipment (Note 6)....................... -- 1,248 2,837
Hotel revenues
Rooms............................................ 3,620 -- --
Food and beverage................................ 3,330 -- --
Other............................................ 2,403 -- --
------- ------- -------
Total hotel revenues............................ 9,353 -- --
------- ------- -------
33,369 24,681 22,688
------- ------- -------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms........................................... 801 -- --
Food and beverage............................... 2,646 -- --
Other departmental costs and deductions......... 3,296 -- --
------- ------- -------
Total property-level costs and expenses....... 6,743 -- --
------- ------- -------
Depreciation...................................... 7,182 7,732 7,823
Property taxes.................................... 1,958 1,965 1,219
Partnership administration and other.............. 445 474 353
Base management fee............................... 281 -- --
Insurance and other............................... 256 -- --
Incentive management fee.......................... 123 -- --
------- ------- -------
16,988 10,171 9,395
------- ------- -------
OPERATING PROFIT.................................... 16,381 14,510 13,293
Interest expense.................................. (14,827) (15,501) (13,371)
Interest income and other......................... 607 1,100 1,663
------- ------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM................ 2,161 109 1,585
------- ------- -------
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental.......... 27,538 -- --
------- ------- -------
NET INCOME.......................................... $29,699 $ 109 $ 1,585
------- ------- -------
ALLOCATION OF NET INCOME
General Partner................................... $ 297 $ 1 $ 16
Limited Partners.................................. 29,402 108 1,569
------- ------- -------
$29,699 $ 109 $ 1,585
------- ------- -------
NET INCOME PER LIMITED PARTNER UNIT (900 Units)..... $32,669 $ 120 $ 1,743
======= ======= =======
</TABLE>
See Notes to financial statements.
Desert Springs Supp-49
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $ (42) $(16,671) $(16,713)
Net income........................................ 16 1,569 1,585
Capital distributions............................. (51) (5,020) (5,071)
----- -------- --------
Balance, December 31, 1995.......................... (77) (20,122) (20,199)
Net income........................................ 1 108 109
Capital distributions............................. (15) (1,532) (1,547)
----- -------- --------
Balance, December 31, 1996.......................... (91) (21,546) (21,637)
Net income........................................ 297 29,402 29,699
Capital distributions............................. (227) (22,500) (22,727)
----- -------- --------
Balance, December 31, 1997.......................... $ (21) $(14,644) $(14,665)
===== ======== ========
</TABLE>
See Notes to financial statements.
Desert Springs Supp-50
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 29,699 $ 109 $ 1,585
Extraordinary item............................ (27,538) -- --
--------- --------- -------
Income before extraordinary item.............. 2,161 109 1,585
Noncash items:
Depreciation................................. 7,182 7,732 7,823
Amortization of deferred financing costs as
interest expense............................ 807 104 135
Loss (gain) on dispositions of property and
equipment................................... 163 (1,248) (1,972)
Changes in operating accounts:
Due to/from Marriott International, Inc. and
affiliates.................................. 640 2,287 (2,241)
Due from airline equipment lessee............ -- -- 1,357
Accounts payable and accrued interest........ 1,488 (1,967) 37
--------- --------- -------
Cash provided by operations................. 12,441 7,017 6,724
--------- --------- -------
INVESTING ACTIVITIES
Additions to property and equipment........... (3,318) (9,989) (3,979)
Change in property improvement fund, net...... (544) 4,384 (2,035)
Proceeds from sales of airline equipment...... -- 2,509 3,964
--------- --------- -------
Cash used in investing activities........... (3,862) (3,096) (2,050)
--------- --------- -------
FINANCING ACTIVITIES
Proceeds from mortgage loan................... 182,727 160,000 --
Repayment of mortgage debt.................... (160,000) (168,239) --
Capital distributions to partners............. (22,727) (1,547) (5,071)
Change in restricted cash..................... (10,236) -- --
Additional rental paid by hotel lessee........ 2,525 3,165 3,672
Payment of refinancing costs.................. (1,170) (2,658) --
Repayment of note payable to Marriott
International, Inc........................... (900) (800) --
Advances from Marriott International, Inc..... -- 1,700 --
--------- --------- -------
Cash used in financing activities........... (9,781) (8,379) (1,399)
--------- --------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (1,202) (4,458) 3,275
CASH AND CASH EQUIVALENTS at beginning of year.. 5,755 10,213 6,938
--------- --------- -------
CASH AND CASH EQUIVALENTS at end of year........ $ 4,553 $ 5,755 $10,213
========= ========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage interest and other..... $ 12,959 $ 17,372 $13,237
========= ========= =======
</TABLE>
See Notes to financial statements.
Desert Springs Supp-51
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own Marriott's Desert Springs
Resort and Spa and the land on which the 884-room hotel and a golf course are
located (the "Hotel") and airline equipment. The sole general partner of the
Partnership, with a 1% interest, is Marriott Desert Springs Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The Hotel was leased to Marriott Hotel Services, Inc. (the
"Tenant"), a wholly-owned subsidiary of Marriott International, along with a
second golf course leased by the Partnership from Marriott Desert Springs
Development Corporation, also a wholly-owned subsidiary of Marriott
International. The airline equipment was leased to TransWorld Airlines, Inc.
("TWA") pursuant to the terms of an operating lease through April 20, 1995. On
April 20, 1995, the Partnership entered into a new sales-type lease agreement
which was due to expire on June 24, 1996. On April 24, 1996, TWA exercised its
early termination option under the airline equipment lease and paid the rent
due on that date of $847,000 along with the termination value of $780,000 plus
the $1 purchase option (see Note 6).
The Partnership was formed on February 26, 1987, and operations commenced on
April 24, 1987 (the "Unit Offering Closing Date"). Between March 20, 1987, and
the Unit Offering Closing Date, 900 limited partnership interests (the
"Units") were subscribed pursuant to a private placement offering. The
offering price per Unit was $100,000; $25,000 payable at subscription with the
balance due in three annual installments through June 15, 1990, or, as an
alternative, $87,715 in cash at closing as full payment of the subscription
price. Of the total 900 Units, 740.5 were purchased on the installment basis
and 159.5 Units were paid in full. The General Partner contributed $909,100 in
cash for its 1% general partnership interest.
In connection with the mortgage debt refinancing in 1997 (see Note 5), the
General Partner received unrevoked consents of limited partners approving
certain amendments to the partnership agreement. The amendments, among other
things, allowed the formation of certain subsidiaries of the Partnership
including DS Hotel LLC and Marriott DSM LLC. The Partnership contributed the
Hotel and its related assets to Marriott DSM LLC, which in turn contributed
them to DS Hotel LLC, a bankruptcy remote subsidiary. Marriott DSM LLC, a
bankruptcy remote subsidiary of the Partnership owns 100% interest in DS Hotel
LLC. The Partnership owns 100% interest in Marriott DSM LLC. In addition,
effective November 25, 1997, the Hotel is managed by the Tenant (the
"Manager").
Partnership Allocations and Distributions
Under the partnership agreement, Partnership allocations, for Federal income
tax purposes, and distributions are generally made as follows:
a. Cash available for distribution will generally be distributed (i) first,
1% to the General Partner and 99% to the limited partners until the General
Partner and the limited partners (collectively, the "Partners") have received
cumulative distributions of sale or refinancing proceeds ("Capital Receipts")
equal to $45,454,545; and (ii) thereafter, 10% to the General Partner and 90%
to the limited partners.
b. Refinancing proceeds and proceeds from the sale or other disposition of
less than substantially all of the assets of the Partnership, not retained by
the Partnership, will be distributed (i) first, 1% to the General Partner and
99% to the limited partners, until the Partners have received cumulative
distributions of Capital Receipts equal to $90,909,100; and (ii) thereafter,
10% to the General Partner and 90% to the limited partners.
Desert Springs Supp-52
<PAGE>
Proceeds from the sale or other disposition of all or substantially all of
the assets of the Partnership or from the sale or other disposition of all or
substantially all of the Hotel will be distributed to the Partners pro rata in
accordance with their capital account balances as defined in the partnership
agreement.
c. Net profits will be allocated as follows: (i) first, through and
including the year ended December 31, 1990, 99% to the General Partner and 1%
to the limited partners; (ii) next, through and including the year ending
December 31, 1992, 70% to the General Partner and 30% to the limited partners;
and (iii) thereafter, 10% to the General Partner and 90% to the limited
partners.
d. Net losses will be allocated 100% to the General Partner through December
31, 1990, and thereafter, 70% to the General Partner and 30% to the limited
partners, subject to certain limitations, as specified in the partnership
agreement, regarding allocations to the limited partners.
e. The deduction for interest on the Purchase Note, as defined, which
cumulatively will not exceed $12,285 per Unit will be allocated to those
limited partners owning the Units purchased on the installment basis.
f. In general, gain recognized by the Partnership will be allocated as
follows: (i) first, to all Partners whose capital accounts have negative
balances until such negative balances are brought to zero; (ii) next, to all
Partners up to the amount necessary to bring their respective capital account
balances to an amount equal to their respective invested capital, as defined;
(iii) third, in the case of gain arising from the sale or other disposition
(or from a related series of sales or dispositions) of all or substantially
all of the assets of the Partnership, (a) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of the product of 12% times the
weighted-average of the limited partners' invested capital, as defined, each
year, minus (2) the sum of cumulative distributions to the limited partners of
cash available for distribution, and (b) next, to the General Partner until it
has been allocated an amount equal to 10/90 times the amount allocated to the
limited partners in (a); and (iv) thereafter, 12% to the General Partner and
88% to the limited partners.
For financial reporting purposes, profits and losses are allocated among the
Partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Restatement of Revenues and Expenses
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The statement of operations of the Partnership presented in the 1997 Annual
Report on Form 10-K did not reflect gross hotel sales and property-level
operating expenses but reflected house profit for the period November
Desert Springs Supp-53
<PAGE>
25, 1997 (the date the management agreement was entered into) through December
31, 1997. House profit represents gross hotel revenues less property-level
operating expenses, excluding depreciation, base and incentive management
fees, property taxes, insurance and certain other costs, which were disclosed
separately in the statement of operations. The Partnership has concluded that
EITF 97-2 should be applied to the Partnership beginning November 25, 1997,
the date the Partnership entered into a new management agreement, and
accordingly the 1997 statement of operations has been restated to reflect an
increase in hotel revenues and property-level expenses of $6.7 million for the
period November 25, 1997 through December 31, 1997. The restatement had no
impact on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets less an estimated residual value of 10% on the original building cost
and 20% on the airline equipment cost:
<TABLE>
<S> <C>
Building and improvements...... 50 years
Furniture and equipment........ 4 to 10 years
Airline equipment.............. 8 years
</TABLE>
All Hotel property and equipment is pledged as security for the Senior Loan
described in Note 5.
The Partnership assesses impairment of its real estate property based on
whether estimated undiscounted future cash flow from the hotel will be less
than its net book value. If the property is impaired, its basis is adjusted to
fair market value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
Mortgage Debt (see Note 5) matured on July 27, 1996. Deferred financing costs
associated with that debt, totaling $943,000, were fully amortized at maturity
and removed from the Partnership's books. Costs associated with the Bridge
Loan totaled $2,658,000 at December 31, 1996. Total financing costs associated
with the Bridge Loan and long-term financing completed on November 25, 1997
totaled $3,828,000. At December 31, 1997 and 1996, accumulated amortization of
deferred financing costs totaled $828,000 and $21,000, respectively.
Restricted Cash Reserves
In conjunction with the refinancing of the mortgage debt, the Partnership
was required to establish cash reserves which are held by an agent of the
lender including:
. $6.2 million debt service reserve
. $1.5 million reserve for capital expenditures
. $2.0 million reserve for payment of fees to the Tenant/Manager
In addition, the Partnership is required to establish with the lender a
separate escrow account for payments of insurance premiums and real estate
taxes for the Hotel if the credit rating of Marriott International is
downgraded by Standard and Poor's Rating Services. The Manager is a wholly-
owned subsidiary of Marriott International. In March 1997, Marriott
International acquired the Renaissance Hotel Group N.V., adding greater
geographic diversity and growth potential to its lodging portfolio. The
assumption of additional debt associated with this transaction resulted in a
single downgrade of Marriott International's long-term senior unsecured debt
effective April, 1997. Therefore, the Partnership was required to establish a
reserve account for insurance and real estate tax. As of December 31, 1997,
$581,000 remains available to pay insurance and real estate taxes. The escrow
reserve is included in restricted cash and the resulting tax and insurance
liability is included in accounts payable and accrued liabilities in the
accompanying balance sheet.
Desert Springs Supp-54
<PAGE>
The reserves were established from the Partnership's restricted cash related
to the Bridge Loan in addition to Partnership operating cash.
Additional Rental
Under the terms of the Hotel operating lease (see Note 7), the Tenant paid
Additional Rental to the Partnership which was subject to possible repayment
under defined conditions; therefore, Additional Rental had been recorded as a
liability in the financial statements. At the termination of the Operating
Lease, all Additional Rental was forgiven and is recorded as an Extraordinary
Gain in the financial statements.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
less than three months at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual
partners. Significant differences exist between the net loss/net income for
financial reporting purposes and the net loss/net income reported in the
Partnership's tax return. These differences are due primarily to the use for
income tax purposes of accelerated depreciation methods, shorter depreciable
lives for the assets and differences in the timing of recognition of rental
income. As a result of these differences, the excess of the tax basis in net
Partnership liabilities and the net liabilities reported in the accompanying
financial statements at December 31, 1997 and 1996 was $55.7 million and $26.0
million, respectively.
New Statements of Financial Accounting Standards
The Partnership adopted SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" during 1996.
Adoption of SFAS No. 121 did not have any effect on the Partnership's
financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and land improvements............................... $ 13,690 $ 13,690
Building and improvements................................ 155,497 155,570
Furniture and equipment.................................. 44,090 47,800
-------- --------
213,277 217,060
Less accumulated depreciation............................ (61,876) (61,619)
-------- --------
$151,401 $155,441
======== ========
</TABLE>
Desert Springs Supp-55
<PAGE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. Fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt............. $103,000 $103,000 $160,000 $160,000
Note payable.............. 20,000 20,000 -- --
Due to Host Marriott and
affiliates............... 59,727 59,727 -- --
Note Payable to Marriott
International............ -- -- 900 900
Additional rental paid by
Hotel lessee............. -- -- 25,013 --
</TABLE>
The estimated fair value of mortgage debt and other long term obligations is
based on the expected future debt service payments discounted at estimated
market rates. Additional rental paid by the Hotel lessee was valued based on
the expected future payments from operating cash flow discounted at a risk-
adjusted rate. As further explained in Note 7, upon closing of the permanent
financing, Marriott International agreed to waive all claims to Additional
Rental that had accrued prior to the consummation of the loan. Consequently,
the estimated fair value of Additional Rental paid by the Hotel lessee is
zero.
NOTE 5. DEBT
In 1996, Partnership debt consisted of a $168.2 million nonrecourse mortgage
loan (the "Mortgage Debt") which matured on July 27, 1996. The Mortgage Debt
bore interest at a fixed rate of 7.76% and required no amortization of
principal prior to maturity. Upon maturity, the Mortgage Debt went into
default as the Partnership was unable to secure replacement financing or
negotiate a forbearance agreement with the lender. Pursuant to the loan
documents, the Mortgage Debt began to accrue interest at the Default Rate, as
defined, of 10.75% which was 2.5 percentage points above the Lender's
Corporate Base Rate, as defined, from the maturity date through December 23,
1996. The Mortgage Debt was refinanced on December 23, 1996.
As of December 31, 1996, Partnership debt consisted of a $160 million
nonrecourse mortgage loan (the "Bridge Loan"). The Bridge Loan was originated
by Goldman, Sachs & Co. ("Goldman Sachs") and the lender was GMAC Commercial
Mortgage Corporation providing an interim $160 million mortgage loan bearing
interest at LIBOR plus 2.75 percentage points which matured on October 31,
1997. Pursuant to the terms of the Bridge Loan, all excess cash from Hotel
operations, if any, was held in a debt service reserve for future debt service
or to reduce the outstanding principal balance upon maturity. Through November
25, 1997, the weighted average interest rate on the Bridge Loan was 8.4%.
On September 26, 1997, the General Partner received unrevoked consents
approving a new loan structure and certain amendments to the Partnership
Agreement which were necessary to refinancing negotiations of the Bridge Loan.
An extension agreement was signed with the current lender on October 30, 1997,
extending the maturity date of the Bridge Loan from October 31, 1997 to
December 31, 1997, without penalty.
On November 25, 1997, the Partnership secured long-term financing for its
$160 million Bridge Loan. The new financing consists of three tranches: 1) a
$103 million senior loan, 2) a $20 million loan and 3) a $59.7 million junior
loan. The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of
the Partnership, DS Hotel LLC, which owns the Hotel and related assets. The
Senior Loan matures in December, 2022 and is secured by a first mortgage lien
on the Hotel. The loan bears interest at a fixed rate of 7.8% and requires
monthly payments of interest and principal with amortization over its twenty-
five year term.
The second tranche of debt consists of a $20 million loan (the "Mezzanine
Loan") from Goldman Sachs Mortgage Company ("GSMC") to a newly formed
bankruptcy remote subsidiary of the Partnership, Marriott
Desert Springs Supp-56
<PAGE>
DSM LLC, which secures the loan. The Mezzanine Loan consists of a fully
amortizing $20 million loan bearing interest at 10.365% for a twelve and one-
half year term maturing in December, 2010.
The third tranche of debt consists of a junior loan, (the "HM Junior Loan")
to the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary
of the General Partner. The HM Junior Loan has a term of thirty years and
requires no principal amortization for the first twelve and one-half years
with a seventeen and one-half year amortization schedule thereafter. If
remaining cash flow is insufficient to pay interest on the HM Junior Loan,
interest is deferred and will accrue and compound and be payable from future
cash flow. The HM Junior Loan also entitles MDSM to receive 30% of any excess
cash flow, as defined, available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan.
On the Closing Date, the Partnership was required to establish certain
reserves which are discussed in Note 2.
The Partnership utilized $1.2 million in 1997 from the refinancing reserve
to pay costs associated with the financing including lender or subsidiary
fees, property appraisals, environmental studies and legal fees.
The required principal payments of the Senior Loan, Mezzanine Loan and the
HM Junior Loan at December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 2,186
1999............................................................. 2,389
2000............................................................. 2,581
2001............................................................. 2,850
2002............................................................. 3,116
Thereafter....................................................... 169,605
--------
$182,727
========
</TABLE>
Debt to Marriott International
On April 30, 1996, the Partnership entered into a short-term loan with
Marriott International in the amount of $1,700,000 to fund a portion of the
Hotel's rooms refurbishment project. The loan matured on June 13, 1997,
bearing interest at 8.5% and was repaid from the property improvement fund as
contributions were made during the year. The loan was fully repaid on March
28, 1997.
NOTE 6. AIRLINE EQUIPMENT LEASE
The Partnership leased airline equipment to TWA under the terms of an
operating lease which expired in April 1995. Pursuant to the terms of the
airline equipment lease, TWA was obligated to make semi-annual payments, in
arrears, based upon specified percentages of the Partnership's cost of the
airline equipment. Rental income under the operating lease is included in
"Airline equipment income" in the statement of operations and was $852,000 in
1995.
On April 20, 1995, the Partnership reached an agreement with TWA whereby TWA
was obligated to pay renewal rents under a 15-month lease agreement. The
renewal rents consisted of quarterly payments of $780,000 plus 17% interest
paid in arrears, all of which totaled $6.5 million. At the end of the lease
term, TWA had the option to purchase the equipment for one dollar ($1). The
Partnership classified the new lease as a sales-type lease and recorded a
receivable for the future lease payments due from TWA, along with a deferred
gain on the transaction. The deferred gain was recognized as income as lease
payments were received on the installment method as a component of the line
item "Airline Equipment Income" in the statement of operations. Deferred gain
amortization was $1,248,000 in 1996 and $1,985,000 in 1995. On April 24, 1996,
TWA exercised its early termination option under the airline equipment lease
and paid the rent due on that date of $847,000 along with the termination
value of $780,000 plus the $1 purchase option.
Desert Springs Supp-57
<PAGE>
NOTE 7. OPERATING LEASE
The Partnership leased the Hotel to the Tenant pursuant to an agreement
which commenced on April 24, 1987, with an initial term of 25 years (the
"Operating Lease") with renewal options for five successive periods of 10
years each.
Annual Rental was equal to the greater of Basic Rental or Owner's Priority,
as described below:
1. Basic Rental equals 85% of Operating Profit, as defined, until
December 31, 1993, and 80% thereafter.
2. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel ("Expansion Debt
Service") or (ii) Debt Service, as defined. If there is a new mortgage (in
an amount which exceeds the outstanding balance of the existing mortgage by
at least $45,455,000), Owner's Priority will equal the greater of (i) $20
million plus Expansion Debt Service, (ii) Debt Service or (iii) the lesser
of Debt Service on the new mortgage or $24 million plus Expansion Debt
Service. In no event will Owner's Priority for any year exceed Operating
Profit.
3. Additional Rental equals the cumulative amount by which Owner's
Priority exceeds Basic Rental plus $268,000 and is recorded as a liability
in the accompanying financial statements. If in any year Basic Rental
exceeds Owner's Priority, Annual Rental will be reduced to equal Basic
Rental minus the lower of (i) Additional Rental then outstanding or (ii)
25% of the amount by which Basic Rental exceeds Owner's Priority.
Pursuant to an agreement reached with Marriott International, for fiscal
year 1997 the $20 million Owner's Priority was increased to $20.5 million.
Marriott International was entitled only to the next $2 million of Operating
Profit. Any additional Operating Profit in excess of $22.5 million was
remitted entirely to the Partnership. In connection with the long-term
financing, Marriott International agreed to waive any and all claims to
Additional Rental that accrued prior to the consummation of the loan. The
Partnership recorded an extraordinary gain of $27.5 million in 1997 to
recognize the gain which resulted from the forgiveness of these fees.
Rental income for 1997 included Basic Rental of $17,608,000 and Additional
Rental of $4,402,000. Operating Profit in 1997 totaled $23,698,000. In
accordance with an agreement reached with Marriott International, the
Partnership was entitled to receive Owner's Priority of $20,500,000 and
Marriott International was entitled to the next $2,000,000 with the remaining
$1,198,000 to the Partnership.
In addition to the Annual Rental, the Tenant was required to pay property
taxes, make annual contributions equal to a percentage of Hotel sales to a
property improvement fund (4.5% through 1997 and 5.5% thereafter) and pay
rental on the second golf course.
Pursuant to the terms of the Hotel purchase agreement, the Tenant and its
affiliates may utilize a portion of the land adjacent to the Hotel for
development of residences and timeshare condominiums. Purchasers of the
residences have the opportunity to use certain Hotel facilities and services
for a fee. Purchasers of the timeshare condominiums also have the ability to
use the Hotel's facilities but such use is subject to the same fees charged to
Hotel guests.
During 1995, the Hotel's main swimming pool was expanded at a cost of
approximately $2.1 million. The project was funded partially by proceeds
received from Marriott Vacation Club International ("MVCI"), a wholly-owned
indirect subsidiary of Marriott International, pursuant to an agreement
between the Partnership and MVCI for the development of additional timeshare
units on land adjacent to the Hotel. As part of this agreement, the Hotel's
spa was also expanded during 1994. Pursuant to the terms of the agreement,
MVCI contributed a total of $1.3 million towards the pool expansion and the
spa expansion projects; the remaining costs were funded by Partnership cash
reserves. Funding by MVCI in 1995 was $692,000, and was included in "Other
Income" in the statement of operations.
Desert Springs Supp-58
<PAGE>
NOTE 8. MANAGEMENT AGREEMENT
On November 25, 1997, in connection with the refinancing, the General
Partner also negotiated with the Tenant to convert the Operating Lease to a
management agreement (the "Management Agreement"). The Tenant would become
manager of the Hotel (the "Manager"). The initial term of the Management
Agreement continues through 2022 with four successive renewal options of ten
years each. The Manager is paid a base management fee equal to 3% of gross
hotel sales.
Beginning in fiscal year 1998, the Management Agreement provides that no
incentive fee will be paid to the Manager with respect to the first $21.5
million of Operating Profit (the "Owner's Priority"). Thereafter the Manager
will receive the next $1.8 million of Operating Profit as incentive management
fee and any operating profit in excess of $23.3 million will be divided 75% to
the Partnership and 25% to the Manager. Any such payments will be made
annually after completion of the audit of the Partnership's books.
The Management Agreement provides that the owner may terminate the
Management Agreement if, in any two of three consecutive fiscal years,
Operating Profit is less than $15 million. The Manager may, however, prevent
termination by paying the owner such amounts as are necessary to achieve the
performance standards.
Pursuant to the Management Agreement, the Manager is required to furnish the
Hotel with certain services ("Chain Services") which are generally provided on
a central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations 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 full-service hotels managed, owned or leased
by the Manager or its subsidiaries. In addition, the Hotels also participate
in the Manager's Marriott Rewards Program. The cost of this program is charged
to all hotels in the Manager's full-service hotel system based upon the
Marriott Rewards sales at each hotel. The total amount of Chain Services and
Marriott Rewards costs charged to the Partnership from November 25 through
December 31, 1997 were $169,000.
The Management Agreements provide for the establishment of a property
improvement fund for the Hotel to cover the cost of certain non-routine
repairs and maintenance to the Hotel which are normally capitalized and the
cost of replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund are 4.5% in 1997
and 5.5% thereafter. Contributions to the property improvement fund from
November 25 through December 31, 1997 were $421,000.
NOTE 9. HOTEL OPERATING RESULTS
The following is a summary of Hotel Operating Profit, as defined in the
Hotel lease agreement, for the three years ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
REVENUES
Rooms.............................................. $ 39,825 $37,031 $33,495
Food and beverage.................................. 40,366 38,431 33,453
Other.............................................. 23,130 22,437 18,450
-------- ------- -------
103,321 97,899 85,398
-------- ------- -------
EXPENSES
Departmental direct costs
Rooms............................................. 8,933 8,545 7,715
Food and beverage................................. 27,642 26,623 23,335
Other operating expenses........................... 43,048 41,686 35,987
-------- ------- -------
79,623 76,854 67,037
-------- ------- -------
OPERATING PROFIT.................................... $ 23,698 $21,045 $18,361
======== ======= =======
</TABLE>
Desert Springs Supp-59
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $150,679 $151,401
Due from Marriott Hotel Services, Inc................. 2,185 1,368
Property improvement fund............................. 2,954 1,598
Deferred financing, net of accumulated amortization... 2,971 3,000
Restricted cash reserves.............................. 9,191 10,236
Cash and cash equivalents............................. 13,644 4,553
-------- --------
$181,624 $172,156
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt....................................... $102,318 $103,000
Note payable........................................ 19,599 20,000
Note payable to Host Marriott Corporation and
affiliates......................................... 59,727 59,727
Due to Marriott Hotel Services, Inc................. 1,963 2,122
Accounts payable and accrued expenses............... 4,757 1,972
-------- --------
Total Liabilities................................. 188,364 186,821
-------- --------
PARTNERS' CAPITAL (DEFICIT)
General Partner..................................... 58 (21)
Limited Partners.................................... (6,798) (14,644)
-------- --------
Total Partners' Deficit........................... (6,740) (14,665)
-------- --------
$181,624 $172,156
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Desert Springs Supp-60
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
----------------
1998 1997
------- -------
<S> <C> <C>
REVENUES (Note 3)
Hotel revenues
Rooms.................................................... $25,394 --
Food and beverage........................................ 24,737 --
Other.................................................... 14,920 --
------- -------
Total hotel revenues................................... 65,051 --
Hotel rentals.............................................. -- 12,488
------- -------
65,051 12,488
------- -------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms.................................................... 5,127 4,534
Food and beverage........................................ 15,624 14,366
Other hotel operating expenses........................... 17,009 15,765
------- -------
Total hotel property-level costs and expenses............ 37,760 34,665
Depreciation............................................... 3,314 3,568
Base management fees....................................... 1,952 --
Incentive management fees.................................. 1,841 --
Property taxes and other................................... 1,639 1,164
------- -------
46,506 39,397
------- -------
OPERATING PROFIT............................................. 18,545 7,756
Interest expense (including first two quarters 1998 amount
related to Host Marriott debt of $3,937).................. (8,803) (6,770)
Interest income and other.................................. 454 213
------- -------
NET INCOME................................................... $10,196 $ 1,199
======= =======
ALLOCATION OF NET INCOME
General Partner............................................ $ 102 $ 12
Limited Partners........................................... 10,094 1,187
------- -------
$10,196 $ 1,199
======= =======
NET INCOME PER LIMITED PARTNER UNIT (900 Units).............. $11,216 $ 1,319
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Desert Springs Supp-61
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $10,196 $ 1,199
Noncash items.............................................. 3,429 4,006
Change in operating accounts............................... 1,256 9,657
------- --------
Cash provided by operating activities.................... 14,881 14,862
------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net................... (2,592) (1,318)
Changes in property improvement fund....................... (1,356) (469)
------- --------
Cash used in investing activities........................ (3,948) (1,787)
------- --------
FINANCING ACTIVITIES
Capital distribution to partners........................... (2,271) --
Change in restricted cash reserves......................... 1,598 (10,931)
Repayment of mortgage debt................................. (682) --
Repayment of note payable.................................. (401) (900)
Payment of refinancing costs............................... (86) (90)
------- --------
Cash used in financing activities........................ (1,842) (11,921)
------- --------
INCREASE IN CASH AND CASH EQUIVALENTS........................ 9,091 1,154
CASH AND CASH EQUIVALENTS at beginning of period............. 4,553 5,755
------- --------
CASH AND CASH EQUIVALENTS at end of period................... $13,644 $ 6,909
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.................. $ 5,866 $ 6,169
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Desert Springs Supp-62
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by Desert Springs Marriott Limited Partnership and subsidiaries (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted from
the accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998 and the results of operations
and cash flows for the first two quarters 1998 and 1997. Interim results are
not necessarily indicative of fiscal year performance because of seasonal and
short-term variations (see Note 3).
For financial reporting purposes, net income of the Partnership is allocated
99% to the limited partners and 1% to Marriott Desert Springs Corporation (the
"General Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income for Federal income tax
purposes. These differences are due primarily to the use, for income tax
purposes, of accelerated depreciation methods, shorter depreciable lives, no
estimated salvage values for the assets and differences in the timing of the
recognition of rental income.
2. In connection with the mortgage debt refinancing in November 1997 (see
Note 3), the General Partner received unrevoked consents of limited partners
approving certain amendments to the partnership agreement. The amendments,
among other things, allowed the formation of certain subsidiaries of the
Partnership including Marriott DSM LLC and DS Hotel LLC. The Partnership
contributed the Hotel and its related assets to Marriott DSM LLC, which in
turn contributed them to DS Hotel LLC, a bankruptcy remote subsidiary.
Marriott DSM LLC, a bankruptcy remote subsidiary of the Partnership, owns 100%
interest in DS Hotel LLC. The Partnership owns 100% interest in Marriott DSM
LLC.
3. On November 25, 1997, the Partnership completed a refinancing of its
mortgage debt. In connection with the refinancing, the Partnership converted
its operating lease with Marriott Hotel Services, Inc. ("MHS") to a management
agreement (the "Conversion"). Prior to the Conversion, the Partnership
recognized estimated annual hotel rental income on a straight-line basis
throughout the year. The profits from the Marriott's Desert Springs Resort and
Spa (the "Hotel") are seasonal and first and second quarter results are
generally higher than the last two quarters of the year. Lease payments in
excess of the income recognized by the Partnership were deferred and, to the
extent not subject to possible future repayment to the Hotel tenant, were
recognized as income during the remainder of the year. Pursuant to the terms
of the Operating Lease, Annual Rental, as defined, was equal to the greater of
Basic Rental (80% of Operating Profit, as defined) and Owner's Priority, as
defined. Additionally, the Hotel tenant was required to pay property taxes,
make contributions equal to a percentage of Hotel sales to a property
improvement fund (4.5% in 1997 and 5.5% thereafter) and pay rental on the
second golf course.
Subsequent to the Conversion, Partnership revenues represent gross sales
generated by the Partnership's hotel. Hotel property-level costs and expenses
reflect all property-level costs and expenses.
Desert Springs Supp-63
<PAGE>
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The statement of operations of the Partnership presented in the first two
quarters 1998 on Form 10-Q did not reflect gross hotel sales and property-
level operating expenses but reflected house profit which represents gross
hotel revenues less property-level operating expenses, excluding base and
incentive management fees, property taxes, insurance and certain other costs,
which were disclosed separately in the statement of operations. The
Partnership has concluded that EITF 97-2 should be applied to the Partnership
beginning November 25, 1997, the date the Partnership entered into a new
management agreement, and accordingly the first two quarters 1998 statement of
operations has been restated to reflect an increase in hotel revenues and
property-level expenses of $37.8 million. The restatement had no impact on
operating profit or net income.
The statements of operations for the first and second quarter of 1998
included in the Partnership Form 10-Q filings did not reflect hotel sales and
property-level expenses. These financial statements have been amended to
conform to the presentation of sales and expenses in the financial statements
included herein.
4. Pursuant to the terms of the management agreement, MHS earns an incentive
management fee based on Operating Profit as defined. For fiscal year 1998, the
Partnership is entitled to the first $21.5 million of Operating Profit (the
"Owners Priority"). Thereafter, MHS will receive the next $1.8 million of
Operating Profit as an incentive management fee and any operating profit in
excess of $23.3 million will be divided 75% to the Partnership and 25% to MHS.
Any such payments will be made annually after completion of the audit of the
Partnership's financial statements. Pursuant to the terms of the management
agreement, contributions to the property improvement fund in 1998 are 5.5% of
gross Hotel sales, a one percentage point increase over the prior year level.
5. Host Marriott Corporation ("Host Marriott"), the parent of the General
Partner of the Partnership, announced on April 17, 1998, that its Board of
Directors has authorized the company to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership") and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Partnership, are expected to be given an opportunity to receive,
on a tax-deferred basis, Operating Partnership units in the new Operating
Partnership in exchange for their current partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
the Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission on June 2, 1998. Limited partners will be
able to vote on the Partnership's participation in the merger later this year
through a consent solicitation.
Desert Springs Supp-64
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
HANOVER MARRIOTT LIMITED PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Hanover Marriott Limited Partnership, a
Delaware limited partnership ("Hanover" or the "Partnership"), and up to seven
other limited partnerships (the "Partnerships") that own full-service hotels
in which Host or its subsidiaries are general partners. As more fully
described in the Consent Solicitation, limited partners of those Partnerships
that participate in the Mergers will receive OP Units 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," and with respect to Hanover, the
"Hanover Limited Partners"). Hanover Limited Partners may elect to exchange
such OP Units received in connection with the Merger for either common shares
of beneficial interest, par value $.01 per share, of Host REIT ("Common
Shares") or unsecured 6.56% Callable Notes due December 15, 2005 issued by the
Operating Partnership ("Notes"). Beginning one year after the Mergers, Limited
Partners who retain OP Units will have the right to redeem their OP Units at
any time and receive, at the election of Host REIT, either 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").
The number of OP Units to be allocated to Hanover will be based upon (i) its
Exchange Value (as defined herein) and (ii) the price attributed to an OP Unit
following the Merger, determined as described herein (but in no event will it
be less than $ or greater than $ per OP Unit) and will not be known at the
time of voting. The number of Common Shares a Hanover Limited Partner may
elect to receive in connection with the Merger will equal the number of OP
Units received. The principal amount of Notes that Hanover Limited Partners
may elect to receive in connection with the Merger will be based upon
Hanover's Note Election Amount (as defined herein). See "Determination of
Exchange Value of Hanover and Allocation of OP Units." The estimated Exchange
Value and Note Election Amount set forth herein may increase or decrease as a
result of various adjustments, and will be finally calculated shortly before
the Effective Date. Pursuant to the Merger, Hanover Limited Partners have an
estimated Exchange Value of $123,202 per Partnership Unit and a Note Election
Amount of $98,562 per Partnership Unit.
RISK FACTORS
In deciding whether to approve the Merger, Hanover Limited Partners should
consider certain risks and other factors. The General Partner believes that
Hanover Limited Partners should particularly consider the following, which
should be read in conjunction with the information in the Consent Solicitation
under "Risk Factors" and "Federal Income Tax Consequences:"
. 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
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corporate-level income taxes expected as a result of the REIT
Conversion. To the extent that such 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. The benefits to Host of the REIT Conversion will be materially
reduced if one or more of the Partnerships do not participate in a
Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the Hanover Limited Partners or the
other Limited Partners. Although the General Partner has obtained the
Appraisal and the Fairness Opinion from AAA, AAA has not negotiated with
the General Partner 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 Hanover Limited Partners or
the other 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 Partner involve the following conflicts
of interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partners and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including Hanover, participate and Host REIT will benefit if the value
of OP Units received by the Limited Partners of Hanover is less than the
value of their Partnership Interests. In addition, the terms of the
Leases of the Hotels, including Hanover's Hotel, will be determined by
Host and 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, including the Hanover Limited Partners.
. Adverse Tax Consequences to the General Partner of a Sale of Hanover's
Hotel. In past years, Hanover has disproportionately allocated tax
losses to the General Partner, with the result that if Hanover's Hotel
were to be sold in a taxable transaction, the General Partner (and thus
Host) would incur a disproportionately larger tax gain than the Hanover
Limited Partners. Accordingly, the General Partner and Host have an
additional conflict of interest in deciding the appropriate course of
action for Hanover with respect to its Hotel.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the Hanover
Limited Partners must vote on the Merger, including (i) the exact
Exchange Value for Hanover (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 Merger, 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 Hanover Limited Partners 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 Note Election Amount is determined. For
these reasons, the Hanover Limited Partners cannot know at the time they
vote on the Merger these important aspects of the Merger.
. Exchange Value May Not Equal Fair Market Value of Hanover's Hotel. Each
Hanover Limited Partner who retains OP Units or elects to exchange OP
Units for Common Shares will receive consideration with a deemed value
equal to the Exchange Value of such Hanover Limited Partner's
Partnership Interest. The determination of the Exchange Value of Hanover
involves numerous estimates and assumptions. There is no assurance that
the Exchange Value of Hanover will equal the fair market value of the
Hotel and other assets contributed by Hanover. See "Determination of
Exchange Value of Hanover and Allocation of OP Units."
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. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of the OP Units equal to the number of shares of Host
common stock outstanding on the Effective Date (including the OP Units
to be received by the General Partners and other subsidiaries of Host in
the Mergers and the OP Units to be acquired from the Hanover Limited
Partners and the other Limited Partners who elect to exchange OP Units
for Common Shares in connection with the Mergers) 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. Host REIT's OP Units, in the aggregate,
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 to Host REIT and the Hanover Limited Partners and
the other Limited Partners may result in such 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 Value of Hanover and
Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the Hanover Limited Partners' Partnership Interests. The price
of an OP Unit, for purposes of the Merger 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
Merger (but in no event will it be less than $ or greater than $ per
OP Unit). This pricing mechanism has the effect of fixing the minimum
and maximum number of OP Units to be issued in the Mergers. It is likely
that, either initially or 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 Merger. This could result in the Hanover Limited Partners receiving
OP Units or Common Shares with an actual value that is less than either
the price of the OP Units for purposes of the Merger or the fair market
value of their Partnership Interests.
. Inability of Hanover Limited Partners Who Retain OP Units to Redeem OP
Units for One Year. Hanover Limited Partners who retain OP Units
received in the Merger will be unable to redeem such OP Units for one
year following the Merger. Until then, Hanover Limited Partners will
bear the risk of illiquidity and of not being able to sell in a falling
market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection
with the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of Hanover. Each
Hanover Limited Partner may elect to receive in exchange for OP Units
received in the Merger an unsecured, seven-year Note of the Operating
Partnership with a principal amount equal to the Note Election Amount of
his Partnership Interest, which is based upon numerous assumptions and
estimates. The deemed value of the OP Units to be received by the
Hanover Limited Partners will exceed the principal amount of the
corresponding Notes (because the Exchange Value will be higher than the
Note Election Amount) and there is no assurance that the Note a Hanover
Limited Partner receives will have a value equal to either (i) the fair
market value of the Hanover Limited Partner's share of the Hotel and
other assets owned by Hanover or (ii) the principal amount of the Note.
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 Hanover 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 ranks equally with such Notes.
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. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of a Hanover Limited Partner's
investment from holding an interest in Hanover, which was structured to
provide distributions of cash flow (some of which was sheltered from
federal income tax), is a finite-life entity, has a fixed portfolio of
one Hotel and distributes the cash flow from the operation of the Hotel
to the Hanover Limited Partners, to holding a direct or indirect
interest in the Operating Partnership, an ongoing real estate company
with a portfolio of approximately 125 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
and (iii) is able to reinvest proceeds from sales or refinancings of
existing Hotels in other hotels. In addition, each Hanover Limited
Partner's investment will change from one that allows a Hanover Limited
Partner to receive a return of capital in the form of distributions from
any net proceeds of a sale or refinancing of Hanover's assets to an
investment in which a Hanover Limited Partner who retains OP Units
likely would realize a return of capital only through the exercise of
the Unit Redemption Right. Those Hanover Limited Partners who elect to
receive Common Shares in connection with the Merger will hold an equity
interest in a publicly traded REIT that (i) provides immediate
liquidity, (ii) intends to make distributions to its shareholders in an
amount equal to at least 95% of its taxable income, (iii) allows
shareholders to influence management by participation in the election of
Trustees and (iv) realizes substantial corporate tax savings as long as
certain requirements are met. A Hanover Limited Partner's share of the
liquidation proceeds, if any, from the sale of Hanover's Hotel could be
higher than the amount realized upon exercise of the Unit Redemption
Right, the sale of Common Shares received in connection with the Merger
or payments on any Note received by a Hanover Limited Partner who elects
to exchange his OP Units for such Note in connection with the Merger. An
investment in the Operating Partnership or Host REIT may not outperform
an investment in Hanover. 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 Merger, Hanover Limited Partners who retain OP Units or elect to
receive Common Shares in connection with the Merger will own interests
in a much larger enterprise with a broader range of assets than Hanover
individually. A material adverse change affecting the Operating
Partnership's assets will affect all Limited Partners, including Hanover
Limited Partners, regardless of whether a particular Limited Partner
previously was an investor in such affected assets. Hanover owns
discrete assets and the Mergers and the REIT Conversion will
significantly diversify the types and geographic locations of the Hotels
in which the Hanover 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 the Hotel previously
owned by Hanover.
. Hanover Limited Partners Have No Cash Appraisal Rights. Hanover Limited
Partners who vote against the Merger have no right to receive cash based
upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The Hanover Limited Partners cannot know at the time they
vote on the 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, 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 Mergers and the REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. Due to current federal income tax law restrictions on a
REIT's ability to derive revenues directly from the operation of a
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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 existing long-term
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. The Operating Partnership
also will not own any of the voting stock of the Non-Controlled
Subsidiaries, which may own up to 20% by value of the Operating
Partnership's assets. 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 and the Non-Controlled
Subsidiaries to operate and manage their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into
new leases with such lessees, which could result in a failure of Host
REIT to qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of Hanover Limited Partners Binds All Hanover Limited
Partners. For Hanover, approval by a majority of the Partnership
Interests of Hanover that are eligible to be voted is required to
approve the Merger and the related amendments to the partnership
agreement, as described in "Voting Procedures--Required Vote and Other
Conditions." Such approval will cause Hanover to participate in the
Merger and will bind all Hanover Limited Partners, including Hanover
Limited Partners who voted against or abstained from voting with respect
to the Merger and the related amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of the Operating Partnership and Host REIT to obtain such
consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on Host, the Operating Partnership and Host REIT and thus
could reduce the value of the OP Units and Common Shares.
. 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 an approximately 53% 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 $15.00). The
Operating Partnership's business is capital intensive and it will have
significant capital requirements in the future.
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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, (including Host REIT)
(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 Prior 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 (including Host
REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural
and other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder
Rights Plan to replace the existing stockholder rights plan of Host.
Host REIT also will become subject to the business combination and
control share provisions under Maryland law. See "Description of Shares
of Beneficial Interest" and "Certain Provisions of Maryland Law and Host
REIT's Declaration of Trust and Bylaws."
. 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 substantial
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
Hanover Limited Partners (other than those who elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger)
generally are not expected to recognize significant taxable gain at the
time of the Merger, there are a variety of events and transactions
(including the sale of the Hotel currently owned by Hanover or the
reduction of indebtedness securing the Hotel) that could cause a Hanover
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 Treatment of Hanover Limited Partners Who Hold OP
Units Following the Merger." Certain Hotels (including the Blackstone
Hotels) will be
Hanover Supp-6
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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. The partnership agreement of the Operating Partnership,
which is substantially in the form attached to the Consent Solicitation
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."
. Election to Exchange OP Units for Common Shares. A Hanover Limited
Partner who elects to receive Common Shares in exchange for his OP Units
in connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. See "Federal Income Tax
Consequences--Tax Treatment of Hanover Limited Partners Who Exercise
Their Right to Make the Common Share Election or the Note Election."
Hanover Limited Partners who elect to receive Common Shares in
connection with the Merger will not receive the Crestline common stock
or any other portion of the E&P distribution made before they become
shareholders of Host REIT.
. Election to Exchange OP Units for Notes. A Hanover Limited Partner who
elects to receive a Note in exchange for his OP Units in connection with
the Merger will be treated as having made a taxable disposition of his
OP Units. A Hanover Limited Partner who receives a Note in connection
with the Merger may be eligible to defer a majority of that gain under
the "installment sale" rules until principal on the Note is paid. See
"Federal Income Tax Consequences--Tax Treatment of Hanover Limited
Partners Who Exercise Their Right to Make the Common Share Election or
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 and Common Shares, 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 the Lease of the Hotel to
the Lessee was to be disregarded for tax purposes (for example, because
the Lease was determined to lack economic substance), Host REIT could
fail to qualify as a REIT and the Operating Partnership might be treated
as a corporation for federal income tax purposes, which would have a
material adverse impact on the Hanover Limited Partners and the value of
the OP Units and the Common Shares.
. 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.
Hanover Supp-7
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. Hanover Limited Partners Need to Consult with Their Own Tax
Advisors. Because the specific tax attributes of a Hanover Limited
Partner and the facts regarding such Hanover Limited Partner's interest
in Hanover could have a material impact on the tax consequences to such
Hanover Limited Partner of the Merger (including the decision whether to
elect to receive Common Shares or Notes in exchange for OP Units in
connection with the Merger) and the subsequent ownership and disposition
of OP Units, Common Shares, or Notes, it is essential that each Hanover
Limited Partner consult with his own tax advisors regarding the
application of federal, foreign and state and local tax laws to such
Hanover 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 Hanover Limited Partners would not be able to use
suspended passive activity losses from other investments to offset
income from the Operating Partnership.
. Host REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
MARRIOTT HANOVER HOTEL CORPORATION (THE "GENERAL PARTNER"), THE GENERAL
PARTNER OF HANOVER, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND
IS FAIR TO THE HANOVER LIMITED PARTNERS AND RECOMMENDS THAT ALL HANOVER
LIMITED PARTNERS VOTE FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO THE
PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for
Hanover Limited Partners the specific risks, benefits, effects and fairness of
the Merger to them and to provide other information specific to Hanover.
Supplements have also been prepared for each of the other Partnerships. This
Supplement, together with the supplements of the other Partnerships
(collectively, the "Supplements"), are part of the Consent Solicitation. Upon
receipt of a written request by a Limited Partner or his representative so
designated in writing, the General Partner will send a copy of any Supplement
without charge. All requests for a copy of a Supplement 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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
Hanover Supp-8
<PAGE>
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger will likely be
beneficial to the Hanover Limited Partners for the reasons set forth below.
This information is qualified by and should be read in conjunction with the
information in the Consent Solicitation under "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of Hanover, are expected to include:
. Exchange Value of Hanover. Hanover Limited Partners who retain OP Units
or elect to receive Common Shares in connection with the Merger will
receive OP Units or Common Shares with an estimated Exchange Value equal
to $123,202 per Partnership Unit.
. Liquidity. The REIT Conversion will offer Hanover Limited Partners
liquidity with respect to their investment in Hanover because Hanover
Limited Partners can receive freely tradeable Host REIT Common Shares by
electing to exchange OP Units for Common Shares in connection with the
Merger or by exercising their Unit Redemption Right, at any time after
one year following the Effective Date. Host has approximately 204
million shares of common stock outstanding and is expected to have a
total common equity market capitalization of approximately $3.6 billion
after giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host REIT Common Share). The exercise of the
election to exchange OP Units for Common Shares in connection with the
Merger or the exercise of the Unit Redemption Right, however, generally
would result in recognition of taxable income or gain at the time of
exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that these distributions will be higher than the estimated cash
distributions for 1998 of Hanover, 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 Hanover and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons
for the Mergers."
. Substantial Tax Deferral for Hanover Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that Hanover Limited Partners who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 Hanover or a sale or other disposition of its
assets in a taxable transaction. Thereafter, such Hanover Limited
Partners generally should be able to defer at least a substantial
portion of such built-in gain until they elect to exercise their Unit
Redemption Right or the Hotel currently owned by Hanover is sold or
otherwise disposed of in a taxable transaction by the Operating
Partnership or the debt now secured by such Hotel is repaid, prepaid or
substantially reduced. The federal income tax consequences of the Merger
are highly complex and, with respect to each Hanover Limited Partner,
are dependent upon many variables, including the particular
circumstances of such Hanover Limited Partner. See "Federal Income Tax
Consequences--Tax Consequences of the Merger." Each Hanover Limited
Partner is urged to consult with his own tax advisors as to the
consequences of the Merger in light of his particular circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of Hanover Limited Partners upon the performance of, and the
exposure to the risks associated with, its Hotel 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 generally have a significantly lower leverage
to value ratio, approximately 53%, than Hanover currently, which has a
leverage ratio of 81% (calculated as a percentage of Exchange Value),
resulting in significant interest and debt service savings and greater
financial stability.
Hanover Supp-9
<PAGE>
. Growth Potential. The General Partner believes that the Hanover Limited
Partners, by directly or indirectly 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
Hanover 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 Hanover 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 Hanover individually.
. Public Market Valuation of Assets. The Partnership Units of Hanover
currently trade at a discount to the net asset value of Hanover's
assets. The General Partner believes that by exchanging interests in
Hanover, which is a non-traded, finite-life limited partnership with a
fixed portfolio for interests in an ongoing 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 Hanover 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 (although not
currently), has resulted at various times 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 they will not trade at a
discount to private market values. Also, the benefit of Host's
conversion to a REIT will not be shared by the Hanover 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.
If Hanover does not participate in the Merger, its business will continue in
its current manner; however, the Operating Partnership may elect to contribute
some or all of its interest in Hanover to a Non-Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF HANOVER AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of Hanover 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 Partner has retained AAA to
determine the market value of the Hotel as of March 1, 1998 (the
"Appraised Value"). The "Adjusted Appraised Value" of Hanover equals the
Appraised Value of its Hotel, adjusted 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 Hanover represents AAA's
estimate, as adopted by the General Partner, of the discounted present
value, as of January 1, 1998, of the Hanover limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender reserves), assuming that Hanover 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 Hanover represents the
General Partner's estimate of the net proceeds to Hanover limited
partners resulting from the assumed sale as of December 31, 1998 of the
Hotel of Hanover, 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.
Hanover Supp-10
<PAGE>
Final determination of the Exchange Value of Hanover 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 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 Hanover after the Initial Valuation Date to
perform deferred maintenance that were previously subtracted in determining
the estimated Adjusted Appraised Value of Hanover and (iii) to reflect any
changes in Hanover's other reserves, such as for litigation expenses and
indemnification costs and any revised estimates of transfer and recordation
taxes and fees. The General Partner does not believe that any adjustments to
the Exchange Value will be material; however, if any such changes are deemed
to be material, the General Partner will provide the Hanover Limited Partners
with an opportunity to change their vote on the Merger.
APPRAISED VALUE. Hanover's Hotel was 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 Hanover's
Hotel. The appraisal ("Appraisal") was reviewed by a Member Appraisal
Institute ("MAI") appraiser and certified by such MAI appraiser as having been
prepared in accordance with the requirements of the Standards of Professional
Practice of the Appraisal Institute and the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation.
The purpose of the Appraisal is to provide an estimate of the "Market Value"
of the 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 a site visit at Hanover's Hotel for purposes of the Appraisal.
In preparing the Appraisal, 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 the Hanover 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 NOI 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.
Hanover Supp-11
<PAGE>
. 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 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
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 effective capitalization
rates for 1997 and Projected Year's Adjusted NOI resulting from AAA's
estimated Appraised Value of Hanover's Hotel.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISAL OF HANOVER'S HOTEL
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.4% 10.1%
</TABLE>
The resulting Appraised Value of Hanover's Hotel, as estimated by AAA,
is $49,400,000.
. Comparison with Comparable Sales. AAA checked the Appraised Value of
Hanover's Hotel derived by the foregoing procedures against its database
of comparable sale transactions for reasonableness.
The Appraisal is not a guarantee of present or future values and no
assurance can be given as to the actual value of Hanover's Hotel. The
Appraisals should be read in conjunction with other information, such as, but
not limited to, the audited financial statements of Hanover.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 Appraisal. Furthermore,
the actual results achieved from Hanover's Hotel will vary from the results
projected in the Appraisal and the variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of Hanover was
determined by making various adjustments to the Appraised Value of Hanover's
Hotel, as described below.
. 1998 Capital Expenditure Reserves. For 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.
Hanover Supp-12
<PAGE>
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Mergers) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of Hanover has been subtracted
from the Appraised Value.
. Mark to Market Adjustment. 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 Hanover, the estimated
Adjusted Appraised Value for Hanover has been 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 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.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to the
Hanover Hotel has 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.
The following table sets forth the adjustments to the Appraised Value made
to derive the estimated Adjusted Appraised Value for Hanover as of the Initial
Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR HANOVER
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................. $ 49,400
Capital expenditure reserve..................................... 1,690
Mortgage debt................................................... (29,394)
Other debt...................................................... (10,398)
Mark to market adjustment....................................... (435)
Deferred maintenance costs...................................... (72)
--------
Estimated Adjusted Appraised Value.............................. $ 10,791
========
General Partner's share(1)...................................... $ 442
Limited partner share of Host subsidiaries(2)................... $ 4,928
Total limited partners' share(3)................................ $ 10,349
Per Partnership Unit............................................ $123,202
</TABLE>
--------
(1) Excludes amounts attributable to limited partner interest of the
General Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of Hanover using
the following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for Hanover 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 Appraisal and for each subsequent
year applying an assumed annual stabilized growth rate (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 Hanover's limited partners after payment of all
management fees, debt
Hanover Supp-13
<PAGE>
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 Hanover's
FF&E reserve was adequate and understood that Host determined that there
were no reserve shortfalls or surpluses.
. Refinancing Assumptions. AAA assumed that Hanover's debt would be
refinanced with an interest rate of 8.58% per annum and a 25-year
amortization schedule, with estimated refinancing costs of 2% of the
refinanced amount being paid from operating cash flow.
. Determination of Residual Value. To estimate the residual value of the
Hanover limited partners' interest in Hanover at the end of the 12-year
period, AAA assumed that the Hanover Hotel would be sold as of December
31, 2009 at its then market value. AAA estimated the market value of the
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 Hanover's
partners. AAA then determined what portion of such estimated net sales
proceeds would be distributable to Hanover's limited partners under the
partnership and debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to Hanover's limited
partners from operations and estimated net sales proceeds 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for Hanover are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR HANOVER
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED GENERAL LIMITED ESTIMATED
CONTINUATION PARTNER'S PARTNERS' CONTINUATION VALUE
GROWTH RATE EXIT CAPITALIZATION RATE (2009) VALUE SHARE(1) SHARE (PER PARTNERSHIP UNIT)
----------- ------------------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
3.7% 9.9% $9,873 $1,633 $8,240 $98,090
</TABLE>
- --------
(1) Includes amounts attributable to interests of other Host subsidiaries.
LIQUIDATION VALUE. The Liquidation Value of Hanover was estimated by the
General Partner and represents the estimated value of Hanover if all of its
assets were sold as of December 31, 1998. Such value was based upon the
Adjusted Appraised Value of Hanover, 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 and (ii)
the deduction for transfer and recordation taxes used to estimate the Adjusted
Appraised Value was eliminated and instead an amount equal to 2.5% of the
Appraised Value of Hanover's Hotel was subtracted from the Appraised Value for
estimated liquidation costs, expenses and contingencies. The General Partner
then determined the portion of the estimated Liquidation Value that would be
distributable to Hanover's limited partners under the terms of the partnership
agreement and other contractual arrangements.
Hanover Supp-14
<PAGE>
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of Hanover as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF HANOVER
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................. $ 49,400
Capital expenditure reserve..................................... 1,690
Mortgage debt................................................... (29,394)
Other debt...................................................... (10,398)
Prepayment/defeasance costs..................................... (2,168)
Deferred maintenance costs...................................... (72)
Sales costs..................................................... (1,235)
--------
Estimated Liquidation Value..................................... $ 7,823
========
General Partner's share(1)...................................... $ 391
Limited partner share of Host subsidiaries(2)................... $ 3,539
Total limited partners' share(3)................................ $ 7,432
Per Partnership Unit............................................ $ 88,474
</TABLE>
--------
(1) Excludes amounts attributable to limited partner interest of the
General Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of Hanover (based upon the greatest of its estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value), the estimated minimum number of OP Units to be received (based upon a
maximum price of $ per OP Unit) and the estimated Note Election Amount for
Hanover, all on a per Partnership Unit basis as of the Initial Valuation Date.
The number of Common Shares received in exchange for OP Units in connection
with the Merger will equal the number of OP Units. The estimated Note Election
Amount for Hanover (which will be received by Hanover Limited Partners
electing to receive Notes in exchange for OP Units) is equal to 80% of the
estimated Exchange Value for Hanover. 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 Hanover 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 (but will not be less than $
per OP Unit) and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUE,NUMBER OF OP UNITS AND NOTE ELECTION AMOUNTS
OF HANOVER PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED MINIMUM ESTIMATED
ESTIMATED ADJUSTED ESTIMATED ESTIMATED EXCHANGE NUMBER OF NOTE ELECTION
APPRAISED VALUE CONTINUATION VALUE LIQUIDATION VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
- ------------------ ------------------ ----------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$123,202 $98,090 $88,474 $123,202 8,213 $98,562
</TABLE>
- --------
(1) A Partnership Unit in Hanover 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units To Pay Exchange Value to Hanover Limited Partners. Each
Hanover Limited Partner will receive OP Units with a deemed value equal to the
Exchange Value of such Hanover Limited Partner's Partnership Interests. The
price of an OP Unit for this purpose will be equal to the average closing
price on the
Hanover Supp-15
<PAGE>
NYSE of a Host REIT Common Share for the 20 trading days after the Effective
Date of the Mergers (but in no event will it be less than $ or greater than
$ per OP Unit). Thus, if the 20-day average trading price is less than $ ,
the price per OP Unit in the Merger would be $ , and if such average trading
price is greater than $ , the price per OP Unit in the Merger would be $ .
The OP Units will be delivered to the Hanover Limited Partners promptly after
the twentieth trading day following the Effective Date of the Merger (which
would be promptly after January 29, 1999 if the Effective Date of the Merger
is December 30, 1998).
Hanover Limited Partners at the Effective Date of the Merger who retain OP
Units will receive cash distributions from Hanover for all of 1998 and, if the
Merger does not occur in 1998, any portion of 1999 prior to the Merger for
which period they do not receive a cash distribution from the Operating
Partnership. Cash distributions will be made by Hanover in accordance with its
partnership agreement on or before June 1, 1999 in respect of 1998 operations
and, if the Merger does not occur prior to January 1, 1999, within 90 days
after the Effective Date of the Merger in respect of any 1999 operations.
Hanover Limited Partners at the Effective Date of the Mergers who receive
Common Shares in exchange for OP Units in connection with the Merger will
participate in the same distributions from Hanover as Hanover Limited Partners
who retain OP Units and will receive distributions from Host REIT with respect
to periods after the Effective Date of the Mergers, which distributions are
expected to equal the amount distributed with respect to the OP Units for such
periods. Hanover Limited Partners at the Effective Date of the Merger will
receive Notes in connection with the Merger in exchange for OP Units will
participate in the same distribution from Hanover as Hanover 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 Merger
because they will be entitled to receive interest on their Notes for such
periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTERESTS IN HANOVER AND ALLOCATION OF OP UNITS TO THE GENERAL PARTNER AND
OTHER HOST SUBSIDIARIES
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the Hanover Limited Partners' Partnership
Interests, by the same methodologies set forth above and giving effect to the
applicable distribution preferences in the Hanover partnership agreement. The
number of OP Units that will be received by the General Partner will be equal
to the value of its interest in Hanover divided by the same price per OP Unit
used to determine the number of OP Units to be received by the Hanover Limited
Partners.
The following table sets forth the estimated value of the interest of the
General Partner and Other Host Subsidiaries in Hanover based upon the
estimated aggregate Exchange Value of the Hanover Limited Partners'
Partnership Interests as of the Initial Valuation Date and the minimum number
of OP Units estimated to be received by the General Partner and other Host
subsidiaries in respect thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTERESTS AND
NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value............................................... $10,791
Limited partners' share of aggregate Exchange Value.................... 10,349
-------
Value of General Partner's Interest(1)................................. $ 442
Value of other Host Subsidiaries' interest............................. 4,928
-------
Total interest of General Partner...................................... $ 5,370
=======
Minimum number of OP Units(2).......................................... 358
</TABLE>
- --------
(1) Excludes limited partner interests owned by the General Partner.
(2) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
Hanover Supp-16
<PAGE>
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of Hanover and recommends that all Limited
Partners of Hanover consent to the Merger. The General Partner bases this
recommendation primarily on (i) its view that the expected benefits of the
Merger for the Hanover Limited Partners outweigh the risks and potential
detriments of the Merger to the Hanover Limited Partners (see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the Mergers" and
"Risk
Factors"), (ii) its view that the value of the OP Units allocable to the
Hanover Limited Partners on the basis of the Exchange Value established for
Hanover represents fair consideration for the Partnership Interests held by
the Hanover Limited Partners and is fair to the Hanover Limited Partners from
a financial point of view and (iii) the Appraisal and Fairness Opinion of AAA.
See "--Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the Hanover Limited Partners, individually
and as a whole, if it is consummated with any combination of other
Participating Partnerships. The General Partner bases this belief primarily on
the fact that the consideration to be paid to the Hanover Limited Partners has
been established based upon Hanover's Exchange Value, without regard to any
possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for Hanover
represents fair consideration for the Partnership Interests of the
Hanover Limited Partners in the Merger in relation to Hanover because
the Exchange Value is equal to the greatest of the Adjusted Appraised
Value, Continuation Value and Liquidation Value, each of which is an
acceptable method for determining the fair market value of a
Partnership's assets. The General Partner also has concluded that the
Exchange Value established for the Hanover Limited Partners fairly
reflects the value of the assets held by Hanover. In addition, the
General Partner's own analysis, as well as the Fairness Opinion, support
these conclusions.
. Hanover Limited Partners who retain OP Units will be able to defer
recognition of gain for tax purposes until such time as they choose to
realize such gain based on their personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the Hanover 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 Merger for
the Hanover Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
Hanover Limited Partners should consider carefully and does not conclude
that the Exchange Value is the best price that could be obtained. 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 Merger.
. The General Partner believes that the economic terms of the lease of the
Hanover Hotel are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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
Hanover Supp-17
<PAGE>
as the other limited partners. The General Partner believes that this is
a factor supporting the fairness of the Merger to the Hanover Limited
Partners.
. The General Partner believes that the value of the consideration to be
received by the Hanover Limited Partners in the Merger 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 Hanover is equal to its Adjusted
Appraised Value, which is the greatest of the Adjusted Appraised Value,
the Continuation Value and the Liquidation Value. The consideration to
be received by the Hanover Limited Partners in the Merger also is
greater than the amounts paid in recent reported sales of Hanover
Partnership Units, including the April 1997 tender offer by Host, which
offered $40,000 per Partnership Unit and is significantly less than the
estimated Exchange Value of $123,202 per Partnership Unit. The General
Partner does not believe that the sale of Hanover's Hotel and
liquidation of Hanover would obtain for Hanover Limited Partners as much
value as the value to be received by such Hanover Limited Partners
following the Merger. The General Partner believes that the following
benefits are of the greatest value and importance to the Hanover Limited
Partners:
. Liquidity. The Merger and the REIT Conversion will offer Hanover
Limited Partners liquidity with respect to their investments in
Hanover because Hanover Limited Partners can receive freely tradeable
Host REIT Common Shares in connection with the Mergers or, for
Hanover Limited Partners who retain OP Units, at any time commencing
one year following the Effective Date, by exercising their Unit
Redemption Right, 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 $3.6 billion after giving effect to the earnings and
profits distribution (based on a price of $15.00 per Host REIT Common
Share). The election to exchange OP units for Common Shares in
connection with the Mergers or 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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and Host REIT will make regular
quarterly cash distributions to holders of Common Shares. Host
expects that these distributions will be higher than the estimated
cash distributions for 1998 of Hanover, and, in any event, the
ability to receive distributions quarterly and in regular amounts
would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
Hanover Limited Partner's investment will be converted from an
investment in Hanover, which owns one hotel, into an investment in an
enterprise that initially will own or control approximately 125
Hotels and will have a total market capitalization of approximately
$3.6 billion, thereby reducing the dependence upon the performance
of, and the exposure to the risks associated with, the Hotel
currently owned by Hanover 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 generally have a significantly lower
leverage to value ratio, approximately 53%, than Hanover currently,
which has a leverage ratio of 81% (calculated as a percentage of
Exchange Value), resulting in significant interest and debt service
savings and greater financial stability.
. Substantial Tax Deferral. The General Partner expects that Hanover
Limited Partners who do not elect to receive Common Shares or Notes
in exchange for OP Units in connection with the Merger generally
should be able to obtain the benefits of the Merger 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 Hanover or a sale or other disposition of its
assets in a taxable transaction.
Hanover Supp-18
<PAGE>
The General Partner believes that the factors described above, which support
the fairness of the Merger to the Hanover Limited Partners, when weighed
against the factors that may be disadvantageous, taken as a whole, indicate
that the Merger is fair to the Hanover Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 Hanover and each
other 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 Hanover Limited
Partners and the Limited Partners of each other Partnership and (ii) the
methodologies used to determine the value of an OP Unit and to allocate the
equity in the Operating Partnership to be received by the Hanover limited
partners and the limited partners of each other Partnership are fair and
reasonable to the Hanover Limited Partners and the Limited Partners of each
other Partnership. The Fairness Opinion is addressed to each Partnership and
it may be relied upon by each of the Hanover Limited Partners and the Limited
Partners of each of the other 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
the Consent Solicitation and should be read in its entirety. The material
assumptions and qualifications to the Fairness Opinion are summarized below,
although this summary does not purport to be a complete description of the
various inquiries and analyses undertaken by AAA in rendering the Fairness
Opinion. Arriving at a fairness opinion is a complex analytical process not
necessarily susceptible to partial analysis or amenable to summary
description. For a more complete description of the assumptions and
qualifications that limit the scope of the Fairness Opinion, see "--
Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 Hanover and the other
Partnerships might not have been more favorable to the Limited Partners in
certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of Hanover's and each other
Partnership's contingent liabilities.
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
Hanover Supp-19
<PAGE>
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partners selected AAA,
on the basis of the proposals, 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.
Hanover Supp-20
<PAGE>
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 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
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 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 each of the Hotels) are fair and reasonable, from a financial point of
view, to the Hanover Limited Partners and the Limited Partners of each other
Partnership and (ii) the methodologies used to determine the value of an OP
Unit and to allocate the equity interest in the Operating Partnership to be
received by the Hanover Limited Partners and the Limited Partners of each
other Partnership are fair and reasonable to the Hanover Limited Partners and
the Limited Partners of each other Partnership.
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.
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by Hanover. Hanover has not paid any cash
distributions to its Limited Partners in the First Two Quarters 1998 and for
the fiscal years 1993 through 1997.
Compensation and Distributions to the General Partner. Under Hanover's
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of Hanover but the
General Partner and its affiliates are reimbursed for certain costs and
expenses incurred on behalf of Hanover. In addition, the General Partner is
entitled to distributions related to its interest in Hanover. The following
information has been prepared to compare the amount of reimbursements paid and
cash distributions made by Hanover to the General Partner and its affiliates
to the amounts that would have been paid if the reimbursement and distribution
structure which will be in effect after the REIT Conversion had been in effect
for the periods presented.
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). Marriott
International receives management fees and other reimbursements from Hanover
under the Management Agreement.
The following table sets forth the reimbursements and distributions paid by
Hanover to the General Partner and its affiliates and payments made to
Marriott International 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 Partner and its affiliates and payments
made to Marriott International 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 $ per year during such period, which is the expected minimum
distribution for 1999.
Hanover Supp-21
<PAGE>
HISTORICAL AND PRO FORMA
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNER AND ITS AFFILIATES
AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
FIRST TWO QUARTERS ------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- ---------- ----------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(1)....... $ 103 $ -- $ 191 $ -- $ 56 $ 43
Distributions(2)........ -- 145 -- 290 -- --
Payments Made to
Marriott Internation-
al(3).................. 691 691 517 517 -- --
----- ----- ----- ----- ----- -----
Total................. $ 794 $ 836 $ 708 $ 807 $ 56 $ 43
===== ===== ===== ===== ===== =====
</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 Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $
per annum per OP Unit (which is the expected minimum distribution per OP
Unit for 1999) with respect to the estimated number of OP Units that the
General Partner and its affiliates will receive with respect to its
general and limited partner interests in Hanover. Such number does not
reflect the aggregate number of OP Units Host REIT will receive in
connection with the REIT Conversion.
(3) Under the Management Agreement, effective August 18, 1997, payments made
to Marriott International include base and incentive management fees,
chain and central office services, and Marriott Rewards Program costs.
Prior to August 18, 1997 under the Operating Lease, these costs and
expenses were not the responsibility of the Partnership. During 1995, the
Partnership paid Marriott International $535,000 of Additional Rental in
accordance with the Operating Lease.
CERTAIN INFORMATION REGARDING THE HOTEL OWNED BY HANOVER
<TABLE>
<CAPTION>
NUMBER OF
NAME OF HOTEL LOCATION OF HOTEL ROOMS DATE OPENED
------------- ----------------- --------- -----------
<S> <C> <C> <C>
Hanover Marriott Hotel Hanover, NJ 353 1986
</TABLE>
The table below sets forth certain performance information for Hanover's
Hotel for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -------------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average daily rate.......... $142.62 $123.98 $123.55 $113.50 $108.39
Occupancy................... 71.5% 82.2% 80.8% 79.1% 74.4%
REVPAR...................... $101.97 $101.91 $ 99.83 $ 89.78 $ 80.64
% REVPAR change............. 0.1% -- 11.2% 11.3% --
</TABLE>
The Hanover Marriott Hotel, Hanover, New Jersey
The Hotel is a full-service Marriott hotel located on approximately 13.41
acres in a business/industrial park district. The Hotel is near several major
highways, including New Jersey State Route 10 and I-287, as well as New Jersey
State Routes 202, 206, 15, 46 and 24. Such routes are well-maintained two to
six lane highways which run both north-south and east-west, providing easy
access to Newark International Airport, New York City and points west.
The Hotel is located within ten miles of many large corporations and
manufacturers, including several Fortune 500 companies. The Hotel is across
Route 10 from the Prudential Business Campus. Nearby Morristown is Morris
County's central business district and seat of government, and also provides
business, retail and historical attractions.
The Hotel, which opened July 30, 1986, has a total of 260,000 square feet of
building area and is operated as part of the Marriott Hotels, Resorts and
Suites system. The Hotel contains a total of 353 guest rooms, including four
suites. The Hotel also contains approximately 19,000 square feet of meeting
space in the form of a grand ballroom and smaller meeting rooms and conference
suites. The Hotel has one multi-purpose restaurant, one Japanese steak house
and a 60-seat lobby lounge. Other features of the Hotel include a gift shop,
business
Hanover Supp-22
<PAGE>
center, small hotel laundry, parking for 695 cars and a package of
recreational facilities that includes an indoor/outdoor swimming pool, sauna,
hydrotherapy pool and health club.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT OF HANOVER
In order to allow the Hotel of Hanover to be leased to Crestline in
connection with the Merger and the REIT Conversion, Hanover's partnership
agreement must be amended. Currently, there is no provision in Hanover's
partnership agreement to allow the Hanover Hotel to be leased. Therefore,
Section 5.02B of Hanover's partnership agreement must be amended to add a new
paragraph 5.02B(x) to read as follows:
(x) lease (or consent to the lease), directly or indirectly, in one
transaction or a series of related transactions of the Hotel.
Other Amendments. Amendments to certain terms and sections of Hanover's
partnership agreement would be made in order to (i) reduce to one the number
of appraisals of the fair market value of Hanover's Hotel that Hanover must
provide to the Hanover Limited Partners before the General Partner can cause
Hanover to sell assets to the General Partner or an affiliate and (ii) make
any other amendments to Hanover's partnership agreement deemed necessary or
advisable, in the sole discretion of the General Partner, in connection with
the consummation of the Merger and the REIT Conversion. The form of amendment
to the Hanover partnership agreement is attached as an exhibit to the
Registration Statement of which this Supplement is a part.
VOTING PROCEDURES
Hanover Limited Partners will be asked to vote separately on the Merger and
the proposed amendments to the partnership agreement, but Hanover will not
participate in the Merger unless both proposals are approved. The consent of
Hanover Limited Partners holding more than 50% of the outstanding limited
partner interests is required for participation in the Merger. An affiliate of
the General Partner holds 47.62% of the outstanding limited partner interests.
The General Partner and its affiliate are required to vote their limited
partner interests in Hanover in the same manner as the majority of the other
limited partner interests vote so long as consents of a majority of limited
partners interests held by Limited Partners are returned and not withdrawn
prior to the end of the Solicitation Period.
At the time of voting, Hanover Limited Partners will be asked to indicate
whether they wish to retain OP Units or elect to exchange their OP Units for
Common Shares or a Note in connection with the Merger. The OP Units will be
delivered to the Hanover Limited Partners promptly after the twentieth trading
day following the Effective Date of the Merger (which would be promptly after
January 29, 1999 if the Effective Date of the Merger is December 30, 1998).
See "Determination of Exchange Value of Hanover and Allocation of OP Units."
A Hanover Limited Partner may mark the Consent Form to vote "FOR," "AGAINST"
or "ABSTAIN" with respect to participation in the Merger by Hanover and "FOR,"
"AGAINST" or "ABSTAIN" with respect to the amendments to the partnership
agreement. THE FAILURE OF A LIMITED PARTNER OF HANOVER TO VOTE OR AN
ABSTENTION WILL HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER HAD VOTED HIS
PARTNERSHIP INTERESTS "AGAINST" THE MERGER AND "AGAINST" THE AMENDMENTS TO THE
PARTNERSHIP AGREEMENT. LIMITED PARTNERS WHO RETURN A SIGNED CONSENT FORM BUT
FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY
Hanover Supp-23
<PAGE>
MATTER (INCLUDING THE MERGER AND THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT)
WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER. The voting procedures
applicable to Hanover Limited Partners are set forth in the Consent
Solicitation under the heading "Voting Procedures--Required Vote and Other
Conditions."
As of June 19, 1998, Hanover Hotel Acquisition Corporation, a wholly owned
subsidiary of Host, holds 47.62% of the total number of Partnership Units. No
other person owned of record, or to the Partnership's knowledge owned
beneficially, more than 5% of the total number of Partnership Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," Hanover Limited Partners should read
carefully the following discussion of federal income tax consequences
applicable specifically to the Hanover Limited Partners. The information
included in this discussion is based upon various factual assumptions and
information which are believed by the Operating Partnership and the General
Partner to be reliable. However, some of these assumptions inevitably will not
materialize and unanticipated events and circumstances will occur. Therefore,
there likely will be differences between the information provided herein,
including the numerical data and estimates, and actual results, and the
variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the Hanover Limited Partners resulting from the Mergers and
the REIT Conversion. The opinion letter is based upon certain assumptions and
certain 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 Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the Mergers and the REIT Conversion of Host REIT, the
Operating Partnership and the Partnerships following the Mergers and the REIT
Conversion. In addition, prior to 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 to the Consent Solicitation) as to
the qualification and taxation of Host REIT as a REIT under the Code following
the REIT Conversion. The receipt of this opinion letter is a condition to the
REIT Conversion and each of the Mergers. See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix E to the Consent Solicitation is applicable to the
Hanover Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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
Hanover Supp-24
<PAGE>
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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to a Hanover Limited Partner (i) who does not elect to receive
Common Shares (the "Common Share Election") or a Note (the "Note Election") in
exchange for his OP Units in connection with the Merger; (ii) 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 Merger; (iii) who does not receive a
cash distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of any prepayment of the Hanover Mortgage
Debt) in connection with the Merger or the REIT Conversion in excess of his
aggregate adjusted basis in his Hanover Partnership Units at the time of the
Merger; (iv) who is not required to recognize gain by reason of the exercise
by another Hanover Limited Partner of his right to make the Common Share
Election or the Note Election (which, in counsel's opinion, described below,
should not be the result of such election); and (v) who does not have his "at
risk" amount fall below zero as a result of the Merger or the REIT Conversion.
See "Federal Income Tax Consequences--Summary of Tax Opinions" in the Consent
Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) a
Hanover Limited Partner who acquired his Hanover Partnership Units in the
original offering of such Partnership Units and who has held such Partnership
Units at all times since would not be considered to receive, as a result of
the Merger, a distribution (or a deemed cash distribution resulting from
relief from liabilities) that exceeds his aggregate adjusted basis in his
Hanover Partnership Units at the time of the Merger, and would not have his
"at risk" amount fall below zero as a result of the Merger, even if all of the
Hanover Mortgage Debt were to be repaid in connection with the Merger or the
REIT Conversion, and (ii) a portion of the personal property owned by Hanover
will need to be sold to a Non-Controlled Subsidiary in connection with the
REIT Conversion, although this sale should not result in the recognition of
any income by the Hanover Limited Partners. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Overview" in the Consent
Solicitation and "Tax Allocations upon the Sale of Certain Personal Property
Associated with the Hanover Marriott" below.
With respect to the effects of a Hanover Limited Partner's election to
receive Common Shares or a Note in exchange for his OP Units in connection
with the Merger, Hogan & Hartson is of the opinion that although the matter is
not free from doubt, a Hanover Limited Partner who does not elect to receive
Common Shares or a Note in connection with the Merger should not be required
to recognize gain by reason of another Hanover Limited Partner's exercise of
either of such rights. With respect to the exercise of a Unit Redemption
Right, Hogan & Hartson is of the opinion that it is more likely than not that
a Hanover Limited Partner's exercise of his Unit Redemption Right more than
one year after the date of consummation of the Merger but less than two years
after such date will not cause the Merger itself to be a taxable transaction
for the Hanover Limited Partner (or the other Hanover Limited Partners). See
"Federal Income Tax Consequences--Summary of Tax Opinions" in the Consent
Solicitation. Opinions of counsel, however, do not bind the IRS or the courts,
and no assurances can be provided that such opinions will not be challenged by
the IRS or will be sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
Hanover Partnership Units, a Hanover Limited Partner will receive no actual
cash distribution in connection with the Merger but would be deemed to receive
a cash distribution in connection with the Merger to the extent that his share
of Operating Partnership liabilities immediately after the Merger and the REIT
Conversion is less than his share of Hanover liabilities immediately prior to
the Merger. For example, any prepayment of the Hanover Mortgage Debt or debt
encumbering other Hotels may result in a deemed cash distribution to the
Hanover Limited Partners. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash Distribution"
in the Consent Solicitation. Even though the Hanover Mortgage Debt and the
debt encumbering other Hotels is not expected to be repaid or refinanced in
connection with the Mergers and the REIT Conversion
Hanover Supp-25
<PAGE>
(except as described in the Consent Solicitation), a Hanover Limited Partner's
share of indebtedness following the Mergers and the REIT Conversion may
nonetheless decrease in comparison to the Limited Partner's estimated
aggregate share of Hanover indebtedness as of December 31, 1998 (calculated
based on the assumption that the Mergers did not occur) by reason of the
manner in which the debt allocation rules work when multiple assets with
different levels of leverage are consolidated into a single partnership.
A Hanover Limited Partner, however, would recognize taxable gain as a result
of any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his Hanover Partnership
Units immediately prior to the Merger. As noted above, the Operating
Partnership and the General Partner believe, based upon and subject to the
assumptions and other limitations described below, that a Limited Partner who
acquired his Hanover Partnership Units in the original offering of such
Partnership Units and has held the Partnership Units at all times since the
offering will have an adjusted tax basis in excess of the deemed cash
distribution that might occur in connection with the Merger and the REIT
Conversion. Therefore, such a Hanover Limited Partner should not recognize
gain due to such deemed cash distribution resulting from the relief from
liabilities in connection with the Merger and the REIT Conversion.
The adjusted tax basis of a Hanover Limited Partner who did not acquire his
Hanover Partnership Units in the original offering of such Partnership Units
or who has not held his Hanover Partnership Units at all times since such
offering could vary materially from that of a Hanover Limited Partner who did
so. If a Hanover Limited Partner has an adjusted tax basis in his Hanover
Partnership Units (per Hanover Partnership Unit) that is substantially less
than the adjusted tax basis of a Hanover Limited Partner who acquired his
Hanover Partnership Units in the original offering of such Partnership Units
and has held such Partnership Units at all times since, he could recognize
gain due to any deemed cash distribution resulting from the relief from
liabilities in connection with the Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the Hanover Mortgage Debt or, except as described in the Consent
Solicitation, any of the nonrecourse liabilities encumbering the Hotels owned
by the other Partnership (other than with the proceeds of indebtedness that
would be considered nonrecourse liabilities allocable to the Hotel being
refinanced). 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 secure nonrecourse mortgage indebtedness
secured only by those Hotels in an amount sufficient to avoid a deemed cash
distribution to the former Limited Partners in those Partnerships, including
Hanover (although such a deemed distribution of cash may or may not result in
the recognition of taxable income or gain by the former Hanover Limited
Partners). Moreover, 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 debt as 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.
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 (including the Hanover Mortgage Debt), would be
considered to be "secured" by those Hotels for purposes of allocating the
liabilities for tax basis purposes (and thus would be allocable, at least in
substantial part, to the former Limited Partners in the Partnerships owning
those Hotels, including the Hanover Limited Partners), 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.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the
Hanover Supp-26
<PAGE>
Code, a partner may be required to include in gross income, or "recapture,"
losses previously allowed to such partner with respect to his investment in a
partnership if the amount for which the partner is "at risk" in relation to
his investment in the partnership is less than zero at the close of the
taxable year. The "at risk" rules 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 his interests before that date (the "grandfather" rule). Thus, the
"at risk" rules have not been applicable to date to those Hanover Limited
Partners who acquired their Partnership Units at the time of the original
offering in November of 1986 or at any time prior to January 1, 1987 and who
have held those Partnership Units since the date of the acquisition. The
Hanover Limited Partners will, however, become subject to the "at risk" rules
as a result of the Merger and their receipt of OP Units in connection
therewith (since the OP Units do not qualify for the "grandfather" rule).
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Mergers
and the REIT Conversion could, singularly or in combination, cause a Hanover
Limited Partner's amount at risk in relation to his investment in Hanover
(and, after the Mergers, in the Operating Partnership) to be reduced below
zero, resulting in an income inclusion to the Limited Partner under Section
465(e) of the Code. Currently, a sufficient portion of the current debt of
Hanover constitutes "qualified nonrecourse financing" so that the Hanover
Limited Partners have positive at risk amounts. The Operating Partnership and
the General Partner believe, based upon and subject to the assumptions and
other limitations described below, that a Hanover Limited Partner who acquired
his Hanover Partnership Units in the original offering of such Partnership
Units and has held the Partnership Units at all times since will have a
positive at risk amount immediately following the Merger and the REIT
Conversion, even if all of the Hanover Mortgage Debt were to be repaid in
connection with the Merger and the REIT Conversion and such Hanover Limited
Partners were to have no share of any other "qualified nonrecourse financing"
following the Mergers and the REIT Conversion.
It is possible, however, that a former Hanover Limited Partner's at risk
amount could decline in the future, either because of the allocation of losses
from the Operating Partnership to that former Hanover Limited Partner or
because of cash distributions by the Operating Partnership to that former
Hanover Limited Partner in excess of the taxable income allocable to him with
respect to his OP Units. In that event, it may be necessary for the former
Hanover Limited Partner to have a share of "qualified nonrecourse financing"
from the Operating Partnership in order to avoid recognizing income by reason
of his at risk amount falling below zero. Moreover, there can be no assurance
that debt incurred by the Operating Partnership in the future to refinance the
Hanover Mortgage Debt or outstanding mortgage debt of the other Hotel
Partnerships or the Hotels contributed by the Blackstone Entities will qualify
as "qualified nonrecourse financing." If, however, the Operating Partnership
were to obtain the requested ruling from the IRS and were to refinance
existing mortgage indebtedness of the Partnerships with the type of
indebtedness described in the ruling, such indebtedness should constitute
"qualified nonrecourse financing" for purposes of the "at risk" rules.
Impact of Assumption of Hanover Liabilities by the Operating Partnership. As
described in the Consent Solicitation, see "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Disguised Sale Regulations," a Hanover
Limited Partner will recognize gain to the extent he is treated as having sold
all or part of his Hanover Partnership Interest in a "disguised sale." 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.
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" also will not be treated as part of
a disguised sale. 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
Hanover Supp-27
<PAGE>
partner within the two-year period prior to the earlier of the date the
partner agrees in writing to transfer the property or the date the partner
transfers the property to a partnership and that has encumbered the
transferred property since it was incurred; (iii) a liability that is
traceable under the Treasury Regulations to capital expenditures with respect
to the property; and (iv) a liability that was incurred in the ordinary course
of the trade or business in which property transferred to the partnership was
used or held, but only if all the assets related to that trade or business are
transferred, other than assets that are not material to a continuation of the
trade or business. However, a recourse liability is not a "qualified
liability" unless the amount of the liability does not exceed the fair market
value of the transferred property (less any other liabilities that are senior
in priority and encumber such property or any allocable liabilities described
in (iii) or (iv), above) at the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of Hanover fall into one
of the four categories of "qualified liabilities" described above and,
accordingly, that the mere assumption by the Operating Partnership of the
outstanding liabilities of Hanover will not give rise to a "disguised sale" by
any of the Hanover Limited Partners.
Tax Treatment of Hanover Limited Partners Who Hold OP Units Following the
Merger
Initial Basis in Units. In general, a Hanover Limited Partner will have an
initial tax basis in his OP Units received in the Merger with respect to his
Hanover Partnership Units equal to the basis in his Hanover Partnership Units
at the time of the Merger, reduced to reflect any deemed cash distributions
resulting from a reduction in his share of Hanover liabilities and increased
to reflect his share of other liabilities of the Operating Partnership and any
gain required to be recognized in connection with the Merger and the REIT
Conversion. For a discussion of the federal income tax considerations for a
Hanover Limited Partner from a reduction in basis that may result from the
Merger and the REIT Conversion, see "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Initial
Tax Basis of OP Units" in the Consent Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of Hanover Marriott
Hotel. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all Hanover Limited Partners (but
excluding all of Host's interests) with respect to the Hanover Marriott Hotel
will be $2,336,940 upon the consummation of the Merger.
If the Operating Partnership were to sell the Hanover Marriott Hotel, the
former partners of Hanover (including Host REIT with respect to Host's
interest in Hanover currently held indirectly by Host through the General
Partner and Hanover Hotel Acquisition Corp.) would be specially allocated by
the Operating Partnership an aggregate amount of taxable gain equal to the
aggregate Book-Tax Difference with respect to the Hanover Marriott Hotel. The
share of such gain allocable to a Hanover Limited Partner who acquired his
Hanover Partnership Units in the original offering of such Partnership Units
and held such Partnership Units at all times since would be $63,680 per
Hanover Partnership Unit if such Limited Partner acquired his Hanover
Partnership Units for cash, and $51,280 per Hanover Partnership Unit if such
Limited Partner required his Partnership Units pursuant to an installment
purchase plan. The share of such gain of a Hanover Limited Partner who did not
acquire his Hanover Partnership Units in the original offering of such
Partnership Units or who has not held his Partnership Units at all times since
such offering could vary materially from this amount. If the Operating
Partnership were to sell the Hanover Marriott Hotel with a Book-Tax
Difference, the remaining Book-Tax Difference at the time the Hotel is sold
would be required to be allocated exclusively to the former Hanover Limited
Partners and the General Partner, even though the proceeds of such sale would
be allocated
Hanover Supp-28
<PAGE>
proportionately among all the partners in the Operating Partnership (and would
likely be retained by the Operating Partnership, rather than distributed to
holders of OP Units and Common Shares of Host REIT). The Hanover Limited
Partners would not be entitled to any special distributions from the Operating
Partnership in connection with such a sale, and thus would not necessarily
receive cash distributions from the Operating Partnership sufficient to pay
such additional taxes. Although the Partnership Agreement does not impose any
restrictions upon the Operating Partnership preventing it from causing the
sale of the Hanover Marriott Hotel at any time following the Merger, the
Operating Partnership does not have current plans to pursue a sale of the
Hotel. See "Federal Income Tax Consequences--Tax Treatment of Limited Partners
Who Hold OP Units Following the Mergers--Sale of Individual Hotels" in the
Consent Solicitation.
Tax Allocations upon the Sale of Certain Personal Property Associated with
the Hanover Marriott Hotel. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Federal Income Taxation of Host REIT
Following the REIT Conversion--Income Tests Applicable to REITs" and "--
Taxable Income Attributable to Sales of Personal Property in Connection with
the REIT Conversion," 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
Partner have determined that the percentage of rent attributable to the
personal property to be leased in connection with the lease of the Hanover
Marriott Hotel would not satisfy the 15% Personal Property Test. The 15%
Personal Property Test is a mechanical test that is based not on the relative
fair market value of the assets subject to lease, or the relative fair rental
value of those assets, but, rather, is based on the average relative adjusted
tax bases of the assets subject to the lease. Accordingly, immediately prior
to the Merger, the Operating Partnership will require Hanover, if it chooses
to participate in the Merger, to sell to a Non-Controlled Subsidiary a portion
of the personal property associated with the Hanover Marriott Hotel. This
sale, which will be a taxable transaction, may result in the recognition by
Hanover of an amount of taxable gain to the extent of the difference, if any,
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. The actual amount of
such gain, if any, 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
Hanover partnership agreement, any such taxable gain will be characterized as
ordinary recapture income and will be allocated by Hanover to the Hanover
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 Merger. The Operating
Partnership and the General Partner have determined that any such recapture
income arising upon the sale of the personal property should properly be
allocated to the General Partner, which would not be entitled to any special
distribution from Hanover in connection with such a sale of personal property.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the Hanover Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the Hanover Marriott Hotel will be
required to be allocated for federal income tax purposes in a manner such that
the Hanover Limited Partners are charged with the Book-Tax Difference
associated with the Hotel at the time of the consummation of the Merger.
Consequently, a Hanover Limited Partner will be allocated less depreciation
with respect to the Hanover Marriott Hotel than would be the case if the
Mergers had not occurred and the Hanover Limited Partner had continued to hold
his Hanover Partnership Units. (On the other hand, a former Hanover Limited
Partner will be allocated depreciation with respect to other Hotels acquired
by the Operating Partnership in connection with the Mergers and the REIT
Conversion, including the Hotels owned by the other Hotel Partnerships and the
Hotels being contributed to the Operating Partnership by Host and the
Blackstone Entities in connection with the Merger and the REIT Conversion.)
Second, the Mergers will cause the technical termination under Section
708(b)(1)(B) of the Code of certain of the Hotel Partnerships that participate
in the Mergers and the REIT Conversion. The Operating Partnership will take
certain steps intended to prevent such a termination of Hanover, but there can
be no assurance that the IRS will not determine that Hanover experienced a
termination as a result of the Merger. Section 168(i)(7) of the Code provides,
in effect,
Hanover Supp-29
<PAGE>
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 real estate components of the Hotels held by the
Hotel Partnerships that terminate will be depreciated over 39 years, rather
than over the remaining current lives of such Hotels (which range from less
than one year to 39 years). See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Effect
of Mergers on Depreciation" in the Consent Solicitation.
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to a Hanover Limited
Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for Hanover Limited Partners) to
the extent that such losses are not in excess of the taxpayer's income from
passive activities or investments. A Hanover Limited Partner would be able to
offset losses from other passive activities 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 Partner 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
limitation rules. In this event, any losses or deductions of the Operating
Partnership allocable to a Hanover Limited Partner after the Merger could not
be used to offset passive income from other passive activities. Similarly,
losses from other passive activities could not be applied to offset income of
the Operating Partnership allocated to a Hanover Limited Partner. A Hanover
Limited Partner, however, would be able to offset any passive losses from his
investments against any gain recognized by the Hanover Limited Partner as a
result of the Merger.
State and Local Taxes. Hanover Limited Partners holding OP Units will 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 and the REIT Conversion, the Operating
Partnership expects that it will own properties in 28 states across the United
States and the District of Columbia. Currently, Hanover owns property in only
one state. See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--State and Local Taxes" in
the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular Hanover
Limited Partner, the tax consequences of the Merger to such Hanover Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH HANOVER LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH
HIS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH HANOVER LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
First, with respect to a Hanover Limited Partner's basis in his Hanover
Partnership Units prior to the Merger, the Operating Partnership and the
General Partner assumed that a Hanover Limited Partner acquired his
Hanover Supp-30
<PAGE>
Hanover Partnership Units in the original offering of such Partnership Units
and has held such Partnership Units at all times since the offering (the
"Original Limited Partner's Adjusted Basis"). In general, each Hanover Limited
Partner had an initial tax basis in his Hanover Partnership Units ("Initial
Basis") equal to his cash investment Hanover (plus his proportionate share of
the Hanover's nonrecourse liabilities at the time he acquired his Hanover
Partnership Units). A Hanover Limited Partner's Initial Basis generally has
been increased by (a) such Limited Partner's share of Hanover's taxable income
and (b) any increases in his share of the liabilities of Hanover. Generally,
such Limited Partner's Initial Basis has been decreased (but not below zero)
by (i) his share of Hanover cash distributions, (ii) any decreases in his
share of liabilities of Hanover, (iii) his share of losses of Hanover, and
(iv) his share of nondeductible expenditures of Hanover are not chargeable to
capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for Hanover (i) the Original Limited Partner's Adjusted Basis as of December
31, 1997 for each such Hanover Limited Partner, and (ii) an estimate of such
Hanover Limited Partner's 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 the Consent Solicitation). The General
Partner also has set forth on Appendix E to the Consent Solicitation for each
Hanover Limited Partner whose adjusted basis in his Hanover Partnership
Interest is the same as the Original Limited Partner's Adjusted Basis (i) the
Hanover liabilities allocable to such Hanover Limited Partner as of December
31, 1997, and (ii) an estimate of the Hanover 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 the Consent
Solicitation). Each of these estimates is shown separately for those Hanover
Limited Partners who required their Partnership Units at the time of the
original offering pursuant to an installment purchase plan.
The adjusted tax basis of a Hanover Limited Partner who did not acquire his
Hanover Partnership Units in the original offering of such Partnership Units
could vary materially from that of a Hanover Limited Partner who did so for
various reasons. If a Hanover Limited Partner has an adjusted tax basis in his
Hanover Partnership Units that is less than the Original Limited Partner's
Adjusted Tax Basis, the Merger might result in the receipt by the Hanover
Limited Partner of a deemed distribution of cash in excess of his adjusted tax
basis in his Hanover Partnership Units, which could result in the recognition
of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
Hanover Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares)
and the subsequent distribution of such OP Units (and possibly Notes and/or
Common Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the Hanover Limited Partners likely would be materially affected.
EACH HANOVER LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH HANOVER LIMITED PARTNER'S PARTICULAR
TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE
MERGER. THE TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER TO A PARTICULAR
HANOVER LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE CONSEQUENCES
DESCRIBED ABOVE.
Tax Treatment of Hanover Limited Partners Who Exercise Their Right to Make
the Common Share Election or the Note Election
A Hanover Limited Partner who exercises his right to make the Common Share
Election or the Note Election and receives Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made
Hanover Supp-31
<PAGE>
pursuant to the exercise of the Common Share Election will equal the sum of
the fair market value of the Common Shares received (i.e., the Exchange Value,
currently estimated as $123,202 per Hanover Partnership Units) plus the
portion of Hanover's liabilities allocable to the Hanover Partner for federal
income tax purposes immediately prior to the disposition of the OP Units
(estimated as $150,038 per Hanover Partnership Unit as of December 31, 1998).
Generally, the amount realized in connection with such disposition made
pursuant to the exercise of the Note Election will equal the sum of the "issue
price" of the Note (i.e., the face amount of the Notes, currently estimated as
$98,562 per Hanover Partnership Unit) plus the portion of the Hanover
liabilities allocable to the Hanover Limited Partner for federal income tax
purposes immediately prior to the disposition of the OP Units (estimated as
$150,038 per Hanover Partnership Unit as of December 31, 1998). To the extent
the applicable amount realized exceeds the Hanover Limited Partner's adjusted
basis in his Hanover Partnership Units, the Hanover Limited Partner will
recognize gain. The Operating Partnership and the General Partner estimate
(assuming the Hanover Limited Partner acquired his Hanover Partnership Units
at the time of the original offering, and has held such Partnership Units at
all times since the offering) that the amount of gain that would be recognized
by a Hanover Limited Partner who made the Common Share Election would be
approximately $50,322 per Hanover Partnership Unit, as of December 31, 1998,
if such Partnership Unit were acquired for cash, and $37,922 per Partnership
Unit if such Partnership Unit were required pursuant to an installment
purchase plan. The amount of gain that would be recognized by a Hanover
Limited Partner who made the Note Election would be approximately $25,682 per
Hanover Partnership Unit, as of December 31, 1998 if such Partnership Unit
were acquired for cash, and $13,282 per Hanover Partnership Unit if such
Partnership Unit were acquired pursuant to an installment purchase plan. For a
discussion of the federal income tax rates applicable to the net capital gain
from the sale of a capital asset, see "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--
Disposition of OP Units by Limited Partners" in the Consent Solicitation. In
this regard, the General Partner estimates that, as of December 31, 1998, if
Hanover sold the Hanover Marriott Hotel in a fully taxable transaction for a
net amount, after payment of liabilities, equal to the Exchange Value of
Hanover (with respect to a Limited Partner who makes the Common Share
Election) or by reference to the Note Election Amount of Hanover (with respect
to a Limited Partner who makes the Note Election), the "unrecognized Section
1250 gain" per Hanover Partnership Unit for a Limited Partner who makes the
Common Share Election or the Note Election would be $14,352 if such
Partnership Unit were acquired for cash, and $12,246 per Hanover Partnership
Unit if such Partnership Unit were acquired pursuant to an installment
purchase plan and the gain subject to tax as ordinary income under Code
Section 1245 per Hanover Partnership Unit would be $1,036 if such Partnership
Unit were acquired for cash, and $1,036 per Hanover Partnership Unit if such
Partnership Unit were acquired pursuant to an installment purchase plan. A
Hanover Limited Partner who makes the Common Share Election or the Note
Election would be able to treat any per Partnership Unit passive activity loss
carryforwards with respect to the activities of Hanover, to the extent the sum
of such losses exceeds its passive activity income for 1998, as losses that
are not from a passive activity and, therefore, not subject to the passive
activity loss limitation rules. For purposes of determining the gain
recognized by a Limited Partner as a result of making the Common Share
Election or the Note Election, an Original Limited Partner's Adjusted Basis
reflects such Limited Partner's share of the syndication costs incurred by his
Partnership at Formation. An original Hanover Limited Partner's share of
syndication costs was $13,358 per Hanover Partnership Unit.
A Hanover Limited Partner who elects to receive Common Shares will not be
eligible to defer any gain under the "installment sale" rules, while a Hanover
Limited Partner who elects to receive a Note may be eligible to defer a
majority of that gain under those rules. Those rules, however, will not permit
the Hanover Limited Partner to defer all of the gain, and, to the extent that
the face amount of the Note (and any other installment obligations received by
the taxpayer during the year) outstanding at the end of the taxable year in
which the Merger occur exceeds $5,000,000, will require that the Hanover
Limited Partner who defers gain pay to the IRS interest on the resulting tax
that has been deferred. The Hanover Limited Partner would not be eligible to
defer gain recognized upon the receipt of the Note to the extent that his
share of Hanover liabilities at the time of the Merger exceeds his adjusted
tax basis in his Hanover Partnership Units immediately prior to the Merger
(that is, to the extent that he has a "negative capital account" for tax
purposes). In addition, the Hanover Limited Partner would not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income
under Sections 1245 and 1250 of the Code. Lastly, if a Hanover Limited Partner
disposes of his Note, any gain that had been deferred would be recognized in
the year of disposition.
Hanover Supp-32
<PAGE>
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR HANOVER LIMITED PARTNER COULD
HAVE A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER, AND THE
SUBSEQUENT OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT
IS ESSENTIAL THAT HANOVER LIMITED PARTNERS CONSIDERING ELECTING TO RECEIVE
COMMON SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH HANOVER LIMITED PARTNERS'
RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
Tax Consequences if Hanover Does Not Participate in the Merger
If Hanover does not participate in the Merger, the Hanover Limited Partners
would not have any tax consequences resulting from the Merger. The
consequences of continued ownership of Hanover Partnership Units will be the
same as would have resulted if the Merger had not been proposed.
* * *
The above description is not exhaustive of all possible tax consequences
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax consequences, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
Hanover Limited Partners in light of their particular circumstances. EACH
HANOVER LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF SUCH HANOVER LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
Hanover Supp-33
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the Hanover financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with Hanover's audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- --------- -------- --------- --------- --------- ---------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(5)............. $ 3,446 $ 3,070 $ 6,853 $ 5,296 $ 4,487 $ 3,727 $ 3,435
Operating profit........ 2,044 2,304 4,400 3,624 2,752 2,345 434
Income (loss) before
extraordinary item(1).. 199 665 663 940 (219) (1,206) (3,224)
Net income (loss)....... 199 665 5,757 940 (219) (1,206) (3,224)
Distributions:
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:(2)
Net income (loss)...... 2,250 7,524 65,107 10,631 (2,476) (13,643) (36,464)
Distributions.......... -- -- -- -- -- -- --
Cash provided by (used
in) operating
activities............. 889 1,557 2,167 1,918 2,561 331 (327)
Cash used in investing
activities............. (2,204) (528) (1,058) (830) (1,241) (715) (427)
Cash provided by (used
in) financing
activities............. (211) (910) (1,714) (272) -- (31) 690
Increase (decrease) in
cash and cash
equivalents............ (1,526) 119 (605) 816 1,320 (415) (64)
Ratio of earnings to
fixed
charges(unaudited)(3).. 1.11x 1.39x 1.17x 1.33x -- -- --
Deficiency of earnings
to fixed
charges(unaudited)(3).. -- -- -- -- 219 1,206 3,224
Total assets at book
value.................. 33,108 34,012 32,883 33,533 32,652 31,559 32,353
Cash and cash
equivalents............ 426 2,672 1,952 2,557 1,741 421 836
Total debt(4)........... 40,153 40,022 40,364 40,527 40,527 40,527 40,596
Total liabilities....... 41,429 47,628 41,403 47,810 47,869 46,557 46,145
Partner's deficit:
Limited partners....... (7,979) (13,005) (8,168) (13,637) (14,530) (14,322) (13,176)
General partner........ (342) (607) (352) (640) (687) (676) (616)
Book value per
Partnership
Unit(unaudited)(2)..... (94,988) (154,821) (97,238) (162,345) (172,976) (170,500) (156,857)
Exchange value per
Partnership
Unit(unaudited)(2)..... 123,202 -- -- -- -- -- --
</TABLE>
- --------
(1) During 1997, the Partnership recorded on extraordinary gain on the
forgiveness of additional rental recorded in conjunction with the
refinancing of the Partnership's mortgage debt.
(2) A Partnership Unit represents a $100,000 original investment in Hanover.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges in 1995, 1994 and 1993 is largely
the result of depreciation and amortization of $1,178,000, $1,136,000 and
$2,213,000, respectively.
(4) Total debt includes amounts due to Host Marriott and affiliates, for the
Subordinated Loan of $7,015,000 and $7,077,000 as of June 19, 1998 and
December 31, 1997, respectively, and the Working Capital Loan and Debt
Service Guarantees of $127,000 and $3,400,000, respectively for June 19,
1998, June 20, 1997 and December 31, 1997--1994 and $89,000 and
$3,469,000, respectively as of December 31, 1993.
(5) On August 18, 1997, the Partnership converted its Operating Lease with
Marriott Hotel Services, Inc. to a management agreement.
Hanover Supp-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
On August 18, 1997, the Partnership completed a refinancing of its Mortgage
Debt. In addition, the Partnership converted the Operating Lease with MHS to
the Management Agreement (the "Conversion") on August 18, 1997. Prior to the
Conversion, the Partnership recorded revenue based on the rental income to be
received from MHS. Annual rental during the term of the Operating Lease was
equal to the greater of: (i) Minimum Rental of $100,000; or (ii) Basic Rental
equal to 80% of Operating Profit, as defined, reduced to 75% of Operating
Profit after the Partnership received $4,421,000 of cumulative capital
receipts; or (iii) Adjusted Rental equal to Debt Service plus the greater of:
(a) a preferred return equal to $840,000 or (b) 50% of the amount by which
Operating Profit exceeded Debt Service. In no event was Adjusted Rental to
exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rental existed. In addition to the Annual Rental, MHS
was required to pay real estate taxes.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real estate
taxes, insurance and certain other costs, which are disclosed separately in
the statement of operations. Revenues are recorded based on house profit of
the Hotel because the Partnership has delegated substantially all of the
operating decisions related to the generation of house profit from the Hotel
to MHS. As a result, Hotel revenues reported for the first two quarters 1998
are not comparable with Hotel rental reported for the first two quarters 1997.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues: For the first two quarters 1998, hotel revenues decreased
$586,000, or 15%, to $3.4 million when compared to the first two quarters
1997. The decrease in hotel revenues is primarily due to decreases in food and
beverage sales. Although the average occupancy decreased ten percentage points
to 71% for the first two quarters 1998 when compared to the first two quarters
1997, rooms sales remained constant at $6.0 million due to the average daily
rate increase of $19, or 15%, to $143. The decline in average occupancy for
the first two quarters 1998 is a result of an overall decline in the Hanover
market and rooms being temporarily out of inventory during the rooms
refurbishment that occurred during January through March 1998.
REVPAR, or revenue per available room, remained constant at $102 for the
first two quarters 1998 and 1997. REVPAR represents the combination of average
daily room rate charged and the average daily occupancy achieved and is a
commonly used indicator of hotel performance (although it is not a measure of
revenue under generally accepted accounting principles).
As a result of the decline in average occupancy, food and beverage sales
decreased $661,000, or 16%, to $3.5 million for the first two quarters 1998
when compared to the same period in 1997. For the remainder of the year,
operations are expected to improve as a result of the new rooms product and
expected increases in market occupancy and demand.
Operating Costs and Expenses: The Partnership's operating costs and expenses
increased $636,000, or 83%, to $1.4 million for the first two quarters 1998
when compared to the same period in 1997 due primarily to the Conversion. Of
the $636,000 increase, $467,000 relates to base and incentive management fees
and $36,000 relates to insurance costs. The Partnership is responsible for
these fees and costs under the Management Agreement but not under the
Operating Lease. On a comparative basis, base management fees for first two
quarters 1998 decreased $21,000, or 7%, to $296,000 when compared to the same
period in 1997. Subsequent to
Hanover Supp-35
<PAGE>
the Conversion, MHS receives an incentive management fee once Owner's Priority
has been met. For the first two quarters 1998, MHS received $171,000 in
incentive management fees. In addition, real estate taxes increased $50,000,
or 27%, to $236,000 for the first two quarters 1998, when compared to the same
period in 1997 due to a re-assessment of the property in 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit decreased $260,000, or 11%, to
$2.0 million for the first two quarters 1998 when compared to the same period
in 1997.
Interest Expense. Interest expense increased $146,000, or 9%, to $1.9
million for the first two quarters 1998, when compared to the same period in
1997 due to refinancing the Partnership's mortgage debt at a higher fixed
interest rate. The weighted average interest rate on the Partnership's debt,
which includes the Subordinated Loan, for the first two quarters 1998 and
1997, was 9.6% and 7.5%, respectively.
Net Income. Net income for the first two quarters 1998 and 1997 was $199,000
and $665,000, respectively, as a result of the items discussed above.
1997 Compared to 1996
Revenues: Total revenues increased by $1.6 million, or 29%, to $6.9 million
in 1997 when compared to 1996, and hotel rental income decreased by $1.2
million, or 24%, to $4.0 million in 1997 when compared to 1996 due to the
Conversion. For the period January 1, 1997 to August 17, 1997, the Partnership
received hotel rental income in accordance with the Operating Lease. For the
period August 18, 1997 to December 31, 1997 under the Management Agreement,
Hotel revenues represent hotel sales less direct hotel operating costs and
expenses. Under the Operating Lease, the hotel rental income was straight-
lined over the year as required by generally accepted accounting principles.
On a comparative basis, house profit increased $1.1 million, or 16%, to $8.0
million in 1997 when compared to 1996. The increase in house profit is
primarily due to an increase in REVPAR. REVPAR for 1997 increased $10, or 11%,
to $100 compared to 1996, primarily due to the increase in average room rate
of $10, or 9%, to $124 and a two percentage point increase in the average
occupancy to 81%.
During 1997, the Hotel increased its rates several times. The result was the
average transient and group rates increased 10% to $134 and 12% to $95,
respectively. As of December 31, 1997, the corporate rate, excluding
discounts, was approximately $195 representing a 37% increase from 1996. Due
to growth in the group segment, food and beverage sales also increased due to
a 16% increase in catering and audio visual sales in comparison to 1996.
As a result of the REVPAR increase, hotel sales increased $1.7 million, or
8%, to $22.5 million in 1997 when compared to 1996. Due to the continued high
average occupancy, the Partnership expects future increases in REVPAR to be
driven by room rate increases, rather than changes in occupancy. However,
there can be no assurance that REVPAR will continue to increase in the future.
Operating Costs and Expenses: The Partnership's operating costs and expenses
increased $781,000, or 47%, to $2.5 million in 1997 when compared to 1996
primarily due to the Conversion. Of the $781,000 increase, $331,000 relates to
base and incentive management fees and $131,000 relates to insurance costs.
The Partnership is responsible for these fees and costs under the Management
Agreement but not under the Operating Lease. On a comparative basis, base
management fees for 1997 increased $52,000, or 8%, due to increased hotel
sales. The Hotel's real estate taxes in 1997 increased $102,000 from 1996 due
to a re-assessment of the property during 1997. In addition, Partnership
administration increased due to administrative costs associated with the
refinancing in August 1997.
Operating Profit: As a result of changes in revenues and operating costs and
expenses discussed above, operating profit increased $776,000, or 21%, to $4.4
million in 1997 when compared to 1996.
Hanover Supp-36
<PAGE>
Interest Expense: Interest expense increased $1.1 million, or 40%, to $3.9
million due to refinancing the Partnership's mortgage debt, which includes the
Subordinated Loan. The weighted average interest rate on the Partnership's
debt for 1997 and 1996 was 7.9% and 6.4%, respectively.
Income Before Extraordinary Items: Income before extraordinary items
decreased $277,000 to $663,000, or 10% of revenues, in 1997, from $940,000, or
18% of revenues, in 1996.
Extraordinary Items: The Partnership recognized an extraordinary gain in
1997 of $5.1 million representing the forgiveness of Additional Rental by MHS.
Net Income: Net income increased by $4.8 million in 1997 to $5.8 million
when compared to 1996 as a result of the items discussed above.
1996 Compared to 1995
Revenues: Revenue increased $809,000, or 18%, to $5.3 million in 1996 when
compared to 1995. The Partnership's rental income was impacted by improved
lodging results. The increase was driven primarily by growth in REVPAR. REVPAR
for 1996 increased $9, or 11%, to $90 compared to 1995, primarily due to the
increase in combined average room rate of $5, or 5%, to $114 and a five
percentage point increase in the average occupancy to 79%. As a result of the
REVPAR increase, hotel sales increased $2.4 million, or 13%, to $20.7 million
in 1996 when compared to 1995. Under the Operating Lease, the hotel rental
income was straight-lined over the year as required by generally accepted
accounting principles.
Operating Costs and Expenses: The Partnership's operating costs and expenses
decreased $63,000, or 4%, to $1.7 million in 1996 when compared to 1995,
primarily due to a decrease in Partnership administration.
Operating Profit: As a result of changes in revenues and operating costs and
expenses discussed above, operating profit increased $872,000, or 32%, to $3.6
million in 1996 when compared to 1995.
Interest Expense: Interest expense decreased $225,000, or 7%, to $2.8
million due to lower interest rates on the Partnership's mortgage debt. The
weighted average interest rate on the mortgage debt for 1996 and 1995 was 6.4%
and 7.2%, respectively.
Net Income (Loss): For 1996, the Partnership had net income of $940,000
compared to a net loss of $219,000 in 1995 as a result of the items discussed
above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions and Host Marriott. As a
result of the successful refinancing of the Partnership's mortgage debt, the
General Partner believes that the Partnership will have sufficient capital
resources and liquidity to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from Hotel operations.
Cash provided by operations for the first two quarters 1998 and 1997 was
$889,000 and $1.6 million, respectively. Cash provided by operations was lower
for the first two quarters 1998 primarily due to a decrease in the Hotel's
food and beverage sales due to a decrease in occupancy as a result of the
rooms refurbishment discussed above.
Cash provided by operations was $2.2 million, $1.9 million and $2.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The
decrease in cash from operations in 1996 from 1995 was primarily due to
repaying MHS $285,000 for Additional Rental earned in 1995. There was no
Additional Rental due MHS at December 31, 1996.
Hanover Supp-37
<PAGE>
The Partnership's cash investing activities consist primarily of
contributions to the property improvement fund and capital expenditures for
improvements to the Hotel. Cash used in investing activities was $2.2 million
and $528,000 for the first two quarters 1998 and 1997, respectively. The
increase in cash used in investing activities is due to payments for the rooms
refurbishment in 1998. Contributions, including interest income, to the
property improvement fund were $484,000 and $493,000 for the first two
quarters 1998 and 1997, respectively. Capital expenditures were $2.3 million
and $156,000 for the same periods, respectively.
Cash used in investing activities was $1.1 million, $830,000 and $1.2
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Under the Operating Lease and Management Agreement, the Partnership is
required to make annual contributions to the property improvement fund which
provides funding for capital expenditures and replacement of furniture,
fixtures and equipment. Contributions to the fund equaled 4% of gross hotel
sales, net of interest income, in 1996 and 1995. In 1997, the contribution
increased to 5%, net of interest income. The General Partner believes that
cash contributions from the Hotel's property improvement fund will provide
adequate funds in the short and long-term to meet the Hotel's capital needs.
Capital expenditures were $1.4 million, $527,000 and $1.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
capital expenditures in 1997 from 1996 is due to a $1.0 million payment in
December 1997 for the rooms refurbishment.
The Partnership's financing activities consist of repayments of debt and
payment of financing costs. Cash used in financing activities was $211,000 and
$910,000 for the first two quarters 1998 and 1997, respectively.
Cash used in financing activities was $1.7 million and $272,000 in 1997 and
1996, respectively. No cash was provided by or used in financing activities in
1995. The Partnership's $37.0 million Mortgage Debt required interest only
payments during the years 1996 and 1995. In 1997, the Partnership refinanced
the Mortgage Debt with the New Mortgage Debt of $29.9 million. In addition,
Host Marriott funded the $10 million Subordinated Loan to the Partnership
which was used to make a $10 million principal payment on the Mortgage Debt.
During 1997, the Partnership amortized $115,000 and $2.9 million of principal
on the New Mortgage Debt and Subordinated Loan, respectively. In addition, the
Partnership made a $1.4 million payment on debt service guarantees provided by
the General Partner in prior years.
DEBT
In April 1997, Host Marriott funded a fully-amortizing $10 million
subordinated loan to the Partnership (the "Subordinated Loan") that bears
interest at a fixed rate of 14.5% over a 15-year term with required monthly
payments. The Subordinated Loan matures June 1, 2012.
In August 1997, the General Partner refinanced all of the Partnership's
outstanding mortgage debt. The total amount of the mortgage debt decreased
from $37.0 million to $29.9 million due to the use of the proceeds from the
Subordinated Loan to repay mortgage debt principal. The new non-recourse loan
with an independent financial institution matures August 18, 2004, requires
principal amortization on a 25-year term and bears interest at a fixed rate of
8.58%.
Pursuant to the Subordinated Loan, any proceeds in excess of the $27 million
for the New Mortgage Debt were to be used to repay the Subordinated Loan.
Therefore, the Partnership repaid principal of $2.9 million on the
Subordinated Loan at refinancing.
PROPERTY IMPROVEMENT FUND
The Management Agreement and Operating Lease require annual contributions to
a property improvement fund to ensure that the physical condition and product
quality of the Hotel is maintained. Contributions to this fund are based on a
percentage of annual total Hotel sales, net of interest income earned on the
fund. Prior to 1997, the contribution rate was 4%, net of interest income and
the current contribution is 5% of gross Hotel sales, net of interest income.
The General Partner believes that the 5% contribution requirement is
consistent
Hanover Supp-38
<PAGE>
with industry standards. However, in accordance with the Management Agreement,
contributions to the property improvement fund may be increased or decreased
by MHS if the current contribution of 5% of gross Hotel sales, net of interest
income, is either insufficient or excessive to make the replacements, renewals
and repairs to maintain the Hotel in accordance with MHS's standards for a
full-service Marriott hotel. Of the total $2.3 million of net additions to
property and equipment during the first two quarters 1998, $1.7 million was
owner funded. The balance in the fund totaled $185,000 as of June 19, 1998 and
$287,000 as of December 31, 1997.
The General Partner believes that cash contributions from the Hotel's
property improvement fund will provide adequate funds in the short and long
term to meet the Hotel's capital needs.
INFLATION
The rate of inflation has been relatively low in the past four years. MHS is
generally able to pass through increased costs to customers through higher
room rates and prices. In 1997, average rates of the Hotel exceeded
inflationary costs. On August 18, 1997, the Partnership refinanced its
mortgage debt and fixed its interest costs, thereby eliminating the
Partnership's exposure to the impact of inflation on future interest costs.
SEASONALITY
Demand, and thus occupancy, is affected by normally recurring seasonal
patterns. Demand is higher in the spring and summer months (March through
October) than during the remainder of the year.
YEAR 2000 ISSUES
Over the last few years, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHS, the
Manager of its property, to obtain financial information. The General Partner
believes that MHS has 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.
Hanover Supp-39
<PAGE>
FINANCIAL STATEMENTS
Hanover Supp-40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF HANOVER MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Hanover Marriott Limited
Partnership (a Delaware limited partnership, the "Partnership") as of December
31, 1997 and 1996 and the related statements of operations, changes in
partners' capital (deficit) and cash flows for the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the General Partner's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Marriott Limited
Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
February 18, 1998
Hanover Supp-41
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Hotel rental..................................... $ 3,950 $ 5,177 $ 4,377
Hotel revenues................................... 2,785 -- --
Other............................................ 118 119 110
------- ------- -------
6,853 5,296 4,487
------- ------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................... 1,239 1,215 1,178
Real estate taxes................................ 483 381 371
Partnership administration....................... 269 76 186
Base management fee (see Note 6)................. 252 -- --
Insurance and other.............................. 131 -- --
Incentive management fee (see Note 6)............ 79 -- --
------- ------- -------
2,453 1,672 1,735
------- ------- -------
OPERATING PROFIT................................... 4,400 3,624 2,752
Interest expense................................. (3,934) (2,811) (3,036)
Interest income.................................. 197 127 65
------- ------- -------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........ 663 940 (219)
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental......... 5,094 -- --
------- ------- -------
NET INCOME (LOSS).................................. $ 5,757 $ 940 $ (219)
======= ======= =======
ALLOCATION OF NET INCOME (LOSS)
General Partner.................................. $ 288 $ 47 $ (11)
Limited Partners................................. 5,469 893 (208)
------- ------- -------
$ 5,757 $ 940 $ (219)
======= ======= =======
NET INCOME (LOSS) PER LIMITED PARTNER UNIT (84
Units)............................................ $65,107 $10,631 $(2,476)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Hanover Supp-42
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $ 29,984 $ 29,850
Due from Marriott Hotel Services, Inc..................... 204 254
Property improvement fund................................. 287 645
Deferred financing costs, net of accumulated
amortization............................................. 456 227
Cash and cash equivalents................................. 1,952 2,557
-------- --------
$ 32,883 $ 33,533
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt............................................. $ 29,760 $ 37,000
Due to Marriott Hotel Services, Inc. for Additional
Rental................................................... -- 5,094
Subordinated loan from Host Marriott Corporation.......... 7,077 --
Notes payable and related interest due to the General
Partner.................................................. 4,317 5,367
Deferred revenue.......................................... 169 287
Accounts payable and accrued expenses..................... 80 62
-------- --------
Total Liabilities..................................... 41,403 47,810
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution, net of offering costs of $21...... 421 421
Cumulative net loss..................................... (773) (1,061)
-------- --------
(352) (640)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $1,122.. 7,147 7,147
Cumulative net loss..................................... (14,693) (20,162)
Capital distributions................................... (622) (622)
-------- --------
(8,168) (13,637)
-------- --------
Total Partners' Capital (Deficit)..................... (8,520) (14,277)
-------- --------
$ 32,883 $ 33,533
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Hanover Supp-43
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994......................... $(676) $(14,322) $(14,998)
Net loss......................................... (11) (208) (219)
----- -------- --------
Balance, December 31, 1995......................... (687) (14,530) (15,217)
Net income....................................... 47 893 940
----- -------- --------
Balance, December 31, 1996......................... (640) (13,637) (14,277)
Net income....................................... 288 5,469 5,757
----- -------- --------
Balance, December 31, 1997......................... $(352) $ (8,168) $ (8,520)
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Hanover Supp-44
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ 5,757 $ 940 $ (219)
Extraordinary item................................. (5,094) -- --
-------- ------ -------
Net income (loss) before extraordinary item........ 663 940 (219)
Noncash items:
Depreciation and amortization.................... 1,239 1,215 1,178
Interest on notes payable due to General
Partner......................................... -- 329 346
Amortization of deferred financing costs as
interest........................................ 272 75 35
Loss on disposition of property and equipment.... 43 -- 98
Changes in operating accounts:
Due to Marriott Hotel Services, Inc. for
Additional Rental............................... -- -- 285
Due from (to) Marriott Hotel Services, Inc....... 50 (530) 434
Deferred revenue................................. (118) (119) 406
Accounts payable and accrued expenses............ 18 8 (2)
-------- ------ -------
Cash provided by operating activities.......... 2,167 1,918 2,561
-------- ------ -------
INVESTING ACTIVITIES
Additions to property and equipment, net........... (1,427) (527) (1,046)
Change in property improvement fund................ 369 (303) (195)
-------- ------ -------
Cash used in investing activities.............. (1,058) (830) (1,241)
-------- ------ -------
FINANCING ACTIVITIES
Repayment of mortgage debt......................... (37,115) -- --
Proceeds from first mortgage loan.................. 29,875 -- --
Proceeds from subordinated loan from Host Marriott
Corporation....................................... 10,000 -- --
Repayment of subordinated loan from Host Marriott
Corporation....................................... (2,923) -- --
Repayment of notes payable and related interest due
to General Partner................................ (1,050) -- --
Payment of financing costs ........................ (501) (272) --
-------- ------ -------
Cash used in financing activities.............. (1,714) (272) --
-------- ------ -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (605) 816 1,320
CASH AND CASH EQUIVALENTS at beginning of year..... 2,557 1,741 421
-------- ------ -------
CASH AND CASH EQUIVALENTS at end of year........... $ 1,952 $2,557 $ 1,741
======== ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.......... $ 4,727 $2,418 $ 2,666
======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Hanover Supp-45
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Hanover Marriott Limited Partnership (the "Partnership") is a Delaware
limited partnership formed on October 8, 1986 to acquire and own the 353-room
Hanover Marriott Hotel and the land on which it is located (the "Hotel"). The
sole general partner of the Partnership, with a 5% interest, is Marriott
Hanover Hotel Corporation (the "General Partner"), a Delaware Corporation and
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott"),
formerly Marriott Corporation. The Hotel, which opened on July 30, 1986, was
leased by the Partnership to Marriott Hotel Services, Inc. ("MHS"), a wholly-
owned subsidiary of Marriott International, Inc. ("MII"), under a long-term
operating lease (the "Operating Lease"). Effective August 18, 1997, the
Operating Lease was converted to a long-term management agreement with MHS
(the "Management Agreement") (see Note 6).
On November 24, 1986 (the "Closing Date"), 84 limited partnership interests
(the "Units"), representing a 95% interest in the Partnership, were sold at
$100,000 per Unit pursuant to a private placement. Each limited partner paid
$15,560 at subscription with the balance due in four annual installments
through March 15, 1990, or, as an alternative, $87,600 in cash at closing as
full payment of the subscription price. The limited partners paid $2,063,460
in cash on the Closing Date. Seventy-three and one-half Units were purchased
on the installment basis. The General Partner contributed $442,000 in cash for
its 5% general partnership interest.
On April 2, 1997, Hanover Hotel Acquisition Corporation (the "Purchaser"), a
wholly-owned subsidiary of Host Marriott, completed a tender offer for limited
partnership Units in the Partnership. The Purchaser acquired 40 units for an
aggregate consideration of $1.6 million or $40,000 per Unit. Combined with its
prior ownership position, Host Marriott now indirectly owns through
affiliates, over 50% of the Partnership. Additionally, in a Partnership vote
held in conjunction with the tender offer, the limited partners approved all
of the proposed amendments to the Amended and Restated Partnership Agreement
that were conditions to the tender offer. The most significant amendments (i)
revised the provisions limiting the voting rights of the General Partner and
its affiliates to permit the General Partner and its affiliates (including the
Purchaser) to have full voting rights with respect to all Units currently held
by the General Partner or acquired by its affiliates except on matters where
the General Partner or its affiliates have an actual economic interest other
than as a limited partner or General Partner (an "Interested Transaction"),
(ii) modified the voting provisions with respect to Interested Transactions to
permit action to be taken, if approved, by limited partners holding a majority
of the outstanding Units, with all Units held by the General Partner and its
affiliates being voted in the same manner as a majority of the Units actually
voted by limited partners other than the General Partner and its affiliates
and (iii) eliminated limited partner consent requirements relating to sale
transactions with third parties and vested the sole authority with respect to
such transactions to the General Partner. As a result of the approval of the
proposed amendments, the Amended and Restated Partnership Agreement was
amended and restated effective April 3, 1997 (the "Second Amended and Restated
Partnership Agreement").
Partnership Allocations and Distributions
Pursuant to the terms of the Second Amended and Restated Partnership
Agreement, Partnership allocations and distributions are generally made as
follows:
a. The Partnership generally allocates cash available for distribution
(after a 10% priority return to the limited partners on their invested
capital) and net profits as follows: (i) 5% to the General Partner and 95%
to the limited partners until cumulative distributions of sale or
refinancing proceeds ("Capital Receipts") equal to 50% of the partners'
capital contributions have been distributed; (ii) next, 15% to the General
Hanover Supp-46
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Partner and 85% to the limited partners until cumulative distributions of
Capital Receipts equal to the full amount of the partners' capital
contributions have been distributed; and (iii) thereafter, 35% to the
General Partner and 65% to the limited partners.
b. Net losses were allocated 100% to the limited partners in 1986.
Thereafter, net losses are allocated 100% to the General Partner.
c. Capital Receipts (other than from the sale of substantially all of the
Partnership assets) not retained by the Partnership will be distributed (i)
first, 5% to the General Partner and 95% to the limited partners until the
partners have received cumulative distributions of Capital Receipts equal
to their capital contributions and (ii) thereafter, 35% to the General
Partner and 65% to the limited partners.
Upon the sale of substantially all of the Partnership assets, gains and
sales proceeds will be allocated and (to the extent available) distributed
based on specific provisions of the partnership agreement in order to first
provide the limited partners with an annual 12% cumulative return on their
invested capital, to the extent not previously distributed.
For financial reporting purposes, profits and losses are allocated based on
the Partner's stated ownership interest in the Partnership.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Hotel revenues since August 18, 1997 (see Note 1) represent house profit of
the Partnership's Hotel since the Partnership has delegated substantially all
of the operating decisions related to the generation of house profit of the
Hotel to MHS. House profit reflects Hotel operating results which flow to the
Partnership as property owner and represents Hotel sales less property-level
expenses, excluding depreciation and amortization, base and incentive
management fees, real estate taxes, insurance and certain other costs, which
are disclosed separately in the accompanying statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to reflect the new
presentation. Application of EITF 97-2 will increase both revenues and
operating expenses by approximately $14.5 million, $13.8 million and $12.5
million for the year ended December 31, 1997, 1996 and 1995, respectively and
will have no impact on operating profit or net income.
Hanover Supp-47
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Building and improvements........................................ 40 years
Furniture and equipment.......................................... 7 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 5.
The Partnership assesses impairment of the Hotel based on whether estimated
undiscounted future cash flows from the Hotel will be less than its net book
value. If the Hotel is impaired, its basis is adjusted to fair market value.
Deferred Financing Costs
Prior to 1997, deferred financing costs of $520,000 were incurred in
connection with obtaining and extending the Mortgage Debt (see Note 5) which
were fully amortized and written-off when the refinancing of such debt
occurred in 1997. Amortization expense on these deferred financing costs for
the years ended December 31, 1997 and 1996 totaled $247,000 and $75,000,
respectively. In connection with the refinancing of the Mortgage Debt, the
Partnership paid $481,000 of refinancing costs in 1997 and is amortizing the
costs over the related terms of the debt (see Note 5). At December 31, 1997
and 1996, accumulated amortization was $25,000 and $293,000, respectively.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported on the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives of the assets, and
different treatments of additional rental. As a result of these differences,
the excess of the net Partnership liabilities reported in the accompanying
consolidated financial statements over the tax basis in the net Partnership
liabilities was $18,557,000 and $18,314,000, respectively as of December 31,
1997 and 1996.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
NOTE 3. REVENUES
On August 18, 1997, the Partnership completed a refinancing of its Mortgage
Debt. In connection with the refinancing, the Partnership converted the
Operating Lease with MHS to the Management Agreement (the "Conversion"). Prior
to the Conversion, the Partnership recorded revenue based on the rental income
to be received from MHS.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses,
Hanover Supp-48
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
excluding depreciation and amortization, base and incentive management fees,
real estate taxes, insurance and certain other costs, which are disclosed
separately in the statement of operations. Revenues are recorded based on
house profit of the Hotel because the Partnership has delegated substantially
all of the operating decisions related to the generation of house profit from
the Hotel to MHS.
The following is a summary of Hotel revenues, as defined in the Management
Agreement, for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $12,826 $11,710 $10,308
Food and beverage................................. 8,933 8,246 7,288
Other............................................. 691 767 764
------- ------- -------
22,450 20,723 18,360
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................... 2,904 2,631 2,374
Food and beverage............................... 6,267 5,964 5,356
Other hotel operating expenses.................... 5,288 5,214 4,739
------- ------- -------
14,459 13,809 12,469
------- ------- -------
HOTEL REVENUES...................................... $ 7,991 $ 6,914 $ 5,891
======= ======= =======
</TABLE>
Hotel revenues under the Management Agreement effective August 18, 1997
consist of Hotel operating results for the period August 18, 1997 to December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
------
<S> <C>
HOTEL SALES
Rooms.............................................................. $4,796
Food and beverage.................................................. 3,392
Other.............................................................. 226
------
8,414
------
HOTEL EXPENSES
Departmental direct costs
Rooms.............................................................. 1,130
Food and beverage.................................................. 2,534
Other hotel operating expenses....................................... 1,965
------
5,629
------
HOTEL REVENUES....................................................... $2,785
======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 3,219 $ 3,203
Building and improvements................................ 32,386 32,433
Furniture and equipment.................................. 10,770 9,879
-------- --------
46,375 45,515
Accumulated depreciation................................. (16,391) (15,665)
-------- --------
$ 29,984 $ 29,850
======== ========
</TABLE>
Hanover Supp-49
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. DEBT
The Partnership originally entered into a loan agreement on November 24,
1986 (the "Original Loan") with a bank that provided $36.5 million to finance
the acquisition of the Hotel. On October 26, 1989, the Partnership refinanced
the Original Loan with a $37 million nonrecourse first mortgage loan (the
"Mortgage Debt") which matured on October 16, 1996. The Mortgage Debt bore
interest at a floating rate from October 27, 1994, through October 28, 1996
equal to 70 basis points over either (i) the London Interbank Offer Rate
("LIBOR") or (ii) an adjusted certificate of deposit rate. On October 28,
1996, the Partnership's $37 million Mortgage Debt matured without replacement
financing in place. However, the Partnership secured an extension of the
Mortgage Debt until October 24, 1997 provided that the Partnership would make
a $10 million principal paydown on the Mortgage Debt by April 30, 1997. During
the extension period the debt bore interest at LIBOR plus 2.0 percentage
points and required quarterly principal amortization equal to all excess cash
flow as defined in the extension agreement.
On April 30, 1997, in connection with the tender offer for limited
partnership units (see Note 1), Host Marriott funded a fully-amortizing $10
million subordinated loan to the Partnership (the "Subordinated Loan") that
bears interest at a fixed rate of 14.5% over a 15-year term with required
monthly payments. The Partnership used the proceeds of the Subordinated Loan
to make the required principal payment under the mortgage loan extension
agreement. If cash flow is insufficient to service the Subordinated Loan, the
unpaid portion will be added to principal and interest will accrue.
On August 18, 1997, the Partnership refinanced its Mortgage Debt with a then
outstanding balance of $25.9 million with new mortgage debt ("New Mortgage
Debt") of $29.9 million. The New Mortgage Debt bears interest at a fixed rate
of 8.58% over its seven year term with required principal amortization based
on a 25-year schedule. Pursuant to the Subordinated Loan, any proceeds from
the New Mortgage Debt in excess of $27 million were to be used to repay the
Subordinated Loan. Therefore, on August 18, 1997, $2.9 million was repaid on
the Subordinated Loan. Pursuant to the limited partnership agreement, the
remaining proceeds and cash held at the Partnership for refinancing were used
to pay refinancing costs (see Note 2) and to repay debt service guarantee
advances made by the General Partner in prior years. For 1997 and 1996, the
weighted-average interest rate on the Partnership's mortgage debt was 7.9% and
6.4%, respectively.
The New Mortgage Debt is secured by the Hotel and substantially all other
assets of the Partnership, including furniture and equipment and the
Partnership's rights under the assignment of the rents and leases (the
"Collateral"). The Subordinated Loan is also secured by the Collateral but is
subordinate to the New Mortgage Debt. Host Marriott and the General Partner
also provided additional security on the Original Loan and the Mortgage Debt
in the form of debt service guarantees in the aggregate amount of $7,200,000
(the "Guarantees"). On October 27, 1994 Host Marriott and the General Partner
were released from their obligations to advance funds. As of December 31, 1997
and 1996, $3,400,000 remains outstanding under the Guarantees. All advances
made under the Guarantees accrue interest at one percent over the prime rate
as announced by Bankers Trust Company. Pursuant to the limited partnership
agreement, $1,382,000 was paid on the Guarantees from loan refinancing
proceeds. Accrued interest payable on the Guarantees as of December 31, 1997
and 1996, totaled $714,000 and $1,775,000, respectively. The weighted-average
interest rate on these advances was 9.3% for 1997 and 1996.
Prior to 1996, the General Partner advanced $127,000 to the Partnership as a
working capital advance which accrues interest at one percent over the prime
rate as announced by Bankers Trust Company. As of December 31, 1997 and 1996,
$203,000 and $192,000, including accrued interest, was outstanding on the
working capital advance, respectively, and is included in notes payable and
related interest due to the General Partner in the accompanying financial
statements.
Hanover Supp-50
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition, the General Partner has provided a foreclosure guarantee to the
lender of the New Mortgage Debt in the amount of $10 million. Pursuant to the
terms of the foreclosure guarantee, amounts would be payable only upon a
foreclosure of the Hotel and only to the extent that the gross proceeds from a
foreclosure sale are less than $10 million.
NOTE 6. OPERATING LEASE AGREEMENT/MANAGEMENT AGREEMENT
The Partnership, through an assignment of a lease from Host Marriott on
November 24, 1986, acquired all rights to a 25-year operating lease with five
10-year renewal options to lease the Hotel to MHS. Effective August 18, 1997,
this agreement was converted to a long-term management agreement with MHS.
Operating Lease Agreement
Annual Rental during the term of the Operating Lease was equal to the
greater of:
(i) Minimum Rental of $100,000; or
(ii) Basic Rental equal to 80% of Operating Profit, as defined, reduced
to 75% of Operating Profit after the Partnership has received $4,421,000 of
cumulative Capital Receipts; or
(iii) Adjusted Rental equal to debt service on the mortgage debt plus
Partnership administration costs (collectively referred to as "Debt
Service") plus the greater of: (a) a preferred return equal to $840,000 or
(b) 50% of the amount by which Operating Profit exceeds Debt Service. In no
event will Adjusted Rental exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rentals existed.
For financial reporting purposes, Additional Rental was not recognized as
revenue but was deferred and recorded as a liability on the balance sheet. As
a result of the conversion of the Operating Lease to a management agreement,
MHS forgave $5.1 million of Additional Rental, which was recorded as a
liability in the Partnership's financial statements. The Partnership recorded
an extraordinary gain related to this forgiveness.
For 1997 and 1996, Basic Rental of $3,031,000 and $3,993,000, respectively
was remitted to the Partnership by MHS. In accordance with the Operating
Lease, MHS was entitled to $758,000 and $998,000 of Operating Profit for the
period from January 1, 1997 to August 17, 1997 and the year ended December 31,
1996, respectively. In addition to the Annual Rental, MHS was required to pay
real estate taxes and make annual contributions equal to 4% of sales net of
interest to the property improvement fund on behalf of the Partnership. In
accordance with the Operating Lease, annual contributions to the property
improvement fund increased to 5% of sales net of interest at the beginning of
1997.
Management Agreement
Effective August 18, 1997, in conjunction with the refinancing of the
Partnership's Mortgage Debt (see Note 5), the Operating Lease was converted to
a long-term management agreement with MHS. The Management Agreement has an
initial term expiring on December 31, 2011. Thereafter, the term is renewed
automatically for each of five successive 10-year periods. Pursuant to the
terms of the Management Agreement, MHS receives a base management fee equal to
3% of gross revenues. The Partnership is entitled to the first $4,650,000 of
operating profit generated by the Hotel each fiscal year ("Owner's Priority").
Owner's Priority is increased by 10% of any Additional Invested Capital, as
defined in the Management Agreement. In addition to a base
Hanover Supp-51
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
management fee, MHS will be paid an incentive management fee of the next
$400,000 from operating profit, as defined. Any cash remaining after the
payment of the Owner's Priority and the incentive management fee will be
allocated 75% to the Partnership and 25% to MHS. The Partnership may terminate
the Management Agreement if in any two of three consecutive fiscal years there
is an operating loss. MHS may, however, prevent termination by paying to the
Partnership such amounts equal to the operating losses during such two fiscal
years.
Pursuant to the terms of the Management Agreement, MHS is required to
furnish the Hotel with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in MII's full service
hotel system. Chain Services include central training, advertising and
promotion, a national reservation system 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 full service hotels managed, owned or leased by MII or its
subsidiaries. In addition, MHS is required to furnish the Hotel with certain
other services ("Central Office Services") such as executive supervision,
planning and policy making, corporate finance, in-house legal services,
research and development, and technical and operational expertise. The Hotel
also participates in MII's Marriott's Reward Program ("MRP"). The cost of this
program is charged to all hotels in MII's full service hotel system based upon
the MRP sales at each hotel. The total amount of Chain and Central Office
Services and MRP costs charged to the Partnership under the Management
Agreement was $186,000 for the period August 18, 1997 to December 31, 1997.
The Management Agreement and Operating Lease provide for the establishment
of a property improvement fund for the Hotel which provides for the
replacement of furniture, fixtures and equipment. Contributions to the
property improvement fund are based on a percentage of gross hotel sales, net
of interest income. Prior to 1997, contributions equaled 4% of hotel sales,
net of interest income. Beginning in 1997 and thereafter, contributions are
equal to 5% of hotel sales, net of interest income. Contributions to the
property improvement fund for 1997 were $1.1 million.
Under the Management Agreement, MHS received base and incentive management
fees of $252,000 and $79,000, respectively, for the period August 18, 1997
through December 31, 1997.
NOTE 7. OFFICE SPACE RENTAL AGREEMENT
On January 28, 1995, the Partnership entered into an agreement with Marriott
Vacation Club International ("MVCI"), formerly known as Marriott Ownership
Resorts, Inc., a wholly-owned subsidiary of MII. Under the terms of the five
year lease with MVCI expiring in January 2000, MVCI funded the renovation of a
portion of the Hotel's lounge into a junior ballroom (for use by the Hotel)
and a MVCI sales office. The total cost of the renovations was $516,000. The
lease with MVCI stipulates that $200,000 of those costs will be treated as
rent concessions. Therefore, the Partnership will begin receiving rental
payments of $18,123 in 1998, $55,600 in 1999 and $4,277 in 2000. In the event
MVCI chooses to exercise its right to terminate the lease agreement prior to
the end of the five year term, any prepayment of rent by MVCI is non-
refundable.
In accordance with generally accepted accounting principles, the Partnership
deferred the total rent due under the lease and is amortizing the deferred
revenue on a straight-line basis over the lease term. For the years ended
December 31, 1997, 1996 and 1995, the Partnership recognized $118,000,
$119,000 and $110,000 of rent under the lease which is included in other
revenues in the Statement of Operations. In addition, deferred revenue related
to the lease totaled $169,000, $287,000 and $406,000 for the years ended
December 31, 1997, 1996 and 1995.
Hanover Supp-52
<PAGE>
NOTE 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997AS OF DECEMBER 31, 1996
------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt............. $ 29,760 $ 29,760 $ 37,000 $ 37,000
Subordinated loan......... 7,077 7,077 -- --
Notes payable and related
interest due to General
Partner.................. 4,317 4,200 5,367 3,500
Additional Rental......... -- -- 6,099 2,000
</TABLE>
The estimated fair value of the mortgage debt is based on the expected
future debt service payments discounted at estimated market rates. Additional
rental paid by the Hotel lessee was valued based on the expected future
payments from operating cash flow discounted at a risk-adjusted rate. As
further explained in Note 6, upon the closing of the debt refinancing on
August 18, 1997, MHS agreed to waive all claims to Additional Rental that had
accrued prior to the conversion to a management agreement. Consequently, the
estimated fair value of Additional Rental paid by the Hotel lessee is zero.
Hanover Supp-53
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
--------------
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotel revenues................................................ $3,391 $ --
Hotel rental.................................................. -- 3,015
Other......................................................... 55 55
------ ------
3,446 3,070
------ ------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................. 572 561
Base management fee........................................... 296 --
Incentive management fee...................................... 171 --
Real estate taxes............................................. 236 186
Insurance and other........................................... 127 19
------ ------
1,402 766
------ ------
OPERATING PROFIT................................................ 2,044 2,304
Interest expense.............................................. (1,863) (1,717)
Interest income............................................... 18 78
------ ------
NET INCOME...................................................... $ 199 $ 665
====== ======
ALLOCATION OF NET INCOME
General Partner............................................... $ 10 $ 33
Limited Partners.............................................. 189 632
------ ------
$ 199 $ 665
====== ======
NET INCOME PER LIMITED PARTNER UNIT (84 Units).................. $2,250 $7,524
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
Hanover Supp-54
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $31,718 $29,984
Due from Marriott Hotel Services, Inc................. 355 204
Other assets.......................................... 609 743
Cash and cash equivalents............................. 426 1,952
------- -------
$33,108 $32,883
======= =======
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $29,611 $29,760
Subordinated loan from Host Marriott Corporation.... 7,015 7,077
Notes payable and related interest due to the
General Partner.................................... 4,473 4,317
Accounts payable and accrued expenses............... 216 80
Deferred revenue.................................... 114 169
------- -------
Total Liabilities................................. 41,429 41,403
------- -------
PARTNERS' DEFICIT
General Partner..................................... (342) (352)
Limited Partners.................................... (7,979) (8,168)
------- -------
Total Partners' Deficit........................... (8,321) (8,520)
------- -------
$33,108 $32,883
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
Hanover Supp-55
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------ -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $ 199 $ 665
Noncash items................................................ 703 796
Changes in operating accounts................................ (13) 96
------ -------
Cash provided by operating activities...................... 889 1,557
------ -------
INVESTING ACTIVITIES
Additions to property and equipment, net..................... (2,306) (156)
Change in property improvement fund.......................... 102 (372)
------ -------
Cash used in investing activities.......................... (2,204) (528)
------ -------
FINANCING ACTIVITIES
Proceeds from subordinated loan.............................. -- 10,000
Repayments on mortgage debt.................................. (148) (10,505)
Repayments on subordinated loan.............................. (63) --
Payment of financing costs................................... -- (405)
------ -------
Cash used in financing activities.......................... (211) (910)
------ -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............... (1,526) 119
CASH AND CASH EQUIVALENTS at beginning of period............... 1,952 2,557
------ -------
CASH AND CASH EQUIVALENTS at end of period..................... $ 426 $ 2,676
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest.............................. $1,488 $ 1,182
====== =======
</TABLE>
See Notes to Condensed Financial Statements.
Hanover Supp-56
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Hanover Marriott Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included elsewhere in the Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
95% to the Limited Partners and 5% to Marriott Hanover Hotel Corporation (the
"General Partner"). Net losses are allocated 100% to the General Partner.
Significant differences exist between the net income for financial reporting
purposes and the net income (loss) for Federal income tax purposes. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives, no estimated
salvage values for the assets and differences in the timing of the recognition
of rental income.
2. On August 18, 1997, the Partnership completed a refinancing of its
mortgage debt. In addition to the refinancing, the Partnership converted the
Operating Lease with MHS to the Management Agreement (the "Conversion"). Prior
to the Conversion, the Partnership recorded revenue based on the rental income
to be received from MHS.
Annual rental during the term of the Operating Lease was equal to the
greater of: (i) Minimum Rental of $100,000; or (ii) Basic Rental equal to 80%
of Operating Profit, as defined, reduced to 75% of Operating Profit after the
Partnership received $4,421,000 of cumulative Capital Receipts, as defined in
the Operating Lease; or (iii) Adjusted Rental equal to debt service on the
mortgage debt plus Partnership administration costs (collectively referred to
as "Debt Service") plus the greater of: (a) a preferred return equal to
$840,000 or (b) 50% of the amount by which Operating Profit exceeded Debt
Service. In no event was Adjusted Rental to exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year
was defined as Additional Rentals. Cumulative Additional Rentals were
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rentals, provided no loans from the General Partner or Host Marriott were then
outstanding. Annual Rental was reduced by 50% of such excess to the extent
cumulative Additional Rentals existed. In addition to the Annual Rental, MHS
was required to pay real estate taxes.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real estate
taxes, insurance and certain other costs, which are disclosed separately in
the statement of operations. Revenues are recorded based on house profit of
the Hotel because the Partnership has delegated substantially all of the
operating decisions related to the generation of house profit from the Hotel
to MHS.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to
Hanover Supp-57
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements." EITF 97-2 addresses the circumstances in
which a management entity may include the revenues and expenses of a managed
entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $6.5 million and $6.6 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
The following is a summary of Hotel revenues, as defined in the Management
Agreement (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-------------
1998 1997
------ ------
<S> <C> <C>
HOTEL SALES
Rooms....................................................... $6,047 $6,047
Food and beverage........................................... 3,520 4,181
Other....................................................... 310 355
------ ------
9,877 10,583
------ ------
HOTEL EXPENSES
Departmental direct costs
Rooms..................................................... 1,413 1,308
Food and beverage......................................... 2,641 2,807
Other hotel operating expenses............................ 2,432 2,491
------ ------
6,486 6,606
------ ------
HOTEL REVENUES................................................ $3,391 $3,977
====== ======
</TABLE>
3. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), parent
company of the General Partner of the Partnership, announced that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including Hanover Marriott Limited Partnership, are expected to be given an
opportunity to receive, on a tax-deferred basis, Operating Partnership units
in the Operating Partnership in exchange for their current limited partnership
interests. The Operating Partnership units would be redeemable by the limited
partner for freely traded Host Marriott shares (or the cash equivalent
thereof) at any time after one year from the closing of the merger. In
connection with the REIT conversion, on June 2, 1998, the Operating
Partnership filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
Hanover Supp-58
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Marriott Diversified American Hotels, L.P.,
a Delaware limited partnership ("MDAH" or the "Partnership"), and up to seven
other limited partnerships (the "Partnerships") that own full-service hotels
in which Host or its subsidiaries are general partners. As more fully
described in the Consent Solicitation, limited partners of those Partnerships
that participate in the Mergers will receive OP Units 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," and with respect to MDAH, the
"MDAH Limited Partners"). MDAH Limited Partners may elect to exchange such OP
Units received in connection with the Merger for either common shares of
beneficial interest, par value $.01 per share, of Host REIT ("Common Shares")
or unsecured 6.56% Callable Notes due December 15, 2005 issued by the
Operating Partnership ("Notes"). Beginning one year after the Mergers, Limited
Partners who retain OP Units will have the right to redeem their OP Units at
any time and receive, at the election of Host REIT, either 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").
The number of OP Units to be allocated to MDAH will be based upon (i) its
Exchange Value (as defined herein) and (ii) the price attributed to an OP Unit
following the Merger, determined as described herein (but in no event will it
be less than $ or greater than $ per OP Unit) and will not be known at
the time of voting. The number of Common Shares an MDAH Limited Partner may
elect to receive in connection with the Merger will equal the number of OP
units received. The principal amount of Notes that MDAH Limited Partners may
elect to receive in connection with the Merger will be based upon MDAH's Note
Election Amount (as defined herein). See "Determination of Exchange Value of
MDAH and Allocation of OP Units." The estimated Exchange Value and Note
Election Amount set forth herein may increase or decrease as a result of
various adjustments, and will be finally calculated shortly before the
Effective Date. Pursuant to the Merger, MDAH Limited Partners have an
estimated Exchange Value of $109,216 per Partnership Unit and a Note Election
Amount of $98,343 per Partnership Unit.
RISK FACTORS
In deciding whether to approve the Merger, MDAH Limited Partners should
consider certain risks and other factors. The General Partner believes that
MDAH Limited Partners should particularly consider the following, which should
be read in conjunction with the information in the Consent Solicitation under
"Risk Factors" and "Federal Income Tax Consequences:"
. 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-
MDAH Supp-1
<PAGE>
level income taxes expected as a result of the REIT Conversion. To the
extent that such 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. The benefits to
Host of the REIT Conversion will be materially reduced if one or more of
the Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the MDAH Limited Partners or the other
Limited Partners. Although the General Partner has obtained the
Appraisals and the Fairness Opinion from AAA, AAA has not negotiated with
the General Partner 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 MDAH Limited Partners or the
other 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 Partner involve the following conflicts of
interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partner and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for the shareholders and the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including MDAH, participate and Host REIT will benefit if the value of
the OP Units received by the Limited Partners of MDAH is less than the
value of their Partnership Interest. In addition, the terms of the Leases
of the Hotels, including MDAH's Hotels, will be determined by Host and
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, including the MDAH Limited Partners.
. Adverse Tax Consequences to the General Partner of a Sale of any of
MDAH's Hotels. In past years, MDAH has disproportionately allocated tax
losses to the General Partner, with the result that if any of MDAH's
Hotels were to be sold in a taxable transaction, the General Partner
(and thus Host) would incur a disproportionately larger tax gain than
the MDAH Limited Partners. Accordingly, the General Partner and Host
have an additional conflict of interest in deciding the appropriate
course of action for MDAH with respect to its Hotels.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the MDAH Limited
Partners must vote on the Merger, including (i) the exact Exchange Value
for MDAH (which will be adjusted for changes in lender and capital
expenditures reserves, deferred maintenance and other items prior to the
Effective Date), (ii) the price of the OP Units for purposes of the
Merger, which will be determined by reference to the post-Merger trading
prices of Host REIT's Common Shares (but will not be less than $ or
greater than $ ) and which, together with the Exchange Value, will
determine the number of OP Units the MDAH Limited Partners 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 Note
Election Amount is determined. For these reasons, the MDAH Limited
Partners cannot know at the time they vote on the Merger these important
aspects of the Merger.
. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
. Exchange Value May Not Equal Fair Market Value of MDAH's Hotels. Each
MDAH Limited Partner who retains OP Units or elects to exchange OP Units
for Common Shares will receive consideration with a deemed value equal to
the Exchange Value of such MDAH Limited Partner's Partnership Interest.
The determination of the Exchange Value of MDAH involves numerous
estimates and assumptions. There is no assurance that the Exchange Value
of MDAH will equal the fair market value of the Hotels and other assets
contributed by MDAH. See "Determination of Exchange Value of MDAH and
Allocation of OP Units."
MDAH Supp-2
<PAGE>
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from Limited Partners who elect
to exchange OP Units for other Common Shares in connection with the
Mergers) 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. Host REIT's OP Units
in the aggregate, 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 to Host REIT and the Partnerships 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 of MDAH
and Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the MDAH Limited Partners' Partnership Interests. The price of
an OP Unit for purposes of the Merger 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 Merger (but in no event will
it be less than $ or greater than $ per OP Unit). This pricing
mechanism has the effect of fixing the minimum and maximum number of OP
Units to be issued in the Mergers. It is likely that, either initially or
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 Merger. This could result
in the MDAH Limited Partners receiving OP Units or Common Shares with an
actual value that is less than either the price of the OP Units for
purposes of the Merger or the fair market value of their Partnership
Interests.
. Inability of MDAH Limited Partners Who Retain OP Units to Redeem OP
Units for One Year. MDAH Limited Partners who retain OP Units received
in the Merger will be unable to redeem such OP Units for one year
following the Merger. Until then, MDAH Limited Partners will bear the
risk of illiquidity and of not being able to sell in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection with
the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price is also
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of MDAH. Each
MDAH Limited Partner may elect to receive, in exchange for OP Units
received in the Merger an unsecured, seven-year Note of the Operating
Partnership with a principal amount equal to the Note Election Amount of
his Partnership Interest, which is based upon numerous assumptions and
estimates. The deemed value of the OP Units to be received by the MDAH
Limited Partners will exceed the principal amount of the corresponding
Notes (because the Exchange Value will be higher than the Note Election
Amount) and there is no assurance that the Note an MDAH Limited Partner
receives will have a value equal to either (i) the fair market value of
the MDAH Limited Partner's share of the Hotels and other assets owned by
MDAH or (ii) the principal amount of the Note. 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
MDAH Supp-3
<PAGE>
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.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of an MDAH Limited Partner's investment
from holding an interest in MDAH, which was structured to make cash flow
distributions (some of which were tax sheltered), is a finite-life
entity, has a fixed portfolio of six Hotels and distributes partially
tax sheltered cash flow from the operation of such Hotels to the MDAH
Limited Partners, to holding a direct or indirect interest in the
Operating Partnership, an ongoing real estate company with a portfolio
of approximately 125 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 and (iii) is able to
reinvest proceeds from sales or refinancings of existing Hotels in other
hotel. In addition, each MDAH Limited Partner's investment will change
from one that allows an MDAH Limited Partner to receive a return of
capital in the form of distributions from any net proceeds of a sale or
refinancing of MDAH's assets to an investment in which an MDAH Limited
Partner who retains OP Units likely would realize a return of capital
only through the exercise of the Unit Redemption Right. Those MDAH
Limited Partners who elect to receive Common Shares in connection with
the Merger will hold an equity interest in a publicly traded REIT that
(i) provides immediate liquidity, (ii) intends to make distributions to
its shareholders in an amount equal to at least 95% of its taxable
income, (iii) allows shareholders to influence management by
participation in the election of Trustees and (iv) realizes substantial
corporate tax savings as long as certain requirements are met. An MDAH
Limited Partner's share of the liquidation proceeds, if any, from the
sale of an MDAH Hotel or Hotels could be higher than the amount realized
upon exercise of the Unit Redemption Right, the sale of Common Shares
received in connection with the Mergers or payments on any Note received
by an MDAH Limited Partner who elects to exchange his OP Units for such
Note in connection with the Merger. An investment in the Operating
Partnership or Host REIT may not outperform an investment in MDAH. 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 Merger, MDAH Limited Partners who retain OP Units or elect to
receive Common Shares in connection with the Merger will own interests
in a much larger enterprise with a broader range of assets than MDAH
individually. A material adverse change affecting the Operating
Partnership's assets will affect all Limited Partners, including MDAH
Limited Partners, regardless of whether a particular Limited Partner
previously was an investor in such affected assets. MDAH owns discrete
assets and the Mergers and the REIT Conversion will significantly
diversify the types and geographic locations of the Hotels in which the
MDAH 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 the Hotels previously owned by MDAH.
. MDAH Limited Partners Have No Cash Appraisal Rights. MDAH Limited
Partners who vote against the Merger have no right to receive cash based
upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The MDAH Limited Partners cannot know at the time they vote
on the 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, 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
Mergers and the REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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
MDAH Supp-4
<PAGE>
the Hotels by continuing to retain the Managers pursuant to the existing
long-term 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. The Operating Partnership also
will not own any of the voting stock of the Non-Controlled Subsidiaries,
which may own up to 20% by value of the Operating Partnership's assets.
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 and the Non-Controlled Subsidiaries to operate and manage their
businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases will generally expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to the
Lessees (or if relet, will be relet on terms as favorable to the Operating
Partnership). If the Hotels are not relet to the Lessees, the Operating
Partnership will be required to find other lessees, which lessees must meet
certain requirements set forth in the Management Agreements and the Code.
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 relet the Hotels or enter into new leases with such lessees, which could
result in a failure of Host REIT to qualify as a REIT or in reduced cash
available for distribution.
. Requisite Vote of MDAH Limited Partners Binds All MDAH Limited
Partners. For MDAH, approval by a majority of the Partnership Interests
of MDAH that are eligible to be voted is required to approve the Merger
and the related amendments to the partnership agreement, as described in
"Voting Procedures--Required Vote and Other Conditions." Such approval
will cause MDAH to participate in the Merger and will bind all MDAH
Limited Partners, including MDAH Limited Partners who voted against or
abstained from voting with respect to the Merger and the related
amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain such
consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material adverse
effect on the Operating Partnership and Host REIT and thus could reduce the
value of the OP Units and Common Shares.
. 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 would have had outstanding indebtedness totaling
approximately $5.1 billion, which represents an approximately 53% 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 $15.00). 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 (including Host REIT), (iv) pursue
its acquisition strategy or (v) compete effectively or operate
successfully under adverse economic conditions.
MDAH Supp-5
<PAGE>
. 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 Prior 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 make distributions to holders of OP Units (including Host
REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the Declaration
of Trust and Bylaws and the Shareholder Rights Plan. The Amended and
Restated Declaration of Trust (the "Declaration of Trust") and Bylaws of
Host REIT to be effective upon completion of the merger of Host with and
into Host REIT, as well as provisions of Maryland law, contain certain
provisions that could have the effect of delaying, deferring or preventing
a change in control of Host REIT. These provisions could limit the price
that certain investors might be willing to pay in the future for Common
Shares. Certain of these provisions provide for a staggered board and allow
Host REIT to issue, without shareholder approval, preferred shares having
rights senior to those of the Common Shares. The Board of Trustees also is
authorized, without a vote of shareholders, to amend the Declaration of
Trust to increase or decrease the number of authorized common or preferred
shares and to classify or reclassify unissued common or preferred shares
into another class or series of shares. Other provisions impose various
procedural and other requirements that could make it difficult for
shareholders to effect certain corporate actions. The Declaration of Trust
also provides that no person or persons acting as a group may own more than
9.8% (in number or value) of the outstanding shares of any class or series
of shares of Host REIT. Host REIT also intends to adopt a Shareholder
Rights Plan to replace the existing stockholder rights plan of Host. Host
REIT also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest" and "Certain Provisions of Maryland Law and Host REIT's
Declaration of Trust and Bylaws."
. 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 substantial
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
MDAH Limited Partners (other than those who elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger)
generally are not expected to recognize significant taxable gain at the
time of the Merger, there are a variety of events and transactions
(including the sale of one or more of the Hotels currently owned by MDAH
or the reduction of indebtedness securing one or more of the Hotels)
that could cause an MDAH 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 Treatment of MDAH Limited
Partners Who Hold OP Units Following the Merger." Certain Hotels
(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
MDAH Supp-6
<PAGE>
certain outside partners for the resulting adverse tax consequences. The
partnership agreement of the Operating Partnership, which is substantially
in the form attached to the Consent Solicitation 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 transaction) and the limited partners have no right to approve or
disapprove such transactions. See "Description of OP Units--Sales of
Assets."
. Election to Exchange OP Units for Common Shares. An MDAH Limited Partner
who elects to receive Common Shares in exchange for his OP Units in
connection with the Merger will be treated as having made a fully taxable
disposition of his OP Units. See "Federal Income Tax Consequences--Tax
Treatment of MDAH Limited Partners Who Exercise Their Right to Make the
Common Share Election or the Note Election." An MDAH Limited Partner who
elects to receive Common Shares in connection with the Merger will not
receive the Crestline common stock or any other portion of the E&P
distribution made before they become Shareholders of Host REIT.
. Election to Exchange OP Units for Notes. An MDAH Limited Partner who
elects to receive a Note in exchange for his OP Units in connection with
the Merger will be treated as having made a taxable disposition of his
OP Units. An MDAH Limited Partner who receives a Note in connection with
the Merger may be eligible to defer at least a portion, but not all, of
that gain under the "installment sale" rules until principal on the Note
is paid. See "Federal Income Tax Consequences--Tax Treatment of MDAH
Limited Partners Who Exercise Their Right to Make the Common Share
Election or 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 and Common Shares, 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 the leases of the Hotels to
the Lessee were to be disregarded for tax purposes (for example, because
the Lease was determined to lack economic substance), Host REIT could fail
to qualify as a REIT and the Operating Partnership might be treated as a
corporation for federal income tax purposes, which would have a material
adverse impact on the MDAH Limited Partners and the value of the OP Units
and the Common Shares.
. 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.
. MDAH Limited Partners Need to Consult with Their Own Tax Advisors. Because
the specific tax attributes of an MDAH Limited Partner and the facts
regarding such MDAH Limited Partner's interest in MDAH could have a
material impact on the tax consequences to such MDAH Limited Partner of the
Merger (including the decision whether to elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger) and the
subsequent ownership and disposition of OP Units,
MDAH Supp-7
<PAGE>
Common Shares or Notes, it is essential that each MDAH Limited Partner
consult with his own tax advisors regarding the application of federal,
foreign and state and local tax laws to such MDAH 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 MDAH Limited Partners would not be able to use suspended
passive activity losses from other investments (including from MDAH) to
offset income from the Operating Partnership. It is estimated that each
MDAH Limited Partner 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 REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
MARRIOTT MDAH ONE CORPORATION (THE "GENERAL PARTNER"), THE GENERAL PARTNER
OF MDAH, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS FAIR TO
THE MDAH LIMITED PARTNERS AND RECOMMENDS THAT ALL MDAH LIMITED PARTNERS VOTE
FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for MDAH
Limited Partners the specific risks, benefits, effects and fairness of the
Merger to them and to provide other information specific to MDAH. Supplements
have also been prepared for each of the other Partnerships. This Supplement,
together with the supplements of the other Partnerships (collectively, the
"Supplements"), are part of the Consent Solicitation. Upon receipt of a
written request by a Limited Partner or his representative so designated in
writing, the General Partner will send a copy of any Supplement without
charge. All requests for a copy of a Supplement 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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
MDAH Supp-8
<PAGE>
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the MDAH Limited Partners for the reasons set forth below.
This information is qualified by and should be read in conjunction with the
information in the Consent Solicitation under "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of MDAH, are expected to include:
. Exchange Value of MDAH. MDAH Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will
receive OP Units or Common Shares with an estimated Exchange Value equal
to $109,216 per Partnership Unit.
. Liquidity of Investment. The REIT Conversion will offer MDAH Limited
Partners liquidity with respect to their investment in MDAH because MDAH
Limited Partners can receive freely tradeable Host REIT Common Shares by
electing to exchange OP Units for Common Shares in connection with the
Merger or by exercising their Unit Redemption Right at any time after one
year following the Effective Date. Host has approximately 204 million
shares of common stock outstanding and is expected to have a total common
equity market capitalization of approximately $3.6 billion after giving
effect to the earnings and profits distribution (based on a price of $15.00
per Host REIT Common Share). The exercise of the election to exchange OP
Units for Common Shares in connection with the Merger or the exercise of
the Unit Redemption Right, however, generally would result in recognition
of taxable income or gain at the time of exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that these distributions will be higher than the estimated cash
distributions for 1998 of MDAH, 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 MDAH and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons
for the Mergers."
. Substantial Tax Deferral for MDAH Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that MDAH Limited Partners who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 MDAH or a sale or other disposition of its
assets in a taxable transaction. Thereafter, such MDAH 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 MDAH 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 Merger
are highly complex and, with respect to each MDAH Limited Partner, are
dependent upon many variables, including the particular circumstances of
such MDAH Limited Partner. See "Federal Income Tax Consequences--Tax
Consequences of the Merger." Each MDAH Limited Partner is urged to
consult with his own tax advisors as to the consequences of the Merger
in light of his particular circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of MDAH Limited Partners upon the performance of, and the
exposure to the risks associated with, MDAH's Hotels 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 generally will have a lower leverage to value
ratio, approximately 53%, than MDAH currently, which has a leverage
ratio of 58% (calculated as a percentage of Exchange Value), resulting
in interest and debt service savings and greater financial stability.
MDAH Supp-9
<PAGE>
. Growth Potential. The General Partner believes that the MDAH Limited
Partners, by directly or indirectly owning interests in a publicly
traded real estate company focused primarily on a more diverse and
growing luxury and upscale 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 MDAH
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 MDAH 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
(including, specifically, the refinancing of the MDAH Mortgage Debt,
substantially all of which will mature on December 15, 1999), as
compared to MDAH individually.
. Public Market Valuation of Assets. The Partnership Units of MDAH
currently trade at a discount to the net asset value of MDAH's assets.
The General Partner believes that by exchanging interests in MDAH, which
is a non-traded, finite-life limited partnership with a fixed portfolio
for interests in an ongoing real estate company focused primarily on a
more diverse and growing full-service hotel portfolio and providing
valuations based upon publicly traded Common Shares of Host REIT, the
MDAH Limited Partners will have the opportunity to participate in the
recent trend of ownership toward real estate through a publicly traded
entity, which, in many instances (although not currently), has resulted
at various times 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 they will not trade at a discount to private market
values. Also, the benefit of Host's conversion to a REIT will not be
shared by the MDAH 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.
If MDAH does not participate in the Merger, its business will continue in
its current manner; however, the Operating Partnership may elect to contribute
some or all of its interest in MDAH to a Non-Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF MDAH AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of MDAH 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 Partner has 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 MDAH 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
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 MDAH represents AAA's
estimate, as adopted by the General Partner, of the discounted present
value, as of January 1, 1998, of the MDAH limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender reserves), assuming that MDAH 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 MDAH represents the
General Partner's estimate of the net proceeds to MDAH limited partners
resulting from the assumed sale as of December 31, 1998 of the Hotels of
MDAH, 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.
MDAH Supp-10
<PAGE>
Final determination of the Exchange Value of MDAH 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 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 MDAH after the Initial Valuation Date to perform
deferred maintenance that were previously subtracted in determining the
estimated Adjusted Appraised Value of MDAH and (iii) to reflect any changes in
MDAH's other reserves, such as for litigation expenses and indemnification
costs and any revised estimates of transfer and recordation taxes and fees.
The General Partner does not believe that any adjustments to the Exchange
Value will be material; however, if any such changes are deemed to be
material, the General Partner will provide the MDAH Limited Partners with an
opportunity to change their vote on the Merger.
APPRAISED VALUE. MDAH's 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 MDAH's Hotels.
Each appraisal (an "Appraisal") was reviewed by a Member Appraisal Institute
("MAI") appraiser and certified by such MAI appraiser as having been prepared
in accordance with the requirements of the Standards of Professional Practice
of the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
The 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 half of MDAH's Hotels for purposes of the Appraisals.
Neither AAA nor the General Partner believes that the lack of site visits to
three of MDAH's Hotels affects the determination of market value because, as
part of the Appraisals, AAA reviewed financial information of the Hotels as
well as conducted extensive interviews with the managers of the Hotels. See
"Fairness Analysis and Opinion--Fairness Opinion--Summary of Materials
Considered and Investigation Undertaken."
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 MDAH 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 each Hotel. AAA
also prepared a projection of the net operating income prior to
incentive management fees and certain capital expenditures for each
Hotel for the twelve month period ending February 28, 1999 (the
"Projected Year"), using historical financial information for each
Hotel, budget information, a survey with the manager of each Hotel
addressing the physical condition of each 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 each Hotel and risk factors
relating to the particular Hotel. The resulting gross margin (ratio of
total revenues to NOI prior to incentive management fees) was checked
against AAA's database of the gross margins for similar hotels for
reasonableness.
MDAH Supp-11
<PAGE>
. 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. 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
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 effective capitalization
rates for 1997 and Projected Year's Adjusted NOI resulting from AAA's
estimated Appraised Values of MDAH's Hotels.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISALS OF MDAH'S HOTELS
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.1--9.9% 10.1--10.6%
</TABLE>
APPRAISED VALUES OF MDAH'S HOTELS
<TABLE>
<CAPTION>
APPRAISED VALUE
HOTEL (IN THOUSANDS)
----- ---------------
<S> <C>
Dayton Marriott Hotel................................... $ 40,500
Fairview Park Marriott Hotel............................ 58,900
Fullerton Marriott Hotel................................ 9,800
Livonia Marriott Hotel.................................. 19,600
Raleigh at Research Triangle Park Marriott Hotel........ 20,900
Southfield Marriott Hotel............................... 16,200
--------
$165,900
========
</TABLE>
. 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.
With respect to MDAH's Hotels, one property was encumbered by a ground lease
as of the date of the Appraisals. Accordingly, the Appraised Value of such
Hotel has been decreased to reflect the encumbrance of the ground lease and
the interest of the ground lessor in the operating cash flows of such Hotel.
The Appraised Value assumes 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 MDAH's Hotels (but estimated
deferred maintenance costs have been deducted in estimating the Adjusted
Appraised Value of each of MDAH's Hotels).
MDAH Supp-12
<PAGE>
The Appraised Value did not take into account the costs that might be incurred
in selling the Hotels (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 MDAH's Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of MDAH.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 MDAH's Hotels will vary from the
results projected in the Appraisals and the variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of MDAH was
determined by totaling the Appraised Values of all of the Hotels of MDAH and
then making various adjustments to the aggregate Appraised Value, as described
below.
. Lender Reserves. MDAH's 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 MDAH will be
made on the Final Valuation Date and any changes in such reserves will
be reflected in the Adjusted Appraised Value.
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Merger) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of MDAH has been subtracted
from the Appraised Value.
. Mark to Market Adjustment. 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 MDAH, the estimated
Adjusted Appraised Value for MDAH has been increased 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 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.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to MDAH's
Hotels has 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.
MDAH Supp-13
<PAGE>
The following table sets forth the adjustments to the aggregate Appraised
Values of MDAH's Hotels made to derive the estimated Adjusted Appraised Value
for MDAH as of the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR MDAH
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................. $165,900
Lender reserves................................................. 3,000
Mortgage debt................................................... (97,371)
Other debt...................................................... (25,355)
Mark to market adjustment....................................... 399
Deferred maintenance costs...................................... (825)
--------
Estimated Adjusted Appraised Value.............................. $ 45,748
========
General Partner's share(1)...................................... $ 533
Limited partner share of Host subsidiaries(2)................... $ 273
Total limited partners' share(3)................................ $ 45,215
Per Partnership Unit............................................ $109,216
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of MDAH using the
following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for MDAH 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 (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 MDAH's 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 MDAH's
FF&E reserve was adequate and understood that Host determined that there
were no reserve shortfalls or surpluses.
. Refinancing Assumptions. For MDAH's first mortgage loan, which matures
during the 12-year period, AAA assumed that the debt would be refinanced
with an interest rate of 7.25% per annum and a 20-year amortization
schedule, with estimated refinancing costs of 2% of the refinanced amount
being paid from operating cash flow.
. Determination of Residual Value. To estimate the residual value of the
MDAH limited partners' interest in MDAH at the end of the 12-year period,
AAA assumed that the MDAH Hotels 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% 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 MDAH's limited partners under the partnership and
debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to MDAH's limited
partners from operations and estimated net sales proceeds 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.
MDAH Supp-14
<PAGE>
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for MDAH are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR MDAH
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT AND PERCENTAGES)
<TABLE>
<CAPTION>
EXIT ESTIMATED LIMITED ESTIMATED
GROWTH CAPITALIZATION CONTINUATION GENERAL PARTNERS' CONTINUATION VALUE
RATE RATE (2009) VALUE PARTNER'S SHARE SHARE (PER PARTNERSHIP UNIT)
------ -------------- ------------ --------------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
3.4% 10.1% $40,245 $3,258 $36,987 $89,340
</TABLE>
LIQUIDATION VALUE. The Liquidation Value of MDAH was estimated by the
General Partner and represents the estimated value of MDAH if all of its
assets were sold as of December 31, 1998. Such value was based upon the
Adjusted Appraised Value of MDAH, 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; and (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 MDAH's Hotels was subtracted from the Appraised Value
for estimated liquidation costs, expenses and contingencies. The General
Partner then determined the portion of the estimated Liquidation Value that
would be distributable to MDAH's limited partners under the terms of the
partnership agreement and other contractual arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of MDAH as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF MDAH
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................................. $165,900
Lender reserves................................................. 3,000
Mortgage debt................................................... (97,371)
Other debt...................................................... (25,355)
Deferred maintenance costs...................................... (825)
Sales costs..................................................... (4,148)
--------
Estimated Liquidation Value..................................... $ 41,201
========
General Partner's share(1)...................................... $ 487
Limited partner share of Host subsidiaries(2)................... $ 246
Total limited partners' share(3)................................ $ 40,714
Per Partnership Unit............................................ $ 98,343
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interests held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of MDAH (based upon the greatest of its estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value), the estimated minimum number of OP Units to be received (based upon
the maximum price
MDAH Supp-15
<PAGE>
of $ per OP Unit) and the estimated Note Election Amount for MDAH, all on a
per Partnership Unit basis as of the Initial Valuation Date. The number of
Common Shares received in exchange for OP Units will equal the number of OP
Units. The estimated Note Election Amount for MDAH (which will be received by
MDAH Limited Partners electing to receive Notes in exchange for OP Units in
connection with the Merger) is equal to the Liquidation Value for MDAH. 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 MDAH 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 (but will not be less than $ or greater than $ per OP
Unit) and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUE, NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT OF MDAH
PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED ESTIMATED NOTE
ADJUSTED CONTINUATION LIQUIDATION EXCHANGE MINIMUM NUMBER ELECTION
APPRAISED VALUE VALUE VALUE VALUE(2) OF OP UNITS(3) AMOUNT(4)
--------------- ------------ ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$109,216 $89,340 $98,343 $109,216 7,281 $98,343
</TABLE>
- --------
(1) A Partnership Unit in MDAH 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units to Pay Exchange Value to MDAH Limited Partners. Each MDAH
Limited Partner will receive OP Units with a deemed value equal to the
Exchange Value of such MDAH 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 will it be less than $ or
greater than $ per OP Unit). Thus, if the 20-day average trading price is
less than $ , the price per OP Unit in the Merger would be $ , and if such
average trading price is greater than $ , the price per OP Unit in the Merger
would be $ . The OP Units will be delivered to the MDAH Limited Partners
promptly after the twentieth trading day following the Effective Date of the
Merger (which would be promptly after January 29, 1999 if the Effective Date
of the Merger is December 30, 1998).
MDAH Limited Partners at the Effective Date of the Merger who retain OP
Units will receive cash distributions from MDAH for all of 1998 and, if the
Merger does not occur in 1998, any portion of 1999 prior to the Merger for
which period they do not receive a cash distribution from the Operating
Partnership. Cash distributions will be made by MDAH in accordance with its
partnership agreement on or before June 1, 1999 in respect of 1998 operations
and, if the Merger does not occur prior to January 1, 1999, within 90 days
after the Effective Date of the Merger in respect of any 1999 operations. MDAH
Limited Partners at the Effective Date of the Mergers who elect to receive
Common Shares in exchange for OP Units in connection with the Merger will
participate in the same distributions from MDAH as MDAH Limited Partners who
retain OP Units and will receive distributions from Host REIT with respect to
periods after the Effective Date of the Mergers, which distributions will
equal the amount distributed with respect to the OP Units. MDAH Limited
Partners at the Effective Date of the Mergers who elect to receive Notes in
exchange for OP Units in connection with the Merger will participate in the
same distributions from MDAH 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 Merger because they will be entitled
to receive interest on their Notes for such periods.
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.
MDAH Supp-16
<PAGE>
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S AND ITS AFFILIATE'S INTEREST
IN MDAH AND ALLOCATION OF OP UNITS TO THE GENERAL PARTNER AND ITS AFFILIATE
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the MDAH Limited Partners' Partnership
Interests, by the same methodologies set forth above and giving effect to the
applicable distribution preferences in the MDAH partnership agreement. The
number of OP Units that will be received by the General Partner will be equal
to the value of its interest in MDAH divided by the same price per OP Unit
used to determine the number of OP Units to be received by the MDAH Limited
Partners.
The following table sets forth the estimated value of the interest of the
General Partner and its affiliate in MDAH based upon the estimated aggregate
Exchange Value of the MDAH Limited Partners' Partnership Interests as of the
Initial Valuation Date and the minimum number of OP Units estimated to be
received by the General Partner and its affiliates in respect thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S AND ITS AFFILIATE'S INTERESTS AND
NUMBER OF OP UNITS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value............................................ $45,748
Limited partners' share of aggregate Exchange Value................. 45,215
-------
Value of General Partner's interest................................. 533
Value of General Partner's affiliate's interest..................... 273
-------
Total interest of General Partner and its affiliate................. $ 806
=======
Number of OP Units:
Minimum(1)........................................................ 53
</TABLE>
- --------
(1)Assumes the price of an OP Unit is $15.00, which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of MDAH and recommends that all Limited
Partners of MDAH consent to the Merger. The General Partner bases this
recommendation primarily on (i) its view that the expected benefits of the
Merger for the MDAH Limited Partners outweigh the risks and potential
detriments of the Merger to the MDAH Limited Partners (see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the Mergers" and
"Risk Factors"), (ii) its view that the value of the OP Units allocable to the
MDAH Limited Partners on the basis of the Exchange Value established for MDAH
represents fair consideration for the Partnership Interests held by the MDAH
Limited Partners and is fair to the MDAH Limited Partners from a financial
point of view and (iii) the Appraisals and Fairness Opinion of AAA. See "--
Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the MDAH Limited Partners, individually
and as a whole, if it is consummated with any combination of other
Participating Partnerships. The General Partner bases this belief primarily on
the fact that the consideration to be paid to the MDAH Limited Partners has
been established based upon MDAH's Exchange Value, without regard to any
possible combination of other Partnerships.
MDAH Supp-17
<PAGE>
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for MDAH
represents fair consideration for the Partnership Interests of the MDAH
Limited Partners in the Merger in relation to MDAH because the Exchange
Value is equal to the greatest of the Adjusted Appraised Value,
Continuation Value and Liquidation Value, each of which is an acceptable
method for determining the fair market value of a Partnership's assets.
The General Partner also has concluded that the Exchange Value
established for the MDAH Limited Partners fairly reflects the value of
the assets held by MDAH. In addition, the General Partner's own analysis,
as well as the Fairness Opinion, support these conclusions.
. MDAH Limited Partners who retain OP Units will be able to defer
recognition of gain until such time as they choose to realize such gain
based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the MDAH 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 Merger for
the MDAH Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
MDAH Limited Partners should consider carefully and does not conclude
that the Exchange Value is the best price that could be obtained. 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 Merger.
. The General Partner believes that the economic terms of the leases of the
MDAH Hotels are fair and reasonable from the standpoint of the Operating
Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the MDAH Limited
Partners.
. The General Partner believes that the value of the consideration to be
received by the MDAH Limited Partners in the Merger 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 MDAH is equal to its Adjusted Appraised Value,
which is the greatest of the Adjusted Appraisal Value, the Continuation
Value and the Liquidation Value and the historic prices paid for MDAH
Partnership Units. The General Partner does not believe that the sale of
any of MDAH's Hotels and liquidation of MDAH would obtain for MDAH
Limited Partners as much value as the value to be received by such MDAH
Limited Partners following the Merger. The General Partner believes that
the following benefits are of the greatest value and importance to the
MDAH Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer MDAH
Limited Partners liquidity with respect to their investment in MDAH
because MDAH Limited Partners can receive freely tradeable Host REIT
Common Shares in connection with the Merger, or for MDAH Limited
Partners who retain OP Units, at any time commencing one year
following the Effective Date, by exercising their Unit Redemption
Right, 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
$3.6 billion after giving effect to the earnings and profits
distribution (based on a price of $15.00 per Host REIT Common
Share). The election to exchange OP Units for Common Shares in
connection with the Merger or 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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host
MDAH Supp-18
<PAGE>
REIT will make regular quarterly cash distributions to the holders of
Common Shares. Host expects that these distributions will be higher
than the estimated cash distributions for 1998 of MDAH and, in any
event, the ability to receive distributions quarterly and in regular
amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
MDAH Limited Partner's investment will be converted from an
investment in MDAH, which owns six hotels, into an investment in an
enterprise that initially will own or control approximately 125
Hotels and will have a total market capitalization of approximately
$3.6 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 MDAH 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 generally will have a lower leverage to value
ratio, approximately 53%, than MDAH currently, which has a leverage
ratio of 58% (calculated as a percentage of Exchange Value),
resulting in interest and debt service savings and greater financial
stability.
. Substantial Tax Deferral. The General Partner expects that MDAH
Limited Partners who do not elect to receive Common Shares or Notes
in exchange for OP Units in connection with the Merger generally
should be able to obtain the benefits of the Merger 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 MDAH or a sale or other disposition of its assets
in a taxable transaction.
The General Partner believes that the factors described above, which support
the fairness of the Merger to the MDAH Limited Partners, when weighed against
the factors that may be disadvantageous, taken as a whole, indicate that the
Merger is fair to the MDAH Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 MDAH and each other
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 MDAH Limited Partners and
the Limited Partners of each other Partnership and (ii) the methodologies used
to determine the value of an OP Unit and to allocate the equity in the
Operating Partnership to be received by the MDAH Limited Partners and the
Limited Partners of each other Partnership are fair and reasonable to the MDAH
Limited Partners and the Limited Partners of each other Partnership. The
Fairness Opinion is addressed to each Partnership and it may be relied upon by
each of the MDAH Limited Partners and the Limited Partners of each of the
other 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 the Consent Solicitation and
should be read in its entirety. The material assumptions and qualifications to
the Fairness Opinion are summarized below, although this summary does not
purport to be a complete description of the various inquiries and analyses
undertaken by AAA in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex analytical process not necessarily susceptible to partial
analysis or amenable to summary description. For a more complete description
of the assumptions and qualifications that limit the scope of the Fairness
Opinion, see "--Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger
MDAH Supp-19
<PAGE>
is conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 MDAH and the other
Partnerships might not have been more favorable to the Limited Partners in
certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of the other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of MDAH's and each other
Partnership's contingent liabilities.
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partner selected AAA, on
the basis of the proposals, 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;
MDAH Supp-20
<PAGE>
(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.
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 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
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 methodologies 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 each of the Hotels) are fair and reasonable, from a financial point of
view, to the MDAH Limited Partners and the Limited Partners of each other
Partnership and (ii) the methodologies used to determine the value of an OP
Unit and to allocate the equity interest in the Operating Partnership to be
received by the MDAH Limited Partners and the Limited Partners of each other
Partnership are fair and reasonable to the MDAH Limited Partners and the
Limited Partners of each other Partnership.
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.
MDAH Supp-21
<PAGE>
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by MDAH. The following table sets forth
the distributions paid to MDAH Limited Partners (per Partnership Unit) for the
periods indicated. The information below should be read in conjunction with
the information in this Supplement under the caption "Selected Financial
Data."
HISTORICAL CASH DISTRIBUTIONS PAID BY MDAH
(PER PARTNERSHIP UNIT)(1)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
--------- --------------------------------
1998 1997 1996 1995 1994 1993
--------- ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
From net income..................... $-- $3,453 $4,575 $4,481 $3,428 $--
Representing return of capital(2)... -- -- -- -- -- --
---- ------ ------ ------ ------ ----
Total............................. $-- $3,453 $4,575 $4,481 $3,428 $--
==== ====== ====== ====== ====== ====
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MDAH.
(2) Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the General Partner. Under MDAH's
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of MDAH but the General
Partner and its affiliates are reimbursed for certain costs and expenses
incurred on behalf of MDAH. In addition, the General Partner is entitled to
distributions related to its interests in MDAH. The following information has
been prepared to compare the amount of reimbursements paid and cash
distributions made by MDAH to the General Partner and its affiliates to the
amounts that would have been paid if the reimbursement and distribution
structure which will be in effect after the REIT Conversion had been in effect
for the periods presented.
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). Marriott
International receives management fees and other reimbursements from MDAH
under the Management Agreement.
The following table sets forth the reimbursements and distributions paid by
MDAH to its General Partner and its affiliates and payments made to Marriott
International 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 Partner and its affiliates and payments made to Marriott
International 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 $0.81 per year during
such period, which is the expected minimum distribution for 1999.
HISTORICAL AND PRO FORMA REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL
PARTNER AND ITS AFFILIATES
AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO FISCAL YEAR
QUARTERS ---------------------------------------
1998 1997 1996 1995
----------------- ----------------- ---------- ----------
PRO PRO
HISTORICAL FORMA HISTORICAL FORMA HISTORICAL HISTORICAL
---------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(1)....... $88 $ -- $124 $ -- $109 $68
Distributions(2)........ -- 20 21 41 28 27
Payments Made to
Marriott
International.......... 2,100 2,100 6,134 6,134 5,583 5,260
------ ------ ------ ------ ------ ------
Total .................. $2,188 $2,120 $6,279 $6,175 $5,720 $5,355
====== ====== ====== ====== ====== ======
</TABLE>
MDAH Supp-22
<PAGE>
- --------
(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 Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $0.81
per annum per OP Unit (which is the expected minimum distribution per OP
Unit for 1999) with respect to the estimated number of OP Units that the
General Partner and its affiliates will receive with respect to its
general and limited partner interests in MDAH. Such number does not
reflect the aggregate number of OP Units Host REIT will receive in
connection with the REIT Conversion.
CERTAIN INFORMATION REGARDING THE HOTELS OWNED BY MDAH
<TABLE>
<CAPTION>
NUMBER OF DATE
NAME OF HOTEL LOCATION OF HOTEL ROOMS OPENED
- ------------- ------------------ --------- ------
<S> <C> <C> <C>
Dayton Marriott Hotel...................... Dayton, OH 399 1982
Fairview Park Marriott Hotel............... Fairfax County, VA 395 1989
Fullerton Marriott Hotel................... Orange County, CA 224 1989
Livonia Marriott Hotel..................... Livonia, MI 224 1989
Marriott Hotel at Research Triangle Park... Raleigh, NC 224 1988
Southfield Marriott Hotel.................. Southfield, MI 226 1989
-----
TOTAL.................................... 1,692
=====
</TABLE>
The table below sets forth certain performance information for MDAH's Hotels
for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -----------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Average daily rate............... $ 114.66 $ 102.29 $102.97 $93.33 $86.39
Occupancy........................ 77.0% 78.1% 76.4% 74.6% 76.1%
REVPAR........................... $ 88.29 $ 79.89 $ 78.66 $69.62 $65.74
% REVPAR change.................. 10.5% -- 13.0% 5.9% --
</TABLE>
Dayton Marriott Hotel, Dayton, Ohio
The Dayton Marriott Hotel is a full-service Marriott hotel located on 9.9
acres of fee-owned land approximately 1.5 miles south of downtown Dayton,
Ohio. The Hotel is situated at the intersection of South Patterson Boulevard
and River Park Drive, which is approximately one-half mile east of I-75. The
Hotel is visible from the interstate and is adjacent to both the University of
Dayton and the world headquarters of NCR Corporation. Because of its
recognized position in the market, the Dayton Marriott Hotel serves the entire
Dayton metropolitan area, including the Wright-Patterson Airforce Base and the
downtown convention center.
The Dayton Marriott Hotel originally opened in January 1982 with 299 rooms
and was expanded to 399 rooms in August 1987. The Dayton Hotel contains 399
guest rooms, of which nine are suites and 50 are concierge-level guest rooms
offering special amenities, decor and services. The Hotel has approximately
10,300 square feet of meeting and banquet space, including a 6,400 square foot
ballroom capable of accommodating up to 800 people for receptions and up to
580 people for banquets. In addition, the Hotel contains a restaurant capable
of seating 165 persons and a lounge capable of seating 112 persons. Other
amenities offered by the Hotel include an indoor/outdoor pool, a hydrotherapy
pool, an exercise room, a sauna, bicycle rentals, a gift/sundry shop and
parking for 547 cars.
MDAH Supp-23
<PAGE>
Competition. The primary competition for the Hotel comes from three hotels
in the Dayton area: (i) the Crown Plaza; (ii) the Doubletree Hotel and (iii)
the Holiday Inn Fairborn. A comparison of these hotels and the Dayton Hotel is
shown below:
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
DAYTON MARRIOTT HOTEL........................... 399 1982 10,300
Crown Plaza..................................... 284 1996 12,000
Doubletree Hotel................................ 189 1988 8,000
Holiday Inn Fairborn............................ 202 1987 8,000
</TABLE>
In addition to the properties described above, the Dayton Hotel faces
secondary competition from various other hotels. These other hotels, however,
differ from the Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. No new primary
competition is expected to open in the Dayton area. However, the Residence Inn
and Fairfield Inn Troy opened in January 1998.
Fairview Park Marriott Hotel, Fairfax County, Virginia
The Fairview Park Marriott Hotel is located approximately nine miles west of
downtown Washington, D.C., on a parcel of approximately 5.2 acres of fee-owned
land in the 220-acre Fairview Park development in Fairfax County, Virginia.
The Hotel is located at the interchange of U.S. Highway 50 and the heavily
traveled Capital Beltway (I-495), which circles Washington, D.C. The Hotel is
located directly across the Capital Beltway from the world headquarters of
Mobil Corporation, is four miles south of Tysons Corner, Virginia, a major
regional commercial and retail center and is near several middle-income and
upscale residential areas. At 15 stories, the Hotel is the tallest building in
the Fairview Park development and is visible from the Capital Beltway.
The Fairview Park Marriott Hotel opened in August 1989. The Hotel contains
395 guest rooms, of which eight are suites, two are parlors and 30 are
concierge-level guest rooms offering special amenities, decor and services.
The Hotel has approximately 13,000 square feet of meeting and banquet space
(including a ballroom of 10,300 square feet) and six hospitality suites which
are available to accommodate meetings of small groups. The Hotel has a
restaurant which seats 130 and one lounge which seats a total of 55, and
offers an indoor/outdoor pool and whirlpool, an exercise room, men and women's
locker rooms with saunas, a business center, a gift/sundry shop and
indoor/outdoor parking for 660 cars. More than half of the Fairview Park
development has been preserved as woodlands and the Hotel is located in a
wooded area which offers a park-like setting containing jogging and cycling
trails that connect with adjacent communities. The Hotel also is adjacent to a
small retail shopping center which offers a food court and shops.
Ground Lease. The Partnership leases the land on which the Fairview Park
Marriott Hotel parking garage is located. The lease expires in 2085 and
requires a nominal rental of $1 per year.
Competition. Four hotels, the Sheraton Tysons Corner, the Hilton McLean, the
Tysons Corner Marriott and the Ritz Carlton Tysons Corner (which is owned by
Host Marriott), provide the primary competition for the Fairview Park Marriott
Hotel. The Ritz Carlton Tysons Corner is also owned by Host and managed by
Marriott International. A comparison of these hotels and the Fairview Park
Marriott Hotel is shown in the table below:
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
FAIRVIEW PARK
MARRIOTT HOTEL................................... 395 1989 13,000
Sheraton Tysons Corner........................... 455 1986 26,000
Hilton McLean.................................... 457 1987 22,000
Tysons Corner Marriott........................... 392 1981 13,600
Ritz Carlton Tysons Corner....................... 232 1989 18,500
</TABLE>
MDAH Supp-24
<PAGE>
The Homewood Suites Hotel, a 109 room extended-stay hotel opened in February
1998, and is located four miles from Fairview Park.
Fullerton Marriott Hotel, Fullerton, California
The Fullerton Marriott Hotel is located in Fullerton, California on a 4.7
acre leased parcel of land located on the campus of California State
University at Fullerton. The Fullerton campus of California State University
has approximately 25,000 students, making it the seventh largest of the 20
campuses in the California State University system. Fullerton is located in
northern Orange County, California's third largest center of high technology
which includes the communities of Fullerton, Placentia, Brea, La Habra, Yorba
Linda and Buena Park. The Fullerton Marriott Hotel is located at the
interchange of State Highway 57 and Nutwood Avenue, approximately 20 miles
north of the John Wayne International Airport and approximately eight miles
north of Disneyland. The Fullerton Marriott Hotel is designed principally to
accommodate the needs of travelers visiting the University and the many
corporate facilities located in the area and to cater to the needs of group
meetings, but the General Partner expects the Hotel to attract a significant
number of leisure travelers as well.
The Hotel offers 224 guest rooms, of which three are suites and 39 are
concierge-level rooms offering special amenities, decor and services. The
Hotel has approximately 4,617 square feet of meeting and banquet space
(including a 2,749 square foot ballroom), a restaurant which seats 68, a
lounge which seats 44, an outdoor pool and whirlpool, an exercise room, men
and women's locker rooms with saunas, a gift/sundry shop and parking for 286
cars. The Hotel is a six-story building located on the southeast corner of the
University campus. The restaurant and lounge are located on the first floor
just off the lobby and the meeting and banquet space is located primarily on
the first floor. The guest rooms are located on floors one though six. Under
the Ground Lease, the Partnership will be prohibited from making any
structural or exterior alterations to the Hotel which are inconsistent with
the development project plans without the written consent of the Ground Lessor
and the Trustees of California State University.
Ground Lease. The Partnership leases the land on which the Fullerton
Marriott Hotel is located. The initial term expires on 2019 with four
successive 10-year renewals at the Partnership's option. The lease provides
for percentage rental equal to 4% of gross room sales for each year.
Competition. Four hotels, the Embassy Suites Anaheim, the Holiday Inn-
Fullerton, Chase Suites and the Embassy Suites Fullerton, provide the primary
competition for the Fullerton Marriott Hotel. A comparison of these hotels and
the Fullerton Marriott Hotel is shown in the following table:
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
FULLERTON MARRIOTT HOTEL......................... 224 1989 4,617
Embassy Suites Anaheim........................... 224 1987 8,000
Holiday Inn Fullerton............................ 289 1973 9,200
Chase Suites..................................... 96 1995 2,700
Embassy Suites................................... 229 1987 9,000
</TABLE>
In addition to the properties described above, the Hotel faces secondary
competition from various other hotels. These other hotels, however, differ
from the Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location.
Detroit Marriott Livonia Hotel, Livonia, Michigan
The Detroit Marriott Hotel is located on four acres of fee-owned land within
Laurel Park Place, a 750,000 square foot upscale office and regional shopping
mall development in Livonia, Michigan, an affluent suburb of Detroit located
west of downtown in the rapidly expanding I-275 corridor. Laurel Park Place is
one of Livonia's three major shopping malls, containing over 60 specialty
shops and restaurants, a ten-screen cinema, over
MDAH Supp-25
<PAGE>
300,000 square feet of office space, the largest Jacobsen's department store
ever built and space for another anchor department store. The Hotel, which
opened in September 1989, is located approximately 15 miles west of downtown
Detroit and is designed principally to accommodate the needs of business
travelers visiting the automobile manufacturing and other corporate facilities
located in the area.
The Hotel contains 226 guest rooms, of which four are suites and 39 are
concierge-level rooms offering special amenities, decor and services. The
Hotel is a six story building and has approximately 5,000 square feet of
meeting and banquet space (including a ballroom of 3,168 square feet), a
restaurant with a seating capacity of 75, a lounge with a seating capacity of
50, an indoor pool and whirlpool, an exercise room, men and women's locker
rooms with saunas, a gift/sundry shop and parking for 280 cars. The Hotel is
adjacent to the Laurel Park Place mall and has an entranceway that opens into
the retail section of the mall.
Competition. Three hotels, the Novi Hilton, the Holiday Inn and the Embassy
Suites, provide the primary competition for the Livonia Hotel. A comparison of
these hotels and the Detroit Marriott Livonia Hotel is shown in the table
below:
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
DETROIT MARRIOTT
LIVONIA HOTEL.................................... 226 1989 3,965
Novi Hilton...................................... 237 1985 15,344
Holiday Inn...................................... 212 1988 11,000
Embassy Suites................................... 137 1989 7,000
</TABLE>
In addition to the properties described above, the faces secondary
competition from various other hotels. These other hotels, however, differ
from the Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. No new primary
competition is expected to open in the Livonia area in the near term.
Marriott Hotel at Research Triangle Park, Durham, North Carolina
The Marriott Hotel at Research Triangle Park is a full-service Marriott
hotel located in Durham, North Carolina, approximately 15 miles northwest of
Raleigh and approximately nine miles southeast of downtown Durham. The Hotel
is located on 10.3 acres of fee-owned land approximately 4.5 miles from the
Raleigh-Durham Airport and approximately one-half mile from Research Triangle
Park. The primary demand generator for the Hotel is Research Triangle Park, a
6,700 acre research park located in the triangle formed by Duke University,
the University of North Carolina and North Carolina State University. Research
Triangle Park contains facilities occupied by over 50 corporations,
institutions and government agencies, all of which are engaged in research,
development or science-oriented production. The Hotel is approximately 12.5
miles from Duke University, 12 miles from the University of North Carolina and
13 miles from North Carolina State University.
The Hotel, which opened in April 1988, is designed principally to meet the
needs of business travelers visiting Research Triangle Park, but it also
caters to the group meeting and leisure traveler segments of the hotel market.
The Hotel offers 224 guest rooms, of which four are suites or parlors and 50
are concierge-level rooms offering special amenities, decor and services. The
Hotel is a six story building and has approximately 4,000 square feet of
meeting space, including a 2,816 square foot ballroom. The Hotel also has a
restaurant which seats 75 persons, a lounge which seats 50 persons, an indoor
pool, a hydrotherapy pool, an exercise room, men and women's saunas, a
gift/sundry shop, a business center and parking for 351 cars.
Competition. Four hotels, the Sheraton Imperial Hotel, the Holiday Inn-
Research Triangle Park, Doubletree Suites and the Radisson Governors Inn,
provide the primary competition for the Research Triangle Park Hotel. A
comparison of these hotels and the Marriott Hotel at Research Triangle Park is
shown in the following table:
MDAH Supp-26
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
MARRIOTT HOTEL at
RESEARCH TRIANGLE PARK........................... 224 1988 4,000
Sheraton Imperial Hotel.......................... 340 1986 31,000
Holiday Inn-RTP.................................. 250 1988 4,850
Doubletree Suites................................ 203 1987 3,000
Radisson Governors Inn........................... 200 1972 7,000
</TABLE>
In addition to the properties described above, the Hotel faces secondary
competition from various other hotels. These other hotels, however, differ
from the Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. An Embassy Suites and
several mid-priced hotels opened in the Research Triangle Park area in 1997. A
three hotel and multiple restaurant complex, is under development and
scheduled to open mid-year 1998.
Southfield Marriott Hotel, Southfield, Michigan
The Southfield Marriott Hotel is located along I-696 and Northwestern
Highway, adjacent to the First Center Office Park on 5.0 acres of fee-owned
land in Southfield, Michigan, a suburb of Detroit located approximately 15
miles northwest of downtown Detroit, Michigan. Over one million square feet of
office space are located within one mile of the Southfield Hotel. Southfield
is a major commercial center, which according to the Southfield Chamber of
Commerce, serves as headquarters for three Fortune 500 companies and 62 other
Fortune 500 companies have offices or other facilities there.
The Southfield Marriott Hotel which opened in September 1989, contains 226
guest rooms, of which four are suites and 39 are concierge-level rooms
offering special amenities, decor and services. The Southfield Marriott Hotel
is a six story building containing approximately 4,000 square feet of meeting
and banquet space, including a 2,816 square foot ballroom. In addition, the
Hotel contains a restaurant with a seating capacity of 75, a lounge with
seating capacity of 50, an indoor pool and whirlpool, an exercise room, men
and women's locker rooms with saunas, a gift/sundry shop and parking for 280
cars.
Competition. Four hotels--the Radisson Plaza, the Doubletree, the Holiday
Inn and the Hilton--provide the primary competition for the Southfield
Marriott Hotel. A comparison of these hotels and the Southfield Marriott Hotel
is shown in the following table:
<TABLE>
<CAPTION>
APPROXIMATE
NO. OF YEAR MEETING SPACE
ROOMS OPENED (SQ. FT.)
------ ------ -------------
<S> <C> <C> <C>
SOUTHFIELD MARRIOTT HOTEL........................ 226 1989 4,000
Westin......................................... 385 1987 11,000
Doubletree..................................... 239 1987 8,000
Holiday Inn.................................... 417 1965 8,000
Hilton......................................... 197 1988 3,000
</TABLE>
In addition to the properties described above, the Hotel faces secondary
competition from various other hotels. These other hotels, however, differ
from the Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. No new primary
competition is expected to open in the Southfield market in the near term.
MDAH Supp-27
<PAGE>
AMENDMENTS TO MDAH'S PARTNERSHIP AGREEMENT
In order to allow the Hotels of MDAH to be leased to Crestline in connection
with the Merger and the REIT Conversion, MDAH's partnership agreement must be
amended. Currently, there is no provision in MDAH's partnership agreement to
allow MDAH's Hotels to be leased. Therefore, Section 5.02B of MDAH's
partnership agreement must be amended to add a new paragraph 5.02B(xiii) to
read as follows:
(xiii) lease or consent to the lease, directly or indirectly, in one
transaction or a series of related transactions, of any or all of the
Hotels.
Other Amendments. Amendments to certain terms and sections of MDAH's
partnership agreement would be made in order to (i) reduce to one the number
of appraisals of the fair market value of MDAH's Hotels that MDAH must provide
to the Limited Partners before the General Partner can cause MDAH to sell its
assets to the General Partner or an affiliate and (ii) make any other
amendments to MDAH's partnership agreement deemed necessary or advisable, in
the sole discretion of the General Partner, in connection with the
consummation of the Merger and the REIT Conversion. The form of amendment to
the MDAH partnership agreement is attached as an exhibit to the Registration
Statement of which this Supplement is a part.
VOTING PROCEDURES
MDAH Limited Partners will be asked to vote separately on the Merger and the
proposed amendments to the partnership agreement, but MDAH will not
participate in the Merger unless both proposals are approved. The consent of
MDAH Limited Partners holding more than 50% of the outstanding limited partner
interests is required for participation in the Merger and with respect to the
amendments to the partnership agreement. The General Partner may not vote its
limited partner interests in connection with the Merger or with respect to the
amendments to the partnership agreement.
At the time of voting, MDAH Limited Partners will be asked to indicate
whether they wish to retain OP Units or elect to exchange their OP Units for
Common Shares or a Note in connection with the Merger. The OP Units will be
delivered to the MDAH Limited Partners promptly after the twentieth trading
day following the Effective Date of the Merger (which would be promptly after
January 29, 1999 if the Effective Date of the Merger is December 30, 1998).
See "Determination of Exchange Value of MDAH and Allocation of OP Units."
An MDAH Limited Partner may mark the Consent Form to vote "FOR," "AGAINST"
or "ABSTAIN" participation in a Merger by MDAH and "FOR," "AGAINST" or
"ABSTAIN" with respect to the amendments to the partnership agreement. THE
FAILURE OF AN MDAH LIMITED PARTNER TO VOTE OR AN ABSTENTION WITH RESPECT
THERETO WILL HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER HAD VOTED HIS
PARTNERSHIP INTERESTS "AGAINST" THE MERGER AND "AGAINST" THE AMENDMENTS TO THE
PARTNERSHIP AGREEMENT. LIMITED PARTNERS WHO RETURN A SIGNED CONSENT FORM BUT
FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY MATTER (INCLUDING THE
MERGER AND THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT) WILL BE DEEMED TO HAVE
VOTED TO APPROVE SUCH MATTER. The voting procedures applicable to MDAH Limited
Partners are set forth in the Consent Solicitation under the heading "Voting
Procedures-- Required Vote and Other Conditions."
As of June 19, 1998, Palm Investors, LLC, owns 27.5 Partnership Units which
represents 6.6% of the total MDAH Partnership Units. No other person owned of
record, or to the Partnership's knowledge owned beneficially, more than 5% of
the total number of MDAH Partnership Units.
MDAH Supp-28
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," MDAH Limited Partners should read
carefully the following discussion of federal income tax consequences
applicable specifically to the MDAH Limited Partners. The information included
in this discussion is based upon various factual assumptions and information
which are believed by the Operating Partnership and the General Partner to be
reliable. However, some of these assumptions inevitably will not materialize,
and unanticipated events and circumstances will occur. Therefore, there likely
will be differences between the information provided herein, including the
numerical data and estimates, and actual results, and the variations may be
material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the MDAH Limited Partners resulting from the Mergers and the
REIT Conversion. The opinion letter is based upon certain assumptions and
certain 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 Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the Mergers and the REIT Conversion and of Host REIT, the
Operating Partnership and the Partnerships following the Mergers and the REIT
Conversion. In addition, prior to 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 to the Consent Solicitation) as to
the qualification and taxation of Host REIT as a REIT under the Code following
the REIT Conversion. The receipt of this opinion letter is a condition to the
REIT Conversion and each of the Mergers. See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the MDAH
Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to an MDAH Limited Partner (i) who does not elect to receive
Common Shares (the "Common Share Election") or a Note (the "Note Election") in
exchange for
MDAH Supp-29
<PAGE>
his OP Units in connection with the Merger; (ii) 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 Merger; (iii) who does not receive a cash
distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of any prepayment of the MDAH Mortgage
Debt) in connection with the Merger or the REIT Conversion in excess of his
aggregate adjusted basis in his MDAH Partnership Units at the time of the
Merger; (iv) who is not required to recognize gain by reason of the exercise
by another MDAH Limited Partner of his right to make the Common Share Election
or the Note Election; and (v) who does not have his "at risk" amount fall
below zero as a result of the Merger or the REIT Conversion. See "Federal
Income Tax Consequences--Summary of Tax Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) an MDAH
Limited Partner who acquired his MDAH Partnership Units in the original
offering of such Partnership Units and who has held such Partnership Units at
all times since would not be considered to receive, as a result of the Merger,
a distribution (or a deemed cash distribution resulting from relief from
liabilities) that exceeds his aggregate adjusted basis in his MDAH Partnership
Units at the time of the Merger, and would not have his "at risk" amount fall
below zero as a result of the Merger, even if all of the MDAH Mortgage Debt
were to be repaid in connection with the Merger or the REIT Conversion, and
(ii) none of the personal property owned by MDAH will need to be sold to a
Non-Controlled Subsidiary in connection with the REIT Conversion. See "Federal
Income Tax Consequences--Tax Consequences of the Mergers--Overview" in the
Consent Solicitation.
With respect to the effects of an MDAH Limited Partner's election to receive
Common Shares or a Note in exchange for his OP Units in connection with the
Merger, Hogan & Hartson is of the opinion that, although the matter is not
free from doubt, an MDAH Limited Partner who does not make the Common Share
Election or the Note Election should not be required to recognize gain by
reason of another MDAH Limited Partner's exercise of either of such rights.
With respect to the exercise of a Unit Redemption Right, Hogan & Hartson is of
the opinion that it is more likely than not that an MDAH Limited Partner's
exercise of his Unit Redemption Right more than one year after the date of
consummation of the Merger but less than two years after such date will not
cause the Merger itself to be a taxable transaction for the MDAH Limited
Partner (or the other MDAH Limited Partners). See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation. Opinions
of counsel, however, do not bind the IRS or the courts, and no assurances can
be provided that such opinions will not be challenged by the IRS or will be
sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
MDAH Partnership Units, an MDAH Limited Partner will receive no actual cash
distribution in connection with the Merger but would be deemed to receive a
cash distribution in connection with the Merger to the extent that his share
of Operating Partnership liabilities immediately after the Merger and the REIT
Conversion is less than his share of MDAH liabilities immediately prior to the
Merger. For example, any prepayment of the MDAH Mortgage Debt or debt
encumbering other Hotels may result in a deemed cash distribution to the MDAH
Limited Partners. See "Federal Income Tax Consequences--Tax Consequences of
the Mergers--Relief from Liabilities/Deemed Cash Distribution" in the Consent
Solicitation. Even though the MDAH Mortgage Debt and the debt encumbering the
other Hotels is not expected to be repaid or refinanced in connection with the
Mergers and the REIT Conversion (except as described in the Consent
Solicitation), an MDAH Limited Partner's share of indebtedness following the
Mergers and the REIT Conversion may nonetheless decrease in comparison to the
Limited Partner's estimated aggregate share of MDAH indebtedness as of
December 31, 1998 (calculated based on the assumption that the Mergers did not
occur) by reason of the manner in which the debt allocation rules work when
multiple assets with different levels of leverage are consolidated into a
single partnership.
An MDAH Limited Partner, however, would recognize taxable gain as a result
of any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his MDAH Partnership
Units immediately prior to the Merger. As noted above, the Operating
Partnership and the General Partner believe, based upon and subject to the
assumptions and other limitations described below, that
MDAH Supp-30
<PAGE>
an MDAH Limited Partner who acquired his MDAH Partnership Units in the
original offering of such Partnership Units and has held the Partnership Units
at all times since the offering will have an adjusted tax basis in excess of
the deemed cash distribution that might occur in connection with the Merger
and the REIT Conversion, even if all MDAH Mortgage Debt were to be repaid.
Therefore, such an MDAH Limited Partner should not recognize gain due to such
deemed cash distribution resulting from the relief from liabilities in
connection with the Merger and the REIT Conversion.
The adjusted tax basis of an MDAH Limited Partner who did not acquire his
MDAH Partnership Units in the original offering of such Partnership Units or
who has not held his MDAH Partnership Units at all times since such offering
could vary materially from that of an MDAH Limited Partner who did so. If an
MDAH Limited Partner has an adjusted tax basis in his MDAH Partnership Units
(per MDAH Partnership Unit) that is substantially less than the adjusted tax
basis of an MDAH Limited Partner who acquired his MDAH Partnership Units in
the original offering of such Partnership Units and has held such Partnership
Units at all times since, he could recognize gain due to any deemed cash
distribution resulting from the relief from liabilities in connection with the
Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the MDAH Mortgage Debt as part of the Merger and the REIT
Conversion or, except as described in the Consent Solicitation, any of the
nonrecourse liabilities encumbering the Hotels owned by the other Partnerships
(other than with the proceeds of indebtedness that would be considered
nonrecourse liabilities allocable to the Hotel being refinanced). The
Operating Partnership, however, will have to repay mortgage indebtedness
securing the Hotels owned by the Partnerships at the time such indebtedness
matures (including the MDAH Mortgage Debt which will mature on December 15,
1999). There can be no assurance that at the time of any such refinancing the
Operating Partnership will be able to secure nonrecourse mortgage indebtedness
secured only by those Hotels in an amount sufficient to avoid a deemed cash
distribution to the former Limited Partners in certain of those Partnerships,
including MDAH in connection with the refinancing of the MDAH Mortgage Debt
(although such a deemed distribution of cash may or may not result in the
recognition of taxable income or gain by the former MDAH Limited Partners).
Moreover, 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 debt as 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. 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 (including the MDAH Mortgage Debt), would be considered to be
"secured" by those Hotels for purposes of allocating the liabilities for tax
basis purposes (and thus would be allocable, at least in substantial part, to
the former Limited Partners in the Partnerships owning those Hotels, including
the MDAH Limited Partners), 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.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner may be required to include in gross income, or
"recapture," losses previously allowed to such partner with respect to his
investment in a partnership if the amount for which the partner is "at risk"
in relation to his investment in the partnership is less than zero at the
close of the taxable year.
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, the Hotel Partnerships or the Hotels contributed
MDAH Supp-31
<PAGE>
to the Operating Partnership by the Blackstone Entities at the time of or
following the Mergers and the REIT Conversion could, singularly or in
combination, cause an MDAH Limited Partner's amount at risk in relation to his
investment in MDAH (and, after the Mergers, in the Operating Partnership) to
be reduced below zero, resulting in an income inclusion to the Limited Partner
under Section 465(e) of the Code. Currently, a sufficient portion of the
current debt of MDAH constitutes "qualified nonrecourse financing" so that the
MDAH Limited Partners have positive at risk amounts. The Operating Partnership
and the General Partner believe, based upon and subject to the assumptions and
other limitations described below, that an MDAH Limited Partner who acquired
his MDAH Partnership Units in the original offering of such Partnership Units
and has held the Partnership Units at all times since will have a positive at
risk amount immediately following the Merger and the REIT Conversion, even if
all of the MDAH Mortgage Debt were to be repaid in connection with the Merger
and the REIT Conversion and the MDAH Limited Partners were to have no share of
any other "qualified nonrecourse financing" following the Merger and the REIT
Conversion.
It is possible, however, that a former MDAH Limited Partner's at risk amount
could decline in the future, either because of the allocation of losses from
the Operating Partnership to that former MDAH Limited Partner or because of
cash distributions by the Operating Partnership to that former MDAH Limited
Partner in excess of the taxable income allocable to him with respect to his
OP Units. In that event, it may be necessary for the former MDAH Limited
Partner to have a share of "qualified nonrecourse financing" from the
Operating Partnership in order to avoid recognizing income by reason of his at
risk amount falling below zero. Moreover, there can be no assurance that debt
incurred by the Operating Partnership in the future to refinance the MDAH
Mortgage Debt or outstanding mortgage debt of the other Hotel Partnerships or
the Hotels contributed by the Blackstone Entities will qualify as "qualified
nonrecourse financing." If, however, the Operating Partnership were to obtain
the requested ruling from the IRS and were to refinance existing mortgage
indebtedness of the Partnerships with the type of indebtedness described in
the ruling, such indebtedness should constitute "qualified nonrecourse
financing" for purposes of the "at risk" rules.
Impact of Assumption of MDAH Liabilities by the Operating Partnership. As
described in the Consent Solicitation, see "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Disguised Sale Regulations," an MDAH Limited
Partner will recognize gain to the extent he is treated as having sold all or
part of his MDAH Partnership Interest in a "disguised sale." 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.
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" also will not be treated as part of
a disguised sale. A "qualified liability" in connection with a transfer of
property to a partnership includes (i) any liability incurred more than two
years prior to the earlier of the transfer of the property or the date the
partner agrees in writing to the transfer, as long as the liability has
encumbered the transferred property throughout the two-year period; (ii) a
liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within the
two-year period prior to the earlier of the date the partner agrees in writing
to transfer the property or the date the partner transfers the property to a
partnership and that has encumbered the transferred property since it was
incurred; (iii) a liability that is traceable under the Treasury Regulations
to capital expenditures with respect to the property; and (iv) a liability
that was incurred in the ordinary course of the trade or business in which
property transferred to the partnership was used or held, but only if all the
assets related to that trade or business are transferred, other than assets
that are not material to a continuation of the trade or business. However, a
recourse liability is not a "qualified liability" unless the amount of the
liability does not exceed the fair market value of the transferred property
(less any other liabilities that are senior in priority and encumber such
property or any allocable liabilities described in (iii) or (iv), above) at
the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of MDAH fall into one of
the four categories of "qualified liabilities" described above and,
accordingly, that the mere assumption by the Operating Partnership of the
outstanding liabilities of MDAH will not give rise to a "disguised sale" by
any of the MDAH Limited Partners.
MDAH Supp-32
<PAGE>
Tax Treatment of MDAH Limited Partners Who Hold OP Units Following the Merger
Initial Basis in Units. In general, an MDAH Limited Partner will have an
initial tax basis in his OP Units received in the Merger with respect to his
MDAH Partnership Units equal to the basis in his MDAH Partnership Units at the
time of the Merger, reduced to reflect any deemed cash distributions resulting
from a reduction in his share of MDAH liabilities and increased to reflect his
share of other liabilities of the Operating Partnership and any gain required
to be recognized in connection with the Merger and the REIT Conversion. For a
discussion of the federal income tax consequences for an MDAH Limited Partner
from a reduction in basis that may result from the Merger and the REIT
Conversion, see "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Initial Tax Basis of OP
Units" in the Consent Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of MDAH
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all MDAH Limited Partners (but
excluding all of Host's interests) with respect to the MDAH Hotels will be
$29,805,942 upon the consummation of the Merger for those Limited Partners who
did not elect to reduce their basis in MDAH Partnership Units in lieu of
recognizing cancellation of indebtedness income in 1993 and $31,815,290 for
those Limited Partnerships who did elect to reduce their basis in MDAH
Partnership Units in lieu of recognizing cancellation of indebtedness income
in 1993.
If the Operating Partnership were to sell all of the MDAH Hotels, the former
partners of MDAH (including Host REIT with respect to the interest in MDAH
held indirectly by Host through the General Partner) would be specially
allocated by the Operating Partnership an aggregate amount of taxable gain
equal to the aggregate Book-Tax Difference with respect to the MDAH Hotels.
The share of such gain allocable to an MDAH Limited Partner who acquired his
MDAH Partnership Units in the original offering of such Partnership Units and
held such Partnership Units at all times since would be $74,925 per MDAH
Partnership Unit for a Limited Partner who acquired his Partnership Units for
cash ($80,077 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing cancellation of indebtedness income
in 1993), and $75,874 per MDAH Partnership Unit for a Limited Partner who
acquired his Partnership Units pursuant to the installment purchase plan
($81,026 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing cancellation of indebtedness income
in 1993). The share of such gain of an MDAH Limited Partner who did not
acquire his MDAH Partnership Units in the original offering of such
Partnership Units or who has not held his MDAH Partnership Units at all times
since such offering could vary materially from these amounts. If the Operating
Partnership were to sell an MDAH Hotel with a Book-Tax Difference, the
remaining Book-Tax Difference at the time the Hotel is sold would be required
to be allocated exclusively to the former MDAH Limited Partners and the
General Partner, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Operating Partnership (and would
likely be retained by the Operating Partnership, rather than distributed to
holders of OP Units and Common Shares of Host REIT). The MDAH Limited Partners
would not be entitled to any special distributions from the Operating
Partnership in connection with such a sale, and thus would not necessarily
receive cash distributions from the Operating Partnership sufficient to pay
such additional taxes. Although the Partnership Agreement does not impose any
restrictions upon the Operating Partnership preventing it from causing the
sale of any or all of the MDAH Hotels at any time following the Merger, the
Operating Partnership does not have current plans to pursue a sale of any of
the MDAH Hotels. See "Federal Income Tax Consequences--Tax Treatment of
Limited Partners Who Hold OP Units Following the Mergers--Sale of Individual
Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the MDAH Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
MDAH Supp-33
<PAGE>
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the MDAH Hotels will be required
to be allocated for federal income tax purposes in a manner such that the MDAH
Limited Partners are charged with the Book-Tax Difference associated with the
MDAH Hotels at the time of the consummation of the Merger. Consequently, an
MDAH Limited Partner will be allocated less depreciation with respect to the
MDAH Hotels than would be the case if the Mergers had not occurred and the
MDAH Limited Partner had continued to hold his MDAH Partnership Units. (On the
other hand, a former MDAH Limited Partner will be allocated depreciation with
respect to other Hotels acquired by the Operating Partnership in connection
with the Mergers and the REIT Conversion, including the Hotels owned by the
other Hotel Partnerships and the Hotels being contributed to the Operating
Partnership by Host and the Blackstone Entities in connection with the Mergers
and the REIT Conversion.) Second, the Mergers will cause the technical
termination under Section 708(b)(1)(B) of the Code of certain of the Hotel
Partnerships that participate in the Mergers. The Operating Partnership will
take certain steps to prevent such a termination of MDAH, but there can be no
assurance that the IRS will not determine that MDAH experienced a termination
as a result of the Merger. 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 real estate components of the Hotels held by the
other Hotel Partnerships that terminate will be depreciated over 39 years,
rather than over the remaining current lives of such Hotels (which range from
less than one year to 39 years). See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Effect
of Mergers on Depreciation" in the Consent Solicitation.
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to an MDAH Limited
Partner.
Special Depreciation Adjustment for Certain MDAH Limited
Partners. Currently, MDAH is reporting on an annual basis to the MDAH Limited
Partners each Limited Partner's proportionate share of depreciation from
MDAH's depreciable real property to assist those MDAH Limited Partners who
elected to exclude from their taxable income certain discharge of indebtedness
income realized by MDAH in taxable year 1993 (and thus to reduce their
adjusted basis in their MDAH Partnership Units). At this time, there is no
administrative guidance regarding the impact of the Merger upon the MDAH
Limited Partners who made the election to exclude such income. In the absence
of such guidance, it is impossible for the Operating Partnership and the
General Partner to predict the tax treatment of such MDAH Limited Partners
resulting from the Merger. More specifically, it is unclear how the MDAH
Limited Partners should account for the basis adjustments following the
Merger. One possible approach might be to continue to recognize as income each
year the depreciation that would have been foregone with respect to the MDAH
Hotels by reason of the basis adjustment if the Merger had not occurred. There
can be no assurance, however, that this method is the correct approach for
dealing with the basis adjustments following the Merger. It is important that
each MDAH Limited Partner who elected to adjust his basis in his Partnership
Units in lieu of recognizing cancellation of indebtedness income in 1993
consult with his personal tax advisors as to how to deal with these basis
adjustments following the Merger. If MDAH participates in the Merger, the
Operating Partnership will provide an annual report to the former MDAH Limited
Partners showing the proportionate share of depreciation from MDAH's
depreciable property that would have been reported to the MDAH Limited
Partners by MDAH if the Merger had not occurred.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules generally provide that
individuals, estates, trusts and certain closely held corporations and
MDAH Supp-34
<PAGE>
personal service corporations can only deduct losses from passive activities
(generally activities in which the taxpayer does not materially participate,
which would include the Operating Partnership for MDAH Limited Partners) to
the extent that such losses are not in excess of the taxpayer's income from
passive activities or investments. An MDAH Limited Partner would be able to
offset losses from other passive activities 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 Partner 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
limitation rules. In this event, any losses or deductions of the Operating
Partnership allocable to an MDAH Limited Partner after the Merger could not be
used to offset passive income from other passive activities. Similarly, losses
from other passive activities (including losses attributable to MDAH for
periods prior to the Merger) could not be applied to offset income of the
Operating Partnership allocated to an MDAH Limited Partner. An MDAH Limited
Partner, however, would be able to offset any passive losses from his
investment in MDAH (or other investments) against any gain recognized by the
MDAH Limited Partner as a result of the Merger. The Operating Partnership and
the General Partner estimate that, as of December 31, 1998, an MDAH Limited
Partner who acquired his MDAH Partnership Units in the original offering of
such Partnership Units, has held those Partnership Units continuously since
that time, and whose Partnership Units have been his only investment in a
passive activity would have a passive activity loss carryforward of
approximately $12,096, on a per Partnership Unit basis, for an MDAH Limited
Partner whose MDAH Partnership Units were acquired for cash (approximately
$28,656 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing cancellation of indebtedness income
in 1993), and approximately, $35,483, on a per Partnership Unit basis, for an
MDAH Limited Partner whose MDAH Partnership Units were acquired pursuant to
the installment purchase plan (approximately $40,635 if such Limited Partner
elected to reduce his basis in his MDAH Partnership Units in lieu of
recognizing cancellation of indebtedness income in 1993).
State and Local Taxes. MDAH Limited Partners holding OP Units will 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 and the REIT Conversion, the Operating
Partnership expects that it will own properties in 28 states across the United
States and in the District of Columbia. Currently, MDAH owns, directly and
indirectly, properties in only five states. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--State and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular MDAH
Limited Partner, the tax consequences of the Merger to such Limited Partner
could be substantially different from those reflected above. ACCORDINGLY, EACH
MDAH LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH MDAH LIMITED PARTNER'S PARTICULAR TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
First, with respect to an MDAH Limited Partner's basis in his MDAH
Partnership Units prior to the Merger, the Operating Partnership and the
General Partner assumed that an MDAH Limited Partner acquired his MDAH
Partnership Units in the original offering of such Partnership Units and has
held such Partnership Units at all times since the offering (the "Original
Limited Partner's Adjusted Basis"). In general, each MDAH Limited Partner had
an initial tax basis in his MDAH Partnership Units ("Initial Basis") equal to
his cash investment in MDAH (plus his proportionate share of MDAH's
nonrecourse liabilities at the time he acquired his MDAH Partnership Units).
An MDAH Limited Partner's Initial Basis generally has been increased by (a)
such Limited Partner's share of MDAH taxable income and (b) any increases in
his share of the liabilities of MDAH. Generally, such Limited Partner's
Initial Basis has been decreased (but not below zero) by (i) his share of MDAH
cash distributions, (ii) any decreases in his share of liabilities of MDAH,
(iii) his share of losses of MDAH and
MDAH Supp-35
<PAGE>
(iv) his share of nondeductible expenditures of MDAH that are not chargeable
to capital. If an MDAH Limited Partner has an adjusted tax basis in his MDAH
Partnership Units that is less than the tax basis of an MDAH Limited Partner
who acquired his MDAH Partnership Units in the original offering of such
Partnership Units and has held such Partnership Units at all times since, the
Merger might result in the receipt by the MDAH Limited Partner of a deemed
distribution of cash in excess of his adjusted tax basis in his MDAH
Partnership Units, which could result in the recognition of income or gain.
The General Partner has set forth on Appendix E to the Consent Solicitation
for MDAH (i) the Original Limited Partner's Adjusted Basis as of December 31,
1997 for each such MDAH Limited Partner, and (ii) an estimate of such MDAH
Limited Partner's 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 the Consent Solicitation). The General Partner also
has set forth on Appendix E to the Consent Solicitation for each MDAH Limited
Partner whose adjusted basis in his MDAH Partnership Interest is the same as
the Original Limited Partner's Adjusted Basis (i) the MDAH liabilities
allocable to such MDAH Limited Partner as of December 31, 1997, and (ii) an
estimate of the MDAH 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 the Consent Solicitation). Each of
these estimates is shown separately for those MDAH Limited Partners who
acquired their Partnership Units at the time of the original offering pursuant
to an installment purchase plan and reflects any adjustments attributable to
an MDAH Limited Partner's election to reduce his basis in his MDAH Partnership
Units in lieu of recognizing cancellation of indebtedness income in 1993.
The adjusted tax basis of an MDAH Limited Partner who did not acquire his
MDAH Partnership Units in the original offering of such Partnership Units
could vary materially from that of an MDAH Limited Partner who did so for
various reasons. If an MDAH Limited Partner has an adjusted tax basis in his
MDAH Partnership Units that is less than the Original Limited Partner's
Adjusted Tax Basis, the Merger might result in the receipt by the MDAH Limited
Partner of a deemed distribution of cash in excess of his adjusted tax basis
in his MDAH Partnership Units, which could result in the recognition of income
or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
MDAH Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares) and the
subsequent distribution of such OP Units (and possibly Notes and/or Common
Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the MDAH Limited Partners likely would be materially affected.
EACH MDAH LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH MDAH LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
THE TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER TO A PARTICULAR MDAH
LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED
ABOVE.
MDAH Supp-36
<PAGE>
Tax Treatment of MDAH Limited Partners Who Exercise Their Right to Make the
Common Share Election or the Note Election
An MDAH Limited Partner who exercises his right to make the Common Share
Election or the Note Election and receive Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e. the Exchange Value, currently estimated as $109,216 per MDAH Partnership
Unit) plus the portion of MDAH's liabilities allocable to the MDAH Limited
Partner for federal income tax purposes immediately prior to the disposition
of the OP Units (estimated as $155,313 per MDAH Partnership Unit as of
December 31, 1998). Generally, the amount realized in connection with such
disposition made pursuant to the Note Election will equal the sum of the
"issue price" of the Note (i.e., the face amount of the Note, currently
estimated as $98,343 per MDAH Partnership Unit) plus the portion of the MDAH
liabilities allocable to the MDAH Limited Partner for federal income tax
purposes immediately prior to the disposition of the OP Units (estimated as
$155,313 per MDAH Partnership Unit as of December 31, 1998). To the extent the
applicable amount realized exceeds the MDAH Limited Partner's adjusted basis
in his MDAH Partnership Units, the MDAH Limited Partner will recognize gain.
The Operating Partnership and the General Partner estimate (assuming the MDAH
Limited Partner acquired his MDAH Partnership Units at the time of the
original offering and has held such Partnership Units at all times since the
offering) that the amount of gain that would be recognized by an MDAH Limited
Partner who made the Common Share Election would be approximately $63,366 per
MDAH Partnership Unit, as of December 31, 1998, if such Partnership Unit were
acquired for cash ($68,518 if such Limited Partner elected to reduce his basis
in his MDAH Partnership Units in lieu of recognizing cancellation of debt
("COD") income in 1993) and $64,315 per MDAH Partnership Unit if such
Partnership Unit were purchased pursuant to an installment purchase plan
($69,467 if such Limited Partnership elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing COD income in 1993). The amount of
gain that would be recognized by an MDAH Partner who made the Note Election
would be approximately $52,493 per MDAH Partnership Unit, as of December 31,
1998, if such Partnership Unit were acquired for cash ($57,645 if such Limited
Partner elected to reduce his basis in his MDAH Partnership Units in lieu of
recognizing COD income in 1993), and $53,442 per MDAH Partnership Unit if such
Partnership Unit were acquired pursuant to an installment purchase plan
($58,594 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing COD income in 1993). For a discussion
of the federal income tax rates applicable to the net capital gain from the
sale of a capital asset, see "Federal Income Tax Consequences--Tax Treatment
of Limited Partners Who Hold OP Units Following the Merger--Disposition of OP
Units by Limited Partners" in the Consent Solicitation. In this regard, the
General Partner estimates that, as of December 31, 1998, if MDAH sold all of
its Hotels in a fully taxable transaction for a net amount, after payment of
liabilities, equal to the Exchange Value of MDAH (with respect to a Limited
Partner who makes the Common Share Election) or Liquidation Value of MDAH
(with respect to a Limited Partner who makes the Note Election), the
"unrecognized Section 1250 gain" per MDAH Partnership Unit would be $32,941 if
such Partnership Unit were acquired for cash ($31,333 if such Limited Partner
elected to reduce his basis in his MDAH Partnership Units in lieu of
recognizing COD income in 1993), and $32,941 per MDAH Partnership Unit if such
Partnership Unit were acquired pursuant to an installment purchase plan
($31,333 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing COD income in 1993) and the gain
subject to tax as ordinary income under Code Section 1245 per MDAH Partnership
Unit would be $6,352 if such Partnership Unit was acquired for cash ($6,236 if
such Limited Partner elected to reduce his basis in his MDAH Partnership Units
in lieu of recognizing COD income in 1993), and $6,352 per MDAH Partnership
Unit if such Partnership Unit was acquired pursuant to an installment purchase
plan ($6,236 if such Limited Partner elected to reduce his basis in his MDAH
Partnership Units in lieu of recognizing COD income in 1993). An MDAH Limited
Partner who makes the Common Share Election or the Note Election would be able
to treat any per Partnership Unit passive activity loss carryforward with
respect to the activities of MDAH, to the extent the sum of such losses
exceeds his passive activity income for 1998, as losses that are not from a
passive activity and, therefore, not subject to the passive activity loss
limitation rules. For purposes of determining the gain recognized by a Limited
Partner as a result of making the Common Share Election or the Note Election,
an Original Limited Partner's Adjusted
MDAH Supp-37
<PAGE>
Basis reflects such Limited Partner's share of the syndication costs incurred
by his Partnership at formation. An original MDAH Limited Partner's share of
syndication costs was $11,559 per MDAH Partnership Unit.
An MDAH Limited Partner who elects to receive Common Shares will not be
eligible to defer any gain under the "installment sale" rules, while an MDAH
Limited Partner who elects to receive a Note may be eligible to defer at least
a portion of that gain under those rules. Those rules, however, will not
permit the MDAH Limited Partner to defer all of the gain, and, to the extent
that the face amount of the Note (and any other installment obligations
received by the taxpayer during the year) outstanding at the end of the
taxable year in which the Merger occur exceeds $5,000,000, will require that
the MDAH Limited Partner who defers gain pay to the IRS interest on the
resulting tax that has been deferred. The MDAH Limited Partner will not be
eligible to defer gain recognized upon the receipt of the Note to the extent
that his share of MDAH liabilities at the time of the Merger exceeds his
adjusted tax basis in his MDAH Partnership Units immediately prior to the
Merger (that is, to the extent that he has a "negative capital account" for
tax purposes). In addition, the MDAH Limited Partner will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income
under Sections 1245 and 1250 of the Code. Lastly, if an MDAH Limited Partner
disposes of his Note, any gain that had been deferred would be recognized in
the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR MDAH LIMITED PARTNER COULD HAVE
A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER, AND THE SUBSEQUENT
OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT IS
ESSENTIAL THAT MDAH LIMITED PARTNERS CONSIDERING ELECTING TO RECEIVE COMMON
SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH MDAH LIMITED PARTNERS'
RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
Tax Consequences if MDAH Does Not Participate in the Merger
If MDAH does not participate in the Merger, the MDAH Limited Partners would
not have any tax consequences resulting from the Merger. The consequences of
continued ownership of MDAH Partnership Units will be the same as would have
resulted if the Merger had not been proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
MDAH Limited Partners in light of their particular circumstances. EACH MDAH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH MDAH LIMITED PARTNER'S PARTICULAR TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
MDAH Supp-38
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997, the unaudited condensed financial statements
for the First Two Quarters 1998 and the First Two Quarters 1997. The following
data should be read in conjunction with the audited financial statements and
the notes thereto, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $14,521 $12,504 $26,699 $22,374 $19,715 $17,020 $15,148
Operating profit.......... 9,225 7,868 15,433 12,125 10,039 5,658 3,335
Income (loss) before
extraordinary item(2).... 5,396 3,784 6,986 3,418 393 (1,982) 158
Net income (loss)......... 5,396 3,784 6,986 3,418 393 (1,982) 4,152
Distributions:
General partner.......... -- 15 14 19 18 15 --
Limited partners......... -- 1,368 1,368 1,894 1,855 1,419 --
------- ------- ------- ------- ------- ------- -------
Total..................... -- 1,383 1,382 1,913 1,873 1,434 --
Per Partnership Unit(1):
Net income (loss)......... 12,903 9,048 16,705 8,174 940 (4,739) 9,928
Distributions............. -- 3,453 3,453 4,575 4,481 3,428 --
Cash provided by operating
activities............... 7,579 6,180 15,597 11,041 6,990 5,957 --
Cash used in investing
activities............... (920) (1,549) (3,133) (2,752) (1,686) (1,694) (504)
Cash used in financing
activities............... (6,378) (6,236) (14,089) (8,537) (4,898) (4,027) (4,110)
Increase (decrease) in
cash and cash
equivalents.............. 281 (1,605) (1,625) (248) 406 236 (4,614)
Ratio of earnings to fixed
charges (unaudited)(3)... 2.29x 1.90x 1.78x 1.37x 1.04x -- 1.00x
Deficiency of earnings to
fixed charges
(unaudited)(3)........... -- -- -- -- -- 1,982 --
Total assets at book
value.................... 124,009 126,620 129,831 129,918 130,360 133,073 137,310
Cash and cash
equivalents.............. 1,418 1,157 1,137 2,762 3,010 2,604 2,368
Total debt(4)............. 125,822 138,181 137,643 144,374 147,052 150,350 152,489
Total liabilities......... 135,092 146,301 146,310 152,001 153,948 155,181 156,032
Partner's deficit:
Limited partners......... (11,023) (19,534) (16,365) (21,913) (23,403) (21,937) (18,586)
General partner.......... (60) (147) (114) (170) (185) (171) (136)
Book value per Partnership
Unit(1) (unaudited)...... (26,626) (47,184) (39,529) (52,930) (56,529) (52,988) (44,894)
Exchange value per
Partnership Unit(1)
(unaudited)................109,216. -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MDAH.
(2) In 1993, the Partnership recorded an extraordinary gain of $3,994,000 for
the forgiveness of accrued incentive management fees in conjunction with
the refinancing of certain debt.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. Interest
expense in 1993 includes a reduction of $2,884,000 related to rate swap
termination costs. The deficiency of earnings to fixed charges is largely
the result of depreciation and amortization of $6,548,000 in 1994.
(4) Total debt amounts includes amounts due to Host Marriott under Debt
Service guarantees, Notes Payable and Deferred Purchase Debt of
$15,629,000 as of June 19, 1998, June 20, 1997 and December 31, 1997 and
1996, $15,106,000 as of December 31, 1995 and $15,706,000 as of December
31, 1994 and 1993.
MDAH Supp-39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Hotel revenues represent house profit of the Hotels since substantially all
of the operating decisions related to the generation of house profit of the
Hotels rest with MHSI. House profit reflects Hotel operating results and
represents gross Hotel sales less property level expenses, excluding
depreciation and amortization, base management fees, property taxes, equipment
rent and certain other costs which are disclosed separately in the statement
of operations.
REVPAR, or revenue per available room, represents the combination of daily
room rate charged and the average daily occupancy achieved and is a commonly
used indicator of hotel performance (although it is not a GAAP, or generally
accepted accounting principles, measure of revenue). REVPAR does not include
food and beverage or other ancillary revenues generated by the properties.
First Two Quarters 1998 Compared to First Two Quarters 1997
Revenues. For the first two quarters 1998, revenues increased $2.0 million
or 16% to $14.5 million when compared to the same period in 1997. The increase
in revenues is primarily due to an 11% increase in REVPAR during the first two
quarters 1998, when compared to the same period in 1997. The increase in
REVPAR resulted primarily from a 12% increase in the combined average room
rate to approximately $115 in the first two quarters 1998 when compared to the
same period in 1997. This was offset by a decrease in the combined average
occupancy of one percentage point to 77% for the first two quarters 1998, when
compared to the same period in 1997.
Operating Costs and Expenses. Operating costs and expenses increased by
$660,000 or 14% to $5.3 million for the first two quarters 1998 when compared
to the same period in 1997. As a percentage of Hotel revenues, Hotel operating
costs and expenses remained at 37% for the first two quarters 1998 and 1997.
Operating Profit. As a result of the changes in revenues and expenses
discussed above, operating profit increased $1.4 million to $9.2 million for
the first two quarters 1998, as compared to the same period in 1997.
Interest Expense. For the first two quarters 1998, interest expense
decreased slightly by one percent when compared to the same period in 1997 due
to principal repayments of mortgage debt.
Net Income. For the first two quarters 1998, net income increased $1.6
million to $5.4 million as compared to the same period in 1997 due to the
items discussed above.
1997 Compared to 1996
Revenues. Revenues increased $4.3 million, or 19% in 1997 to $26.7 million
in 1997 as a result of strong growth in REVPAR of 13%. Hotel sales increased
$5.8 million, or 8%, to $75.3 million in 1997 also reflecting improvements in
REVPAR for the year. The increase in REVPAR was the result of an increase in
average room rates of 10% coupled with a 1.8 percentage point increase in
average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $1.0
million to $11.3 million in 1997 from $10.2 million in 1996. As a percentage
of Hotel revenues, Hotel operating costs and expenses represented 42% of
revenues for 1997 and 46% in 1996.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased $3.3 million to $15.4
million, or 58% of total revenues in 1997 from $12.1 million, or 54% of
revenues in 1996.
Interest Expense. Interest expense decreased $200,000 to $8.9 million in
1997 from $9.1 million in 1996.
MDAH Supp-40
<PAGE>
Net Income. Net income increased $3.6 million to $7.0 million in 1997, due
to the items discussed above.
1996 Compared to 1995
Revenues. Revenues increased $2.7 million, or 13%, to $22.4 million in 1996
from $19.7 million in 1995 as a result of strong growth in REVPAR of 6%. The
increase in REVPAR was primarily the result of a 8% increase in average room
rates offset by a 1.5 percentage point decrease in average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased
$600,000 to $10.2 million, or 46% of Hotel revenues, in 1996 from $9.7
million, or 49% of Hotel revenues, in 1995.
Operating Profit. Operating profit increased $2.1 million to $12.1 million,
or 54% of Hotel revenues, in 1996 from $10.0 million, or 51% of Hotel
revenues, in 1995 due to the changes in Hotel revenues and Hotel operating
costs discussed above.
Interest Expense. Interest expense decreased $1.0 million to $9.1 million in
1996. This decrease can be attributed to a decline in interest rates, as well
as a lower outstanding principal balance due to principal amortization on the
Mortgage Debt.
Net Income. Net income increased to $3.4 million in 1996, from $393,000 in
1995 due to the items discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. The General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to conduct its operations in the ordinary course of business.
The Partnership is required to maintain the Hotels in good condition. The
hotel management agreement provides for the establishment of a property
improvement fund for each Hotel. Contributions to the property improvement
fund are equal to a percentage of gross Hotel sales. Contributions to the fund
for the Fairview Park, Southfield, Livonia and Fullerton Hotels were 3% for
the years 1995 through 1999 and 4% for the year 2000 and thereafter. The
Dayton Hotel will contribute 4% annually. Annual contributions at the Research
Triangle Park Hotel were 3% through 1997 and will be 4% in 1998 and
thereafter. The Partnership believes that the contributions provide sufficient
reserve for the capital repair and replacement needs of the Hotels in 1998.
However, it is anticipated that shortfalls in the property improvement fund
will occur after 1998. The General Partner will work with the Manager to
resolve the expected shortfall.
For 1997, the Partnership paid a base management fee equal to 3% of gross
sales. No incentive management fees will be accrued by the Partnership or be
considered earned by the manager until the entire mortgage principal balance,
together with accrued interest, is paid in full. No incentive management fees
have been earned by or paid to MHSI since the inception of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel operations. Its
principal uses of cash are to pay debt service, fund the property improvement
fund and, until September 1996, make distributions to partners. Cash provided
by operations was $15.6 million, $11.0 million and $7.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively and $7.6 million and $6.2
million for the first two quarters of 1998 and 1997, respectively. The
increase is primarily due to improved Hotel operations.
Cash used in investing activities was $3.1 million, $2.8 million and $1.7
million in 1997, 1996 and 1995, respectively. The Partnership's cash investing
activities consist primarily of contributions to the property improvement fund
and capital expenditures for improvements to existing hotels. Contributions to
the property
MDAH Supp-41
<PAGE>
improvement fund amounted to $2,442,000, $2,558,000 and $2,104,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Cash used in
investing activities for the first two quarters of 1998 and 1997 was $920,000
and $1,549,000, respectively. Contributions to the property improvement fund
were $1.3 million and $1.1 million for the first two quarters of 1998 and
1997, respectively.
Cash used in financing activities was $14.1 million, $8.5 million and $4.9
million in 1997, 1996 and 1995, respectively. The Partnership's cash financing
activities consist primarily of capital distributions to partners and payments
of the mortgage debt. The increase in cash used in financing activities in
1997 is primarily due to the increased principal amortization in 1997 as
compared to 1996 and 1995 as required under the loan agreement. For the first
two quarters of 1998 and 1997, cash used in financing activities was $6.4
million and $6.2 million, respectively. The increase in cash used during the
first two quarters of 1998 compared to the comparable period in the prior year
is due to increased principal amortization in 1998. Principal payments on the
mortgage debt increased due to improved operations at the hotels.
INFLATION
For the three fiscal years ended December 31, 1997 and the first two
quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott, the parent company of the General
Partner, has invested in implementing new accounting systems which are Year
2000 compliant. Accordingly, the General Partner believes that future costs
associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHSI,
the manager of its properties to obtain financial information. The General
Partner believes that the manager has begun to implement changes to the
property specific software to ensure the software will function properly in
the Year 2000 and does not expect to incur significant costs related to these
modifications.
MDAH Supp-42
<PAGE>
FINANCIAL STATEMENTS
MDAH Supp-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.:
We have audited the accompanying balance sheet of Marriott Diversified
American Hotels, L.P. (a Delaware limited partnership) as of December 31, 1997
and 1996, and the related statements of operations, changes in partners'
deficit and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Diversified
American Hotels, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
April 8, 1998
MDAH Supp-44
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net.............................. $108,153 $111,278
Mortgage escrow.......................................... 11,624 5,710
Due from Marriott Hotel Services, Inc.................... 3,714 4,571
Debt service reserve fund................................ 3,000 3,000
Property improvement fund................................ 1,667 1,781
Deferred financing costs, net............................ 536 816
Cash and cash equivalents................................ 1,137 2,762
-------- --------
Total Assets........................................... $129,831 $129,918
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................ $122,014 $128,745
Debt service guarantee and related interest payable to
Host Marriott Corporation................................ 19,762 18,600
Note payable and related interest due to the General
Partner................................................. 2,804 2,615
Deferred purchase debt and related interest payable to
Host Marriott Corporation................................ 676 675
Accounts payable and accrued expenses.................... 1,054 1,366
-------- --------
Total Liabilities...................................... 146,310 152,001
-------- --------
Partners' Deficit
General Partner
Capital contribution, net of offering costs of $15...... 403 403
Capital distributions................................... (98) (84)
Cumulative net losses................................... (419) (489)
-------- --------
(114) (170)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $4,785.. 35,830 35,830
Investor notes receivable............................... (966) (966)
Capital distributions................................... (9,738) (8,370)
Cumulative net losses................................... (41,491) (48,407)
-------- --------
(16,365) (21,913)
-------- --------
Total Partners' Deficit................................ (16,479) (22,083)
-------- --------
$129,831 $129,918
======== ========
</TABLE>
See Notes to Financial Statements.
MDAH Supp-45
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
REVENUES
Hotel Revenues (Note 3).......................... $26,699 $22,374 $ 19,715
------- ------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................... 6,398 6,032 5,534
Base management fee due to Marriott
Hotel Services, Inc.............................. 2,260 2,086 1,944
Property taxes and other......................... 2,608 2,131 2,198
------- ------- --------
11,266 10,249 9,676
------- ------- --------
OPERATING PROFIT................................... 15,433 12,125 10,039
Interest expense................................. (8,944) (9,129) (10,093)
Interest income.................................. 497 422 447
------- ------- --------
NET INCOME......................................... $ 6,986 $ 3,418 $ 393
======= ======= ========
ALLOCATION OF NET INCOME
General Partner.................................. $ 70 $ 34 $ 4
Limited Partners................................. 6,916 3,384 389
------- ------- --------
$ 6,986 $ 3,418 $ 393
======= ======= ========
NET INCOME PER LIMITED PARTNER UNIT (414 UNITS).... $16,705 $ 8,174 $ 940
======= ======= ========
</TABLE>
See Notes to Financial Statements.
MDAH Supp-46
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $(171) $(21,937) $(22,108)
Capital distributions............................. (18) (1,855) (1,873)
Net income........................................ 4 389 393
----- -------- --------
Balance, December 31, 1995.......................... (185) (23,403) (23,588)
Capital distributions............................. (19) (1,894) (1,913)
Net income........................................ 34 3,384 3,418
----- -------- --------
Balance, December 31, 1996.......................... (170) (21,913) (22,083)
Capital distributions............................. (14) (1,368) (1,382)
Net income........................................ 70 6,916 6,986
----- -------- --------
Balance, December 31, 1997.......................... $(114) $(16,365) $(16,479)
===== ======== ========
</TABLE>
See Notes to Financial Statements.
MDAH Supp-47
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 6,986 $ 3,418 $ 393
Noncash items:
Depreciation and amortization.................... 6,398 6,032 5,534
Deferred interest................................ 1,414 1,375 1,414
Amortization of deferred financing costs as
interest expense................................ 280 279 278
Loss on retirement of property and equipment..... 15 12 73
Changes in operating accounts:
Due to/from Marriott Hotel Services, Inc......... 816 (730) (153)
Accounts payable and accrued expenses............ (312) 55 104
Due to/from Host Marriott Corporation............ -- 600 (653)
-------- ------- -------
Cash provided by operations.................... 15,597 11,041 6,990
-------- ------- -------
INVESTING ACTIVITIES
Additions to property and equipment.............. (3,288) (3,588) (2,895)
Change in property improvement fund, net......... 114 786 609
Return of working capital from Marriott Hotel
Services, Inc................................... 41 50 600
-------- ------- -------
Cash used in investing activities.............. (3,133) (2,752) (1,686)
-------- ------- -------
FINANCING ACTIVITIES
Payment of mortgage debt......................... (6,731) (3,201) (2,698)
Mortgage escrow.................................. (5,914) (3,341) (326)
Capital distributions to partners................ (1,382) (1,913) (1,873)
Repayment of deferred purchase debt due to Host
Marriott Corporation............................ (62) (82) --
Deferred financing costs......................... -- -- (1)
-------- ------- -------
Cash used in financing activities.............. (14,089) (8,537) (4,898)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (1,625) (248) 406
CASH AND CASH EQUIVALENTS at beginning of year..... 2,762 3,010 2,604
-------- ------- -------
CASH AND CASH EQUIVALENTS at end of year........... $ 1,137 $ 2,762 $ 3,010
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest:
Mortgage debt.................................... $ 7,373 $ 7,491 $ 8,362
Deferred purchase debt due to Host Marriott
Corporation..................................... 62 10 81
-------- ------- -------
$ 7,435 $ 7,501 $ 8,443
======== ======= =======
</TABLE>
See Notes to Financial Statements.
MDAH Supp-48
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Diversified American Hotels, L.P. (the "Partnership"), a Delaware
limited partnership, was formed on October 4, 1989 to acquire, own and operate
the following hotels (the "Hotels") which are managed as part of the Marriott
full-service hotel system by Marriott Hotel Services, Inc. ("MHSI"), a wholly-
owned subsidiary of Marriott International, Inc. ("Marriott International"):
(i) the 395-room Fairview Park Marriott in Virginia; (ii) the 399-room Dayton
Marriott in Ohio; (iii) the 224-room Marriott at Research Triangle Park in
North Carolina; (iv) the 226-room Detroit Marriott Southfield in Michigan; (v)
the 224-room Detroit Marriott Livonia in Michigan; and (vi) the 224-room
Fullerton Marriott in California. The sole general partner of the Partnership,
with a 1% interest, is Marriott MDAH One Corporation (the "General Partner"),
a wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott").
Partnership operations commenced on February 8, 1990 (the "Initial Closing
Date"). Between November 14, 1989 and the Initial Closing Date, 381 limited
partnership interests (the "Units") were sold pursuant to a private placement
offering. Between the Initial Closing Date and April 23, 1990 (the "Final
Closing Date"), the offering was completed with the sale of 33 additional
Units. The offering price per Unit was $100,000; $15,000 payable at
subscription with the balance due in three annual installments through June
20, 1992, or, alternatively, $88,396 in cash at closing as full payment of the
subscription price. As of the Final Closing Date, 348.5 Units were purchased
on the installment basis, and 65.5 Units were paid in full. The limited
partners' obligation to make the installment payments is evidenced by
promissory notes (the "Investor Notes") payable to the Partnership and secured
by the Units. The General Partner contributed $418,182 in cash on the Initial
Closing Date for its 1% general partnership interest.
On the Initial Closing Date, the Partnership executed a purchase agreement
with Host Marriott and certain of its affiliates to acquire the Hotels and the
Hotels' working capital and supplies for $157 million. Of the total purchase
price, $131.4 million was paid in cash from the proceeds of mortgage financing
and the initial installment on the sale of the Units with the remaining $25.6
million evidenced by a promissory note (the "Deferred Purchase Debt") payable
to Host Marriott.
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership allocations,
for Federal income tax purposes, and distributions are generally made as
follows:
a. Cash available for distribution will generally be distributed (i) first,
1% to the General Partner and 99% to the limited partners, until the partners
have received, with respect to such year, an amount equal to 10% of
contributed capital, as defined; (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of
cumulative distributions of net refinancing and/or sales proceeds ("Capital
Receipts") previously distributed:
(1) 1% to the General Partner and 99% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(2) 10% to the General Partner and 90% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(3) 20% to the General Partner and 80% to the limited partners, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
MDAH Supp-49
<PAGE>
b. Capital Receipts not retained by the Partnership will be distributed (i)
first, 1% to the General Partner and 99% to the limited partners until the
partners have received an amount equal to the unpaid portion of a cumulative
15% return on Net Invested Capital, defined as the excess of capital
contributions over cumulative distributions of Capital Receipts, plus
contributed capital, as defined; and (ii) thereafter, 20% to the General
Partner and 80% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their
capital account balances as adjusted to take into account gain or loss
resulting from such sale.
d. Net profits will generally be allocated to the partners in proportion to
the distributions of cash available for distribution.
e. Net losses will be allocated 75% to the General Partner and 25% to the
limited partners.
f. Deductions for interest on the Deferred Purchase Debt (see Note 6), which
cumulatively will not exceed $11,604 per Unit, will be allocated to those
limited partners owning the Units purchased on the installment basis.
g. Gain recognized by the Partnership will be allocated as follows: (i)
first, to all partners whose capital accounts have negative balances until
such balances are brought to zero; (ii) next, to all partners in amounts
necessary to bring their respective capital account balances to an amount
equal to their Net Invested Capital plus a cumulative 15% return on Net
Invested Capital; and (iii) thereafter, 20% to the General Partner and 80% to
the limited partners.
h. Losses will generally be allocated as follows: (i) first, to all partners
whose capital accounts have positive balances until such balances have been
eliminated; and (ii) thereafter, 100% to the General Partner.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year.
Restricted Cash
In connection with the June 30, 1993 refinancing of the mortgage debt, a
debt service reserve in the amount of $3.0 million was required to be held by
the lender. In addition, the loan agreement requires that to the extent that
there was cash available after payment of principal and interest on Note A and
interest on Note B, then such remaining cash was split 50% to the Partnership
and 50% to the Mortgage Escrow. The Mortgage Escrow was applied annually 50%
to the payment of additional principal on Note A, and 50% to the principal on
Note B, until the Partnership received a cumulative amount equal to
$7,352,000. The Partnership reached this cumulative amount in September 1996.
Thereafter, 100% of remaining cash flow is reserved in the Mortgage Escrow and
applied annually 25% to Note A and 75% to Note B. At December 31, 1997, the
balance of the Mortgage Escrow was $11.6 million. This amount will be applied
toward principal amortization in 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
MDAH Supp-50
<PAGE>
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.
Revenues and Expenses
Revenues represent house profit of the Hotels since the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit from the Hotels to MHSI. House profit reflects
Hotel operating results which flow to the Partnership as property owner and
represents gross Hotel sales less property-level expenses, excluding
depreciation and amortization, base management fees, real and personal
property taxes, ground and equipment rent, insurance and certain other costs,
which are disclosed in the statement of operations (see Note 3).
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $48.6 million, $47.2 million and $45.1 million for the year
ended December 31, 1997, 1996, and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Land improvements........................................... 40 years
Buildings and improvements.................................. 40 years
Leasehold improvements...................................... 40 years
Furniture and equipment..................................... 4 to 10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If the property
is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the Mortgage Debt and are being amortized over the term thereof.
Organization costs incurred in the formation of the Partnership were amortized
on a straight-line basis over five years. Organization costs were fully
amortized and removed from the Partnership's accounts as of December 31, 1995.
As of December 31, 1997 and 1996, accumulated amortization of deferred
financing costs totaled $1,995,000 and $1,715,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
less than three months at date of purchase to be cash equivalents.
MDAH Supp-51
<PAGE>
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income (loss) for financial
reporting purposes and the net income (loss) reported in the Partnership's tax
return. These differences are primarily due to the use, for income tax
purposes, of accelerated depreciation methods and shorter depreciable lives of
the assets. As a result of these differences, the excess of the tax basis in
net Partnership liabilities over the net liabilities reported in the
accompanying financial statements is $3,462,000 and $5,650,000 as of December
31, 1997 and 1996, respectively.
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on the financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 3. HOTEL REVENUES
Hotel Revenues consist of Hotel operating results for the three years ended
December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms.............................................. $48,427 $43,621 $40,201
Food and beverage.................................. 22,900 22,058 20,716
Other.............................................. 3,994 3,864 3,876
------- ------- -------
75,321 69,543 64,793
------- ------- -------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................. 12,063 11,333 10,638
Food and beverage................................. 17,464 17,172 16,439
Other hotel operating expenses..................... 19,095 18,664 18,001
------- ------- -------
48,622 47,169 45,078
------- ------- -------
HOTEL REVENUES....................................... $26,699 $22,374 $19,715
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 14,265 $ 14,265
Buildings and improvements............................... 95,477 94,368
Leasehold improvements................................... 15,717 15,173
Furniture and equipment.................................. 29,255 27,832
-------- --------
154,714 151,638
Less accumulated depreciation............................ (46,561) (40,360)
-------- --------
$108,153 $111,278
======== ========
</TABLE>
MDAH Supp-52
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Mortgage debt.............. $122,014 $113,300 $128,745 $117,231
Debt service guarantee and
related interest payable
to Host Marriott
Corporation............... 19,762 17,600 18,600 7,800
Note payable and related
interest due to the
General Partner........... 2,804 800 2,615 743
Deferred purchase debt and
related interest payable
to Host Marriott
Corporation............... 676 450 675 384
</TABLE>
The estimated fair value of mortgage debt obligations is based on the
expected future debt service payments discounted at estimated market rates.
Notes and other payables due to Host Marriott and affiliates are valued based
on the expected future payments from operating cash flow discounted at risk-
adjusted rates.
NOTE 6. DEBT
Mortgage Debt
On June 30, 1993, the General Partner completed a restructuring of the
Partnership's first mortgage (the "Mortgage Debt"). Pursuant to the terms of
the restructuring, the original Mortgage Debt of $128 million was divided into
two notes, Note A with a principal balance of $85 million and Note B with a
principal balance of $43 million, which mature on December 15, 1999. In
addition, interest rate swap termination costs of $9.3 million relating to the
original Mortgage Debt were established as Note C with a maturity date of
December 15, 2010. The Partnership paid $12.3 million to the lender which was
applied as follows: $7.6 million to the interest due through closing, $3.0
million to fund a new debt service reserve (the "Reserve"), $1.0 million as a
loan extension fee, and $.7 million to principal. The 1992 purchase price
adjustment made by Host Marriott to the Partnership was applied toward the
scheduled interest payment and to partially fund the Reserve. The remainder of
the payment was funded by a $2.0 million loan from the General Partner and
from the Partnership's operating cash account funds. The loan from the General
Partner bears interest at the prime lending rate plus 1% and matures on June
30, 2008.
Interest on Note A accrues at a floating rate, as elected by the
Partnership, equal to one percentage point over either one, two, three or six-
month London interbank offered rate ("LIBOR"). Principal amortization of
$600,000 was required in 1993 escalating annually to $1 million in 1998. To
the extent that operating profit is not sufficient to fund required Note A
interest and principal, then necessary funds will be drawn from the Reserve.
The weighted-average effective interest rate on Note A was 6.7% and 6.2% for
1997 and 1996, respectively. Interest on Note B accrues at LIBOR. To the
extent that operating profit is not sufficient to fund Note B interest in any
fiscal year, then Note B interest is limited to cash available after payment
of Note A principal and interest. Unpaid Note B interest for any fiscal year
is forgiven. The weighted-average effective interest rate on Note B was 5.7%
and 5.5% for 1997 and 1996, respectively. In addition, to the extent that
there was cash available after payment of principal and interest on Note A and
interest on Note B, then such remaining cash was split 50% to the Partnership
and 50% to the Mortgage Escrow. The Mortgage Escrow was applied annually 50%
to the payment of additional principal on Note A, and 50% to the principal on
Note B, until the Partnership received a cumulative amount equal to
$7,352,000. The Partnership reached this cumulative amount in September 1996.
Thereafter, 100% of remaining cash flow is applied 25% to Note A and 75% to
Note B. At December 31, 1997, the balance of the Mortgage Escrow was $11.6
million and is included in the accompanying balance sheet. Note C bears no
interest and has no required principal amortization prior to its maturity.
MDAH Supp-53
<PAGE>
The Mortgage Debt is secured by first mortgages on each of the Hotels, the
Partnership's interest in the Fullerton Hotel ground lease, the land on which
the remaining Hotels are located, the Partnership's interest in the Fairview
Park Hotel parking garage lease, a security interest in all of the personal
property associated with each Hotel, a security interest in the Partnership's
rights under the management and purchase agreement and a security interest in
the Partnership's deposit accounts.
Scheduled amortization and maturities of the Mortgage Debt at December 31,
1997 are (in thousands):
<TABLE>
<S> <C>
1998................................ $ 1,000
1999................................ 111,678
2000................................ 0
2001................................ 0
2002................................ 0
Thereafter.......................... 9,336
--------
$122,014
========
</TABLE>
As of December 31, 1993, Host Marriott's debt service guarantee on the
original Mortgage Debt totaling $13 million was fully exhausted. Advances
under the guarantee bear interest at the prime lending rate plus one-half
percentage point. For 1997 and 1996, the weighted-average effective interest
rate was 8.9% and 8.8%, respectively. These advances will be repaid from
available cash flow after payments of ground rent, Mortgage Debt Service,
Partnership administrative expenses in excess of Partnership interest income
and retention by the Partnership of an amount equal to 10% of the partners'
contributed capital, as defined. During 1997, no amounts were repaid to Host
Marriott pursuant to the debt service guarantees. In addition, the General
Partner has provided a foreclosure guarantee to the lender in the amount of
$25 million. Pursuant to the terms of the foreclosure guarantee, amounts would
be payable only upon a foreclosure on the Hotels and only to the extent that
the gross proceeds from the foreclosure sale were less than $25 million.
Deferred Purchase Debt
The Deferred Purchase Debt bears interest at 10% per annum and was due July
1, 1992. The note was required to be repaid from, and is secured by, the
proceeds of the Investor Notes which were due through June 20, 1992. Investor
Notes outstanding as of December 31, 1997 represent payments due from
defaulters and related interest payable under such notes. As a result of the
Partnership's failure to collect the Investor Notes in full, and subsequent
failure to repay the Deferred Purchase Debt in full, the Partnership is
currently in default under the terms of the Deferred Purchase Debt agreements.
Host Marriott has the right to perfect a security interest in the Units
securing the defaulted Investor Notes. However, Host Marriott agreed not to
foreclose on its interest in the Units prior to the earlier of the sale of the
Hotels or January 1, 1998. As of April 8, 1998, Host Marriott has not
exercised its option to foreclose on its interest in the Units. Total accrued
interest on the Deferred Purchase Debt at December 31, 1997 and 1996, was
$47,000 and $42,000, respectively.
NOTE 7. MANAGEMENT AGREEMENT
The Partnership entered into a hotel management agreement on the Initial
Closing Date with Marriott International to manage the Hotels for an initial
20-year term expiring December 31, 2009. During 1996, Marriott International
assigned all of its interest in the hotel management agreement to MHSI, a
wholly-owned subsidiary of Marriott International. MHSI has the option to
renew the hotel management agreement on one or more of the Hotels for up to
five successive 10-year terms (four successive 10-year terms for the Fullerton
Hotel). MHSI earns a base management fee equal to 3% of gross sales.
In connection with the 1993 loan restructuring, the hotel management
agreement was modified. During the restructured loan term, no incentive
management fees will be accrued by the Partnership or be considered earned by
the manager until the entire mortgage principal balance, together with accrued
interest, is paid in full. No incentive management fees have been paid to MHSI
since the inception of the Partnership.
MDAH Supp-54
<PAGE>
Pursuant to the terms of the hotel management agreement, MHSI 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 full-service 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 full-service
hotels managed, owned or leased by Marriott International or its subsidiaries.
In addition, the Hotels also participate in Marriott's Rewards Program ("MRP")
which succeeded the Marriott Honored Guest Awards Program. The cost of this
program is charged to all hotels in the Marriott full-service hotel system
based upon the MRP sales at each hotel. The total amount of Chain Services and
MRP costs charged to the Partnership was $3,874,000 for 1997, $3,497,000 for
1996, $3,316,000 for 1995.
Pursuant to the terms of the hotel management agreement, the Partnership is
required to provide MHSI with working capital and supplies to meet the
operating needs of the Hotels. MHSI converts cash advanced by the Partnership
into other forms of working capital consisting primarily of operating cash,
inventories, and trade receivables and payables which are maintained and
controlled by MHSI. Upon termination of the hotel management agreement, the
working capital and supplies will be returned to the Partnership. The
individual components of working capital and supplies controlled by MHSI are
not reflected in the Partnership's balance sheet. A total of $4,500,000 was
advanced to MHSI for working capital and supplies of which $600,000 was
returned to the Partnership during 1995, $50,000 was returned during 1996 and
$41,000 was returned in 1997 leaving a balance of $3,900,000, $3,850,000 and
$3,809,000 as of December 31, 1995, 1996 and 1997, respectively, which is
included in Due from Marriott Hotel Services, Inc. in the accompanying balance
sheet. The supplies advanced to MHSI are recorded at their estimated net
realizable value. At December 31, 1997 and 1996, accumulated amortization
related to the revaluation of these supplies totaled $473,000.
The hotel management agreement provides for the establishment of a property
improvement fund for each Hotel. Contributions to the property improvement
fund are equal to a percentage of gross Hotel sales. Contributions to the fund
for the Fairview Park, Southfield, Livonia and Fullerton Hotels were 3% for
the years 1995 through 1999 and 4% for the year 2000 and thereafter. The
Dayton Hotel contributes 4% annually. Annual contributions at the Research
Triangle Park Hotel were 3% through 1997 and will be 4% in 1998 and
thereafter. Aggregate contributions to the property improvement fund amounted
to $2,442,000, $2,258,000 and $2,104,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
NOTE 8. GROUND LEASES
The Partnership leases the land on which the Fullerton Hotel is located. The
initial term expires in 2019 with four successive 10-year renewals at the
Partnership's option. The lease provides for percentage rental equal to 4% of
gross room sales for each year. Prior to October 1995, the lease provided for
percentage rent equal to 1% of gross room sales. Ground rent expense incurred
for this lease for the years ended December 31, 1997, 1996 and 1995 was
$199,000, $185,000 and $99,000, respectively. The Partnership also leases the
land on which the Fairview Park Hotel parking garage is located. The lease
expires in 2085 and requires a nominal rental of $1 per year.
MDAH Supp-55
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES.................................................. $ 14,521 $ 12,504
--------- ---------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................... 2,779 2,381
Base management fees.................................... 1,144 1,042
Property taxes and other................................ 1,373 1,213
--------- ---------
5,296 4,636
--------- ---------
OPERATING PROFIT.......................................... 9,225 7,868
Interest expense........................................ (4,139) (4,175)
Interest income......................................... 310 91
--------- ---------
NET INCOME................................................ $ 5,396 $ 3,784
========= =========
ALLOCATION OF NET INCOME
General Partner......................................... $ 54 $ 38
Limited Partners........................................ 5,342 3,746
--------- ---------
$ 5,396 $ 3,784
========= =========
NET INCOME PER LIMITED PARTNER UNIT (414 Units)........... $ 12,903 $ 9,048
========= =========
</TABLE>
See Notes To Condensed Financial Statements.
MDAH Supp-56
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $106,447 $108,153
Mortgage escrow....................................... 6,182 11,624
Due from Marriott Hotel Services, Inc................. 4,590 3,714
Debt service reserve fund............................. 3,000 3,000
Property improvement fund............................. 1,964 1,667
Deferred financing costs, net......................... 408 536
Cash and cash equivalents............................. 1,418 1,137
-------- --------
Total Assets...................................... $124,009 $129,831
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $110,193 $122,014
Debt service guarantee and related interest payable
to Host Marriott Corporation....................... 20,307 19,762
Note payable and related interest due to the General
Partner............................................ 2,893 2,804
Deferred purchase debt and related interest payable
to Host Marriott Corporation....................... 706 676
Accounts payable and accrued expenses............... 993 1,054
-------- --------
Total Liabilities................................. 135,092 146,310
-------- --------
PARTNERS' DEFICIT
General Partner..................................... (60) (114)
Limited Partners.................................... (11,023) (16,365)
-------- --------
Total Partners' Deficit........................... (11,083) (16,479)
-------- --------
$124,009 $129,831
======== ========
</TABLE>
See Notes To Condensed Financial Statements.
MDAH Supp-57
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 5,396 $ 3,784
Noncash items........................................... 3,570 3,108
Change in operating accounts............................ (1,387) (712)
--------- --------
Cash provided by operating activities................. 7,579 6,180
--------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net................ (1,073) (2,135)
Change in property improvement fund..................... (297) 586
Return of working capital from Marriott Hotel Services,
Inc.................................................... 450 --
--------- --------
Cash used in investing activities..................... (920) (1,549)
--------- --------
FINANCING ACTIVITIES
Payment of mortgage debt................................ (11,821) (6,192)
Change in mortgage escrow............................... 5,443 1,339
Capital distributions to partners....................... -- (1,383)
--------- --------
Cash used in financing activities..................... (6,378) (6,236)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 281 (1,605)
CASH AND CASH EQUIVALENTS at beginning of period.......... 1,137 2,762
--------- --------
CASH AND CASH EQUIVALENTS at end of period................ $ 1,418 $ 1,157
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............... $ 3,357 $ 3,532
========= ========
</TABLE>
See Notes To Condensed Financial Statements.
MDAH Supp-58
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Marriott Diversified American Hotels, L.P. (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto for the fiscal year ended December 31, 1997
included in the Partnership's Form 10.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998, the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
99% to the Limited Partners and 1% to the General Partner. Significant
differences exist between the net income for financial reporting purposes and
the net income reported for Federal income tax purposes. These differences are
due primarily to the use, for income tax purposes, of accelerated depreciation
methods and shorter depreciable lives of the assets.
2. The Partnership owns and operates the Marriott Research Triangle Park,
Southfield Marriott, Detroit Marriott at Livonia, Fullerton Marriott, Fairview
Park Marriott and Dayton Marriott. The sole general partner of the
Partnership, with a 1% interest, is Marriott MDAH One Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The remaining 99% interest in the Partnership is owned by
the limited partners.
3. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
4. Hotel revenues represent house profit of the Partnership's Hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, Inc. (the "Manager"). House profit reflects hotel operating results
which flow to the Partnership as property owner and represents gross hotel
sales less property-level expenses, excluding depreciation and amortization,
base management fees, property taxes, ground rent, insurance and other costs,
which are disclosed separately in the condensed statement of operations.
MDAH Supp-59
<PAGE>
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Partnership revenues generated by the Hotels for 1998 and 1997 consist of
(in thousands):
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
-------------------
1998 1997
--------- ---------
<S> <C> <C>
HOTEL SALES
Rooms................................................. $ 25,093 $ 22,710
Food and beverage..................................... 11,054 10,216
Other................................................. 1,981 1,819
--------- ---------
38,128 34,745
--------- ---------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................... 5,995 5,573
Food and beverage................................... 8,423 7,938
Other hotel operating expenses........................ 9,189 8,730
--------- ---------
23,607 22,241
--------- ---------
REVENUES................................................ $ 14,521 $ 12,504
========= =========
</TABLE>
5. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $23.6 million and $22.2 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
6. On April 17, 1998, Host Marriott, the General Partner of the Partnership,
announced that its Board of Directors has authorized the company to reorganize
its business operations to qualify as a real estate investment trust ("REIT")
to become effective as of January 1, 1999. As part of the REIT conversion,
Host Marriott expects to form a new operating partnership (the "Operating
Partnership") and limited partners in certain Host Marriott full-service hotel
partnerships and joint ventures, including the Marriott Diversified American
Hotels, L.P., are expected to be given an opportunity to receive, on a tax-
deferred basis, Operating Partnership units in the Operating Partnership in
exchange for their current limited partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one
year from the closing of the merger. In connection with the REIT conversion,
on June 2, 1998, the Operating Partnership filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission. Limited partners will be
able to vote on this Partnership's participation in the merger later this year
through a consent solicitation.
MDAH Supp-60
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR PROSPECTUS/CONSENT SOLICITATION
STATEMENT DATED SEPTEMBER , 1998 FORMARRIOTT HOTEL PROPERTIES LIMITED
PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Marriott Hotel Properties Limited
Partnership, a Delaware limited partnership ("MHP" or the "Partnership"), and
up to seven other limited partnerships (the "Partnerships") that own full-
service hotels in which Host or its subsidiaries are general partners. As more
fully described in the Consent Solicitation, limited partners of those
Partnerships that participate in the Mergers will receive OP Units 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," and with respect
to MHP, the "MHP Limited Partners"). MHP Limited Partners may elect to
exchange such OP Units received in connection with the Merger for either
common shares of beneficial interest, par value $.01 per share, of Host REIT
("Common Shares") or unsecured 6.56% Callable Notes due December 15, 2005
issued by the Operating Partnership ("Notes"). Beginning one year after the
Mergers, Limited Partners who retain OP Units will have the right to redeem
their OP Units at any time and receive, at the election of Host REIT, either
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").
The number of OP Units to be allocated to MHP will be based upon (i) its
Exchange Value (as defined herein) and (ii) the price attributed to an OP Unit
following the Merger, determined as described herein (but in no event will it
be less than $ or greater than $ per OP Unit) and will not be known at
the time of voting. The number of Common Shares an MHP Limited Partner may
elect to receive in connection with the Merger will equal the number of OP
Units received. The principal amount of Notes that MHP Limited Partners may
elect to receive in connection with the Merger will be based upon MHP's Note
Election Amount (as defined herein). See "Determination of Exchange Value of
MHP and Allocation of OP Units." The Estimated Exchange Value and Note
Election Amount set forth herein may increase or decrease as a result of
various adjustments, and will be finally calculated shortly before the
Effective Date. Pursuant to the Merger, MHP Limited Partners have an estimated
Exchange Value of $141,074 per Partnership Unit and a Note Election Amount of
$124,261 per Partnership Unit.
RISK FACTORS
In deciding whether to approve the Merger, MHP Limited Partners should
consider certain risks and other factors. The General Partner believes that
MHP Limited Partners should particularly consider the following, which should
be read in conjunction with the information in the Consent Solicitation under
"Risk Factors" and "Federal Income Tax Consequences:"
. 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-
MHP Supp-1
<PAGE>
level income taxes expected as a result of the REIT Conversion. To the
extent that such 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. The benefits to
Host of the REIT Conversion will be materially reduced if one or more of
the Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the MHP Limited Partners or the other
Limited Partners. Although the General Partner has obtained the Appraisals
and the Fairness Opinion from AAA, AAA has not negotiated with General
Partner 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 MHP Limited Partners or the other 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 Partner involve the following conflicts of
interest because of the relationships among Host, Host REIT, the Operating
Partnership, the General Partners and Crestline. The General Partners, which
are all subsidiaries of Host (except for PHLP, in which Host is the General
Partner), must assess whether a Merger is fair and equitable to and is
advisable for the Limited Partners of its Partnership. This assessment
involves considerations that are different from those relevant to the
determination of whether the Mergers and the REIT Conversion are advisable
for Host and its shareholders. The considerations relevant to that
determination include Host's belief that the REIT Conversion is advisable
for its shareholders, the benefits of the REIT Conversion to Host will be
greater if the Partnerships, including MHP, participate and Host REIT will
benefit if the value of the OP Units received by the Limited Partners of MHP
is less than the value of their Partnership Interests. In addition, the
terms of the Leases of the Hotels, including MHP's Hotels, will be
determined by Host and 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, including the MHP Limited Partners.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the MHP Limited
Partners must vote on the Merger, including (i) the exact Exchange Value for
MHP (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 Merger, which will be
determined by reference to the post-Merger trading prices of Host REIT's
Common Shares (but will not be less than $ or greater than $ ) and which,
together with the Exchange Value, will determine the number of OP Units the
MHP Limited Partners 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 Note Election Amount is determined. For these reasons,
the MHP Limited Partners cannot know at the time they vote on the Merger
these important aspects of the Merger.
. Combined REVPAR for the Operating Partnership's Hotels is Significantly Less
than the REVPAR for MHP's Hotels. The Operating Partnership's pro forma
REVPAR for the First Two Quarters 1998 is significantly lower than the
REVPAR attributable to MHP's Hotels for the same period.
. Cash Distributions; Reduced Cash Distributions for MHP Limited Partners.
There is no assurance as to the amount or source of funds for the estimated
initial cash distributions of the Operating Partnership and Host REIT. In
addition, the expected initial annual cash distributions from the Operating
Partnership or Host REIT to the MHP Limited Partners per Partnership Unit ($
) will be less than the estimated cash distributions of MHP per Partnership
Unit ($9,500) made in 1998 (excluding amounts, if any, to be distributed in
1999 from third and fourth quarter operations).
. Sale of Personal Property May Result in Gain to MHP Limited Partners. In
order to facilitate the participation of MHP in the Merger without adversely
affecting Host REIT's qualification as a REIT, the Operating Partnership
will require, as part of the Merger, that MHP sell a portion of the personal
property associated with its Hotels to a Non-Controlled Subsidiary. This
sale will be a taxable transaction and may result in an allocation of a
relatively modest amount of ordinary recapture income by MHP to MHP Limited
Partners. This income, if any, will be allocated to each MHP Limited Partner
in the same proportion and to the same extent that such MHP Limited Partner
was allocated any deductions directly QS
MHP Supp-2
<PAGE>
or indirectly giving rise to the treatment of such income as recapture
income. An MHP Limited Partner who receives such an allocation of
recapture income would not be entitled to any special distribution from
MHP in connection with the sale of personal property.
. Exchange Value May Not Equal Fair Market Value of MHP's Hotels. Each MHP
Limited Partner who retains OP Units or elects to exchange OP Units for
Common Shares will receive consideration with a deemed value equal to
the Exchange Value of such MHP Limited Partner's Partnership Interest.
The determination of the Exchange Value of MHP involves numerous
estimates and assumptions. There is no assurance that the Exchange Value
of MHP will equal the fair market value of the Hotels and other assets
contributed by MHP. See "Determination of Exchange Value of MHP and
Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from Limited Partners who elect
to exchange OP Units for Common Shares in connection with the Mergers)
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. Host REIT's OP Units, in the
aggregate, 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 to Host REIT and the Partnerships 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 Value of MHP
and Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the MHP Limited Partners' Partnership Interests. The price of an
OP Unit for purposes of the Merger 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 Merger (but in no event will it be
less than $ or greater than $ per OP Unit). This pricing mechanism
has the effect of fixing the minimum and maximum number of OP Units to be
issued in the Mergers. It is likely that, either initially or 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 Merger. This could result in the
MHP Limited Partners receiving OP Units or Common Shares with an actual
value that is less than either the price of the OP Units for purposes of
the Merger or the fair market value of their Partnership Interests.
. Inability of MHP Limited Partners Who Retain OP Units to Redeem OP Units
for One Year. MHP Limited Partners who retain OP Units received in the
Merger will be unable to redeem such OP Units for one year following the
Merger. Until then, MHP Limited Partners will bear the risk of
illiquidity and of not being able to sell in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection with
the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of MHP. Each MHP
Limited Partner may elect to receive in exchange for OP Units received
in the Merger an unsecured, seven-year Note of the Operating Partnership
with a principal amount equal to the Note Election Amount of his
Partnership Interest, which is based upon numerous assumptions and
estimates. The deemed value of the OP Units to be received by the MHP
Limited Partners will exceed the principal amount of the corresponding
Notes (because the Exchange Value will be higher than the Note Election
Amount) and there is no assurance
MHP Supp-3
<PAGE>
that the Note an MHP Limited Partner receives will have a value equal to
either (i) the fair market value of the MHP Limited Partner's share of the
Hotels and other assets owned by MHP or (ii) the principal amount of the
Note. 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 ranks equally with such Notes.
. Fundamental Change in Nature of Investment; Potential Underperformance. The
Merger and the REIT Conversion involve a fundamental change in the nature of
an MHP Limited Partner's investment from holding an interest in MHP, which
was structured as a tax shelter and tax credit investment, is a finite-life
entity, has a fixed portfolio of two Hotels and distributes the cash flow
from the operation of such Hotels to the MHP Limited Partners, to holding a
direct or indirect interest in the Operating Partnership, an ongoing real
estate company with a portfolio of approximately 125 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 and
(iii) is able to reinvest proceeds from sales or refinancings of existing
Hotels in other hotels. In addition, each MHP Limited Partner's investment
will change from one that allows an MHP Limited Partner to receive a return
of capital in the form of distributions from any net proceeds of a sale or
refinancing of MHP's assets to an investment in which an MHP Limited Partner
who retains OP Units likely would realize a return of capital only through
the exercise of the Unit Redemption Right. Those MHP Limited Partners who
elect to receive Common Shares in connection with the Merger will hold an
equity interest in a publicly traded REIT that (i) provides immediate
liquidity, (ii) intends to make distributions to its shareholders in an
amount equal to at least 95% of its taxable income, (iii) allows
shareholders to influence management by participation in the election of
Trustees and (iv) realizes substantial corporate tax savings as long as
certain requirements are met. An MHP Limited Partner's share of the
liquidation proceeds, if any, from the sale of MHP's Hotels could be higher
than the amount realized upon exercise of the Unit Redemption Right (or
payments on any Note received by an MHP Limited Partner who elects to
exchange his OP Units for such Note in connection with the Merger). An
investment in the Operating Partnership or Host REIT may not outperform an
investment in MHP. 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 Merger, MHP Limited Partners who retain OP Units or elect to receive
Common Shares in connection with the Merger will own interests in a much
larger enterprise with a broader range of assets than MHP individually. A
material adverse change affecting the Operating Partnership's assets will
affect all Limited Partners, including MHP Limited Partners, regardless of
whether a particular Limited Partner previously was an investor in such
affected assets. MHP owns discrete assets and the Mergers and the REIT
Conversion will significantly diversify the types and geographic locations
of the Hotels in which the MHP 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 the Hotels previously
owned by MHP.
. MHP Limited Partners Have No Cash Appraisal Rights. MHP Limited Partners who
vote against the Merger have no right to receive cash based upon an
appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating Partnership. The
MHP Limited Partners cannot know at the time they vote on the 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
MHP Supp-4
<PAGE>
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, 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 Mergers and the
REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term
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. The Operating Partnership
also will not own any of the voting stock of the Non-Controlled
Subsidiaries, which may own up to 20% by value of the Operating
Partnership's assets. 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 and the Non-Controlled
Subsidiaries to operate and manage their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into
new leases with such lessees, which could result in a failure of Host
REIT to qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of MHP Limited Partners Binds All MHP Limited
Partners. For MHP, approval by a majority of the Partnership Interests
of MHP that are eligible to be voted is required to approve the Merger
and the related amendments to the partnership agreement, as described in
"Voting Procedures--Required Vote and Other Conditions." Such approval
will cause MHP to participate in the Merger and will bind all MHP
Limited Partners, including MHP Limited Partners who voted against or
abstained from voting with respect to the Merger and the related
amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain
such consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares. The agreement of
merger specifically provides that in the event the outside partner in
Marriott's Harbor Beach Resort does not consent to the REIT Conversion,
the Operating Partnership will have the right to terminate such merger
agreement.
. 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
MHP Supp-5
<PAGE>
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 an approximately 53% 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 $15.00). 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 (including Host REIT), (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 Prior 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 (including Host
REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural and
other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder Rights
Plan to replace the existing stockholder rights plan of Host. Host REIT
also will become subject to the business combination and control share
provisions under Maryland law. See "Description of Shares of Beneficial
Interest" and "Certain Provisions of Maryland Law and Host REIT's
Declaration of Trust and Bylaws."
. 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 substantial
corporate-level income taxes in 1999 and could cause the Blackstone
Acquisition not to be consummated.
MHP Supp-6
<PAGE>
. Effect of Subsequent Events upon Recognition of Gain. Even though the
MHP Limited Partners (other than those who elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger)
generally are not expected to recognize significant taxable gain at the
time of the Merger, there are a variety of events and transactions
(including the sale of one or more of the Hotels currently owned by MHP
or the reduction of indebtedness securing one or more of the Hotels)
that could cause an MHP 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 Treatment of MHP Limited
Partners Who Hold OP Units Following the Merger." Certain Hotels
(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. The partnership agreement of the
Operating Partnership, which is substantially in the form attached to
the Consent Solicitation 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."
. Election to Exchange OP Units for Common Shares. An MHP Limited Partner
who elects to receive Common Shares in exchange for his OP Units in
connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. If he has a "negative capital
account" with respect to his Partnership Interest, he will recognize
"phantom income" (i.e., the income recognized would exceed the value of
the Common Shares by the amount of his negative capital account). Such
MHP Limited Partner may not defer recognition of any part of the gain
realized from the exchange under the "installment sale" rules. See
"Federal Income Tax Consequences--Tax Treatment of MHP Limited Partners
Who Exercise Their Right to Make the Common Share Election or the Note
Election." An MHP Limited Partner who elects to receive Common Shares in
connection with the Merger will not receive the Crestline common stock
or any other portion of the E&P distribution made before they become
shareholders of Host REIT.
. Election to Exchange OP Units for Notes. An MHP Limited Partner who
elects to receive a Note in exchange for his OP Units in connection with
the Merger will be treated as having made a taxable disposition of his
OP Units. An MHP Limited Partner who receives a Note may be eligible to
defer a majority of that gain under the "installment sale" rules until
principal on the Note is paid. An MHP Limited Partner with a "negative
capital account" with respect to his Partnership Interest who elects to
receive a Note in connection with the Merger will recognize "phantom
income" in that amount in any event. See "Federal Income Tax
Consequences--Tax Treatment of MHP Limited Partners Who Exercise Their
Right to Make the Common Share Election or 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 and Common Shares, would cause Host
REIT to fail to qualify as a REIT for tax purposes and would cause the
holders of OP
MHP Supp-7
<PAGE>
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 the Lease was determined to lack economic substance),
Host REIT could fail to qualify as a REIT and the Operating Partnership
might be treated as a corporation for federal income tax purposes, which
would have a material adverse impact on the MHP Limited Partners and the
value of the OP Units and the Common Shares.
. 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.
. MHP Limited Partners Need to Consult with Their Own Tax Advisors.
Because the specific tax attributes of an MHP Limited Partner and the
facts regarding such MHP Limited Partner's interest in MHP could have a
material impact on the tax consequences to such MHP Limited Partner of
the Merger (including the decision whether to elect to receive Common
Shares or Notes in exchange for OP Units in connection with the Merger)
and the subsequent ownership and disposition of OP Units, Common Shares
or Notes, it is essential that each MHP Limited Partner consult with his
own tax advisors regarding the application of federal, foreign and state
and local tax laws to such MHP 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 MHP Limited Partners would not be able to use suspended
passive activity losses from other investments (including from MHP) to
offset income from the Operating Partnership. It is estimated that each
MHP Limited Partner 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 REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT is
required to do in order to qualify as a REIT. Shares of Host REIT and Crestline
will become separately traded securities and the companies will operate
independently. There will be no overlap between the boards of Host REIT and
Crestline. There will be a substantial overlap of shareholders of the two
companies initially, but this overlap will diverge over time.
HOTEL PROPERTIES MANAGEMENT, INC. (THE "GENERAL PARTNER"), THE GENERAL
PARTNER OF MHP AND A WHOLLY OWNED SUBSIDIARY OF HOST MARRIOTT, BELIEVES THAT
THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS FAIR TO THE MHP LIMITED
PARTNERS AND RECOMMENDS THAT ALL MHP LIMITED PARTNERS VOTE FOR THE MERGER AND
FOR THE RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
MHP Supp-8
<PAGE>
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for MHP
Limited Partners the specific risks, benefits, effects and fairness of the
Merger to them and to provide other information specific to MHP. Supplements
have also been prepared for each of the other Partnerships. This Supplement,
together with the supplements of the other Partnerships (collectively, the
"Supplements"), are part of the Consent Solicitation. Upon receipt of a
written request by a Limited Partner or his representative so designated in
writing, the General Partner will send a copy of any Supplement without
charge. All requests for a copy of a Supplement 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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Notes being issued (the "Full
Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the MHP Limited Partners for the reasons set forth below.
This information is qualified by and should be read in conjunction with the
information in the Consent Solicitation under "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of MHP, are expected to include:
. Exchange Value of MHP. MHP Limited Partners who retain OP Units or elect
to receive Common Shares in connection with the Merger will receive OP
Units or Common Shares with an estimated Exchange Value equal to
$141,074 per Partnership Unit.
. Liquidity. The REIT Conversion will offer MHP Limited Partners liquidity
with respect to their investment in MHP because MHP Limited Partners can
receive freely tradeable Host REIT Common Shares by electing to exchange
OP Units for Common Shares in connection with the Merger or by
exercising their Unit Redemption Right, at any time after one year
following the Effective Date. Host has approximately 204 million shares
of common stock outstanding and is expected to have a total common
equity market capitalization of approximately $3.6 billion after giving
effect to the earnings and profits distribution (based on a price of
$15.00 per Host REIT Common Share). The exercise of the election to
exchange OP Units for Common Shares in connection with the Merger or the
exercise of the Unit Redemption Right, however, generally would result
in recognition of taxable income or gain at the time of exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that while these distributions will be lower than the estimated
cash distributions of MHP to be made in 1998, the ability to receive
distributions quarterly and in regular amounts would be enhanced. For
additional information regarding historical and estimated future
distributions for MHP and the other Partnerships, see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the
Mergers."
. Substantial Tax Deferral for MHP Limited Partners not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that MHP Limited Partners who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 MHP or a sale or other disposition of its
assets in a taxable transaction (although MHP Limited Partners may
recognize a relatively modest amount of ordinary income as the result of
required sales of personal property to a Non-Controlled Subsidiary in
order to facilitate Host REIT's qualification as a REIT). Thereafter,
such MHP Limited
MHP Supp-9
<PAGE>
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, one or both of the Hotels currently owned, directly or indirectly,
by MHP 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 Merger are highly complex and, with respect to each MHP Limited
Partner, are dependent upon many variables, including the particular
circumstances of such MHP Limited Partner. See "Federal Income Tax
Consequences--Tax Consequences of the Merger." Each MHP Limited Partner is
urged to consult with his own tax advisors as to the consequences of the
Merger in light of his particular circumstances.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of MHP Limited Partners upon the performance of, and the
exposure to the risks associated with, MHP's Hotels 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 generally will have a lower leverage to value
ratio, approximately 53%, than MHP currently, which has a leverage ratio
of 56% (calculated as a percentage of Exchange Value), resulting in
interest and debt service savings and greater financial stability.
. Growth Potential. The General Partner believes that the MHP Limited
Partners, by directly or indirectly owning interests in a publicly
traded real estate company focused primarily on a more diverse and
growing luxury and upscale 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 MHP
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 MHP 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 MHP individually.
. Public Market Valuation of Assets. The Partnership Units of MHP
currently trade at a discount to the net asset value of MHP's assets.
The General Partner believes that by exchanging interests in MHP, which
is a non-traded, finite-life limited partnership with a fixed portfolio
for interests in an ongoing 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 MHP
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 (although not currently), has resulted at
various times 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 they will not trade at a discount to private market
values. Also, the benefit of Host's conversion to a REIT will not be
shared by the MHP 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.
If MHP does not participate in the Merger, its business will continue in its
current manner; however, the Operating Partnership may elect to contribute
some or all of its interest in MHP to a Non-Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF MHP AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of MHP 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 Partner has 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
MHP Supp-10
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MHP 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
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 MHP represents AAA's
estimate, as adopted by the General Partner, of the discounted present
value, as of January 1, 1998, of the MHP limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender reserves), assuming that MHP 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 MHP represents the
General Partner's estimate of the net proceeds to MHP limited partners
resulting from the assumed sale as of December 31, 1998 of the Hotel(s)
of MHP, 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 MHP 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 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 MHP after the Initial Valuation Date to perform
deferred maintenance that were previously subtracted in determining the
estimated Adjusted Appraised Value of MHP and (iii) to reflect any changes in
MHP's other reserves, such as for litigation expenses and indemnification
costs and any revised estimates of transfer and recordation taxes and fees.
The General Partner does not believe that any adjustments to the Exchange
Value will be material; however, if any such changes are deemed to be
material, the General Partner will provide the MHP Limited Partners with an
opportunity to change their vote on the Merger.
APPRAISED VALUE. MHP's 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 MHP's Hotels. Each
appraisal (an "Appraisal") was reviewed by a Member Appraisal Institute
("MAI") appraiser and certified by such MAI appraiser as having been prepared
in accordance with the requirements of the Standards of Professional Practice
of the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
The 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 MHP's Hotels 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 MHP Hotel:
MHP Supp-11
<PAGE>
. 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 each
Hotel, budget information, a survey with the manager of each 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 NOI 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. 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
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 effective capitalization
rates for 1997 and Projected Year's Adjusted NOI resulting from AAA's
estimated Appraised Values of MHP's Hotels.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISALS OF MHP'S HOTELS
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
8.8-9.4% 9.8-10.2%
</TABLE>
APPRAISED VALUES OF MHP'S HOTELS
<TABLE>
<CAPTION>
APPRAISED
HOTEL VALUE
----- --------------
(IN THOUSANDS)
<S> <C>
Orlando World Center.......... $292,500
Harbor Beach Resort........... 61,761(1)
--------
Total....................... $354,261
========
</TABLE>
- --------
(1) Excludes 49.5% of the $122,300,000 Appraised Value of the Harbor Beach
Resort.
. 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.
MHP Supp-12
<PAGE>
In the case of Harbor Beach Resort, which is only partly owned by MHP, the
Appraised Value of such Hotel was reduced proportionately to the amount
attributable to MHP'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 MHP's Hotels, one property was encumbered by a ground lease as of
the date of the Appraisals. Accordingly, the Appraised Value of such Hotel has
been decreased to reflect the encumbrance of the ground lease and the interest
of the ground lessor in the operating cash flows of such Hotel. The Appraised
Value assumes 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 MHP's Hotels (but estimated deferred
maintenance costs have been deducted in estimating the Adjusted Appraised
Value of each of MHP's Hotels). The Appraised Value did not take into account
the costs that might be incurred in selling the Hotels (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 MHP's Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of MHP.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 MHP's Hotels will vary from the
results projected in the Appraisals and the variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of MHP was determined
by totaling the Appraised Values of all of the Hotels of MHP and then making
various adjustments to the aggregate Appraised Value, as described below.
. Lender Reserves. MHP's 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 MHP will be made
on the Final Valuation Date and any changes in such reserves will be
reflected in the Adjusted Appraised Value.)
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Merger) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of MHP has been subtracted from
the Appraised Value.
. Mark to Market Adjustment. 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 MHP has been increased 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 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.
. Deferred Maintenance Costs. The estimated cost to complete any deferred
maintenance items identified in the Engineering Study relating to MHP's
Hotels 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
MHP Supp-13
<PAGE>
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.
The following table sets forth the adjustments to the aggregate Appraised
Values made to derive the estimated Adjusted Appraised Value for MHP as of the
Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR MHP AS OF THE INITIAL
VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................ $ 354,261(1)
Lender reserves................ 1,800
Mortgage debt.................. (192,137)(1)
Other debt..................... (722)
Mark to market adjustment...... 2,878
Deferred maintenance costs..... (245)
---------
Estimated Adjusted Appraised
Value......................... $ 165,835
=========
General Partner's share(2)..... $ 25,803
Limited partner share of Host
subsidiaries(3)............... $ 67,670
Total limited partners'
share(4)...................... $ 140,032
Per Partnership Unit........... $ 140,032
</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 amounts attributable to limited partner interest of a General
Partner.
(3) Includes limited partner interests held by a General Partner.
(4) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of MHP using the
following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for MHP 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 (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 MHP's 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
MHP's FF&E reserve was adequate and understood that Host determined that
there were no reserve shortfalls or surpluses.
. Refinancing Assumptions. For MHP's debt that matures during the 12-year
period, AAA assumed that the debt would be refinanced with an interest
rate of 7.50% per annum and a 30-year amortization schedule, with
estimated refinancing costs of 2% of the refinanced amount being paid
from operating cash flow.
. Determination of Residual Value. To estimate the residual value of the
MHP limited partners' interest in MHP at the end of the 12-year period,
AAA assumed that the MHP Hotels 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% 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 MHP's limited partners under the partnership and
debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to MHP's limited
partners from operations and estimated net sales proceeds 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.
MHP Supp-14
<PAGE>
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for MHP are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE AND ESTIMATED CONTINUATION VALUE FOR MHP
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNTS AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED GENERAL LIMITED ESTIMATED
CONTINUATION PARTNER'S PARTNER'S CONTINUATION VALUE
GROWTH RATE EXIT CAPITALIZATION RATE (2009) VALUE SHARE(2) SHARE (PER PARTNERSHIP UNIT)
----------- ------------------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
3.65%(1) 9.9% $153,031 $11,957 $141,074 $141,074
</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).
(2) Includes amounts attributable to interests of other Host subsidiaries.
LIQUIDATION VALUE. The Liquidation Value of MHP was estimated by the General
Partner and represents the estimated value of MHP if all of its assets were
sold as of December 31, 1998. Such value was based upon the Adjusted Appraised
Value of MHP, 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; and (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 MHP's Hotels was subtracted from the Appraised Value
for estimated liquidation costs, expenses and contingencies. The General
Partner then determined the portion of the estimated Liquidation Value that
would be distributable to MHP's limited partners under the terms of the
partnership agreement and other contractual arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of MHP as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF MHP AS OF THE INITIAL VALUATION
DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value...... $ 354,261(1)
Lender reserves...... 1,800
Mortgage debt........ (192,137)(1)
Other debt........... (722)
Prepayment/defeasance
costs............... (10,794)
Deferred maintenance
costs............... (245)
Sales costs.......... (8,857)
---------
Estimated Liquidation
Value............... $ 143,306
=========
General Partner's
share(2)............ $ 19,045
Limited partner share
of Host
subsidiaries(3)..... $ 60,049
Total limited
partners' share(4).. $ 124,261
Per Partnership
Unit................ $ 124,261
</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 amounts attributable to limited partner interest of the General
Partner.
(3) Includes limited partner interests held by the General Partner.
(4) Includes limited partner share of Host subsidiaries.
MHP Supp-15
<PAGE>
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of MHP (based upon the greatest of its estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value), the estimated minimum number of OP Units to be received (based upon
the maximum price of $ per OP Unit) and the estimated Note Election Amount
for MHP, all on a per Partnership Unit basis, as of the Initial Valuation
Date. The number of Common Shares received in exchange for OP Units in
connection with the Merger will equal the number of OP Units. The estimated
Note Election Amount for MHP (which will be received by MHP Limited Partners
electing to receive Notes in exchange for OP Units in connection with the
Merger) is equal to the Liquidation Value for MHP. 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 MHP 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 (but will not be less than
$ or greater than $ per OP Unit) and will not be finally determined until
such time.
ESTIMATED EXCHANGE VALUE, NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT OF MHP
PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ADJUSTED ESTIMATED ESTIMATED ESTIMATED MINIMUM NOTE
APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF ELECTION
VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
--------- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$140,032 $141,074 $124,261 $141,074 9,405 $124,261
</TABLE>
- --------
(1) A Partnership Unit in MHP 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units to Pay Exchange Value to MHP Limited Partners. Each MHP
Limited Partner will receive OP Units with a deemed value equal to the
Exchange Value of such MHP 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 will it be less than $ or
greater than $ per OP Unit). Thus, if the 20-day average trading price is
less than $ , the price per OP Unit in the Merger would be $ , and if such
average trading price is greater than $ , the price per OP Unit in the Merger
would be $ . The OP Units will be delivered to the MHP Limited Partners
promptly after the twentieth trading day following the Effective Date of the
Merger (which would be promptly after January 29, 1999 if the Effective Date
of the Merger is December 30, 1998).
MHP Limited Partners at the Effective Date of the Merger who retain OP Units
will receive cash distributions from MHP for all of 1998 and, if the Merger
does not occur in 1998, any portion of 1999 prior to the Merger for which
period they do not receive a cash distribution from the Operating Partnership.
Cash distributions will be made by MHP in accordance with its partnership
agreement on or before June 1, 1999 in respect of 1998 operations and, if the
Merger does not occur prior to January 1, 1999, within 90 days after the
Effective Date of the Merger in respect of any 1999 operations. MHP Limited
Partners at the Effective Date of the Mergers who elect to receive Common
Shares in exchange for OP Units in connection with the Merger will participate
in the same distributions from MHP as MHP Limited Partners who retain OP Units
and will receive distributions from Host REIT with respect to periods after
the Effective Date of the Mergers, which distributions are expected to equal
the amount distributed with respect to the OP Units. Limited Partners at the
Effective Date of the Merger who elect to receive Notes in exchange for OP
Units in connection with the Merger will participate in the same distributions
from MHP 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 Merger because they will be entitled to receive interest
on their Notes for such periods.
MHP Supp-16
<PAGE>
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTERESTS IN MHP AND ALLOCATION OF OP UNITS TO THE GENERAL PARTNER AND OTHER
HOST SUBSIDIARIES
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the MHP Limited Partners' Partnership
Interests, by the same methodologies set forth above and giving effect to the
applicable distribution preferences in the MHP partnership agreement. The
number of OP Units that will be received by the General Partner will be equal
to the value of its interest in MHP divided by the same price per OP Unit used
to determine the number of OP Units to be received by the MHP Limited
Partners.
The following table sets forth the estimated value of the interest of the
General Partner and other Host subsidiaries in MHP based upon the estimated
aggregate Exchange Value of the MHP Limited Partners' Partnership Interests as
of the Initial Valuation Date and the minimum number of OP Units estimated to
be received by the General Partner and other Host subsidiaries in respect
thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTERESTS AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value........................................... $153,031
Limited partners' share of aggregate Exchange Value................ 141,074
--------
Value of General Partner's interest................................ 11,957
Value of General Partner's affiliate's interest.................... 68,174
--------
Total interest of General Partner and its affiliate................ $ 80,131
========
Minimum number of OP Units(1)...................................... 5,342
</TABLE>
- --------
(1) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of MHP and recommends that all Limited
Partners of MHP consent to the Merger. The General Partner bases this
recommendation primarily on (i) its view that the expected benefits of the
Merger for the MHP Limited Partners outweigh the risks and potential
detriments of the Merger to the MHP Limited Partners (see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the Mergers" and
"Risk Factors"), (ii) its view that the value of the OP Units allocable to the
MHP Limited Partners on the basis of the Exchange Value established for MHP
represents fair consideration for the Partnership Interests held by the MHP
Limited Partners and is fair to the MHP Limited Partners from a financial
point of view and (iii) the Appraisals and Fairness Opinion of AAA. See "--
Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the MHP Limited Partners, individually and
as a whole, if it is consummated with any combination of other Participating
Partnerships. The General Partner bases this belief primarily on the fact that
the consideration to be paid to the MHP Limited Partners has been established
based upon MHP's Exchange Value, without regard to any possible combination of
other Partnerships.
MHP Supp-17
<PAGE>
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for MHP
represents fair consideration for the Partnership Interests of the MHP
Limited Partners in the Merger in relation to MHP because the Exchange
Value is equal to the greatest of the Adjusted Appraised Value,
Continuation Value and Liquidation Value, each of which is an acceptable
method for determining the fair market value of a Partnership's assets.
The General Partner also has concluded that the Exchange Value
established for the MHP Limited Partners fairly reflects the value of
the assets held by MHP. In addition, the General Partner's own analysis,
as well as the Fairness Opinion, support these conclusions.
. MHP Limited Partners who retain OP Units will be able to defer
recognition of gain until such time as they choose to realize such gain
based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the MHP 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 Merger for
the MHP Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
MHP Limited Partners should consider carefully and does not conclude
that the Exchange Value is the best price that could be obtained. 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 Merger.
. The General Partner believes that the economic terms of the leases of
the MHP Hotels are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the MHP Limited
Partners.
. The General Partner believes that the value of the consideration to be
received by the MHP Limited Partners in the Merger 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 MHP is equal to its Continuation
Value, which is the greatest of the Adjusted Appraised Value, the
Continuation Value and the Liquidation Value and the historic prices
paid for MHP Partnership Units. The consideration also is greater than
the amounts paid in recent sales of Partnership Units, including the
January 1997 tender offer by Host. The General Partner does not believe
that the sale of any of MHP's Hotels and liquidation of MHP would obtain
for MHP Limited Partners as much value as the value to be received by
such MHP Limited Partners following the Merger. The General Partner
believes that the following benefits are of the greatest value and
importance to the MHP Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer MHP Limited
Partners liquidity with respect to their investments in MHP because
MHP Limited Partners can receive freely tradeable Host REIT Common
Shares in connection with the Merger or for MHP Limited Partners who
retain OP Units, at any time commencing one year following the
Effective Date, by exercising their Unit Redemption Right, 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 $3.6 billion after
giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host REIT Common Share). The election to exchange
OP Units for Common Shares in connection with the Merger or 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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host REIT will make
MHP Supp-18
<PAGE>
regular quarterly cash distributions to holders of Common Shares. Host
expects that distributions by MHP would be higher than the estimated
cash distributions by the Operating Partnership for 1998, but
nevertheless the ability to receive distributions quarterly and in
regular amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
MHP Limited Partner's investment will be converted from an investment
in MHP, which owns two hotels, into an investment in an enterprise
that initially will own or control approximately 125 Hotels and will
have a total market capitalization of approximately $3.6 billion,
thereby reducing the dependence upon the performance of, and the
exposure to the risks associated with, the Hotels currently owned by
MHP 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 generally will have a lower leverage to value
ratio, approximately 53%, than MHP currently, which has a leverage
ratio of 56% (calculated as a percentage of Exchange Value),
resulting in interest and debt service savings and greater financial
stability.
. Substantial Tax Deferral. The General Partner expects that MHP Limited
Partners who do not elect to receive Common Shares or Notes in
exchange for OP Units in connection with the Mergers generally should
be able to obtain the benefits of the Merger 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 MHP or a sale or other disposition of its assets in a
taxable transaction.
The General Partner believes that the factors described above, which support
the fairness of the Merger to the MHP Limited Partners, when weighed against
the factors that may be disadvantageous, taken as a whole, indicate that the
Merger is fair to the MHP Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 MHP and each other
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 MHP Limited Partners and
the Limited Partners of each other Partnership and (ii) the methodologies used
to determine the value of an OP Unit and to allocate the equity in the
Operating Partnership to be received by the MHP Limited Partners and the
Limited Partners of each other Partnership are fair and reasonable to the MHP
Limited Partners and the Limited Partners of each other Partnership. The
Fairness Opinion is addressed to each Partnership and it may be relied upon by
each of the MHP Limited Partners and the Limited Partners of each of the other
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 the Consent Solicitation and
should be read in its entirety. The material assumptions and qualifications to
the Fairness Opinion are summarized below, although this summary does not
purport to be a complete description of the various inquiries and analyses
undertaken by AAA in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex analytical process not necessarily susceptible to partial
analysis or amenable to summary description. For a more complete description
of the assumptions and qualifications that limit the scope of the Fairness
Opinion, see "--Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the
MHP Supp-19
<PAGE>
Exchange Value for each Partnership to the Limited Partners of each
Partnership, which Exchange Value has been established for each Partnership
without regard to any possible combination of Partnerships. In light of the
foregoing, the Fairness Opinion will not be revised to reflect the actual
Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 MHP and the other
Partnerships might not have been more favorable to the Limited Partners in
certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of the other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of MHP's and each other
Partnership's contingent liabilities.
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion, and received proposals from each. The General Partner selected AAA,
on the basis of the proposals, 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
MHP Supp-20
<PAGE>
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.
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 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
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 used to determine the
Exchange Value, the Adjusted Appraised Value, the Continuation Value and the
Liquidation Value of each Partnership of each Partnership (including, without
limitation, the assumptions used to determine the various adjustments to the
Appraised Values of each of the Hotels) are fair and reasonable, from a
financial point of view, to the MHP Limited Partners and the Limited Partners
of each other Partnership and (ii) the methodologies used to determine the
price of an OP Unit and to allocate the equity interest in the Operating
Partnership to be received by the MHP Limited Partners and the Limited
Partners of each other Partnership are fair and reasonable to the MHP Limited
Partners and the Limited Partners of each other Partnership.
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.
MHP Supp-21
<PAGE>
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by MHP. The following table sets forth
the distributions paid to MHP Limited Partners (per Partnership Unit) during
the periods indicated. The information below should be read in conjunction
with the information in this Supplement under the caption "Selected Financial
Data."
HISTORICAL CASH DISTRIBUTIONS PAID BY MHP
(PER PARTNERSHIP UNIT)(1)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
------------------ --------------------------------
1998 1997 1996 1995 1994 1993
------------------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
From net income(2)........ $1,500 $7,700 $4,970 $2,084 $ -- $ --
Representing return of
capital(3)............... -- -- -- -- -- --
------ ------ ------ ------ ----- -----
Total................... $1,500 $7,700 $4,970 $2,084 $ -- $ --
====== ====== ====== ====== ===== =====
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP.
(2) In addition, the Partnership distributed $8,000 per partnership unit in
August 1998.
(3) Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the General Partner. Under MHP's
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of MHP but the General
Partner and its affiliates are reimbursed for certain costs and expenses
incurred on behalf of MHP. In addition, the General Partner is entitled to
distributions related to its interests in MHP. The following information has
been prepared to compare the amount of reimbursements paid and cash
distributions made by MHP to the General Partner and its affiliates to the
amounts that would have been paid if the reimbursement and distribution
structure which will be in effect after the REIT Conversion had been in effect
for the periods presented.
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). Marriott
International receives management fees and other reimbursements from MHP under
the Management Agreement.
The following table sets forth the reimbursements and distributions paid by
MHP to its General Partner and its affiliates and payments made to Marriott
International 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 Partner and its affiliates and payments made to Marriott
International for the last fiscal year and for 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 $0.81 per
year during such period, which is the expected minimum distribution for 1999.
HISTORICAL AND PRO FORMA REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL
PARTNER AND ITS AFFILIATES AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
1998 1997 1996 1995
------------------ ------------------ ---------- ----------
PRO PRO
HISTORICAL FORMA HISTORICAL FORMA HISTORICAL HISTORICAL
---------- ------- ---------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Principal and Interest
Payments on Orlando
Ballroom Loan.......... $ -- $ N/A $ 2,429 $ N/A $ 4,604 $ 3,531
Reimbursements(1)(2).... 271 -- 204 -- 126 129
Distributions(3)........ 740 2,168 3,797 4,336 102 43
Payments Made to
Marriott
International.......... 9,843 9,843 19,146 19,146 16,832 16,483
------- ------- ------- ------- ------- -------
Total .............. $10,854 $12,011 $25,576 $23,482 $21,664 $20,186
======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) All expenses will be paid directly by the Operating Partnership,
accordingly, there are no expected reimbursements on a pro forma basis.
MHP Supp-22
<PAGE>
(2) In 1997, MHP Acquisition Corporation, which is a wholly owned subsidiary
of Host Marriott, purchased a controlling interest in MHP. Distributions
to the General Partner were $15,000, $78,000, $50,000 and $21,000 for the
First Two Quarters 1998 and the fiscal years ended December 31, 1997, 1996
and 1995, respectively, and to the Partnership Units owned by the General
Partner and affiliates of the General Partner were $725,000 and $3,719,000
for the First Two Quarters 1998 and the fiscal year ended December 31,
1997.
(3) The amount of distributions payable to the General Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $ per
annum per OP Unit (which is the expected minimum distribution per OP Unit
for 1999) with respect to the estimated number of OP Units that the
General Partner and its affiliates will receive with respect to its
general and limited partner interests in MHP. Such number does not reflect
the aggregate number of OP Units Host REIT will receive in connection with
the REIT Conversion.
CERTAIN INFORMATION REGARDING THE HOTELS OWNED BY MHP
<TABLE>
<CAPTION>
NAME OF HOTEL LOCATION OF HOTEL NUMBER OF ROOMS DATE OPENED
------------- ------------------- --------------- -----------
<S> <C> <C> <C>
Marriott's Orlando World
Center....................... Orlando, FL 1,503 1986
Marriott's Harbor Beach
Resort(1).................... Fort Lauderdale, FL 624 1984
-----
Total....................... 2,127
=====
</TABLE>
- --------
(1) MHP owns a 50.5% interest in Marriott's Harbor Beach Resort.
The table below sets forth certain performance information for MHP's Hotels
for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -------------------------
1998 1997 1997 1996 1995
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average daily rate............. $ 176.75 $ 167.75 $155.44 $145.33 $139.40
Occupancy...................... 85.0% 87.1% 80.3% 78.7% 79.0%
REVPAR......................... $ 150.24 $ 146.11 $124.82 $114.37 $110.13
% REVPAR change................ 2.8% -- 9.1% 3.9% --
</TABLE>
Marriott's Orlando World Center, Orlando, Florida
The Orlando Hotel is a full-service Marriott hotel located on approximately
190 acres of fee-owned land two miles from Walt Disney World Resort and is
known as Marriott's Orlando World Center. It is located approximately 15 miles
from the Orlando International Airport.
The Orlando Hotel opened on March 24, 1986. The Orlando Hotel contains 1,503
guest rooms, including 85 suites, in a 27-story building. Designed as part of
the Marriott International network of convention hotels, it has extensive
meeting and convention facilities totaling 200,000 square feet, all on one
level of the hotel, including (i) a 38,675 square foot grand ballroom, (ii)
additional ballroom space of 40,740 square feet which can be subdivided into
meeting rooms and exhibit space, (iii) a 50,960 square foot ballroom and
exhibition hall which was completed in 1990 and (iv) 14 meeting rooms. Hotel
facilities also include nine restaurants and lounges, an 18-hole championship
golf course, eight lighted tennis courts, four pools, a health club, golf and
tennis pro shops, specialty and gift shops, a game room and parking for 2,100
cars. MHP purchased the Orlando Hotel in 1984 for approximately $211 million.
In March 1998, MHP announced its plan to construct a 500-room tower with a new
parking garage at the Orlando Hotel.
Competition. The primary competition for the Orlando Hotel comes from the
following five first-class convention and resort lodging-oriented hotels: (i)
the Sheraton Dolphin Hotel with 1,510 guest rooms and 202,000 square feet of
meeting space, (ii) the Westin Swan with 758 guest rooms and 52,000 square
feet of meeting space, (iii) the Peabody Hotel with 891 guest rooms and 54,000
square feet of meeting space, (iv) the Hyatt Regency Grand Cypress Hotel, with
750 guest rooms and 65,000 square feet of meeting space and (v) the Coronado
Springs Resort, which opened in July 1997, with 1,967 rooms and 99,000 square
feet of meeting space. In addition, other hotels, including hotels owned by
Disney, also compete with the Orlando Hotel. None of these hotels are operated
as part of the Marriott International full-service hotel system. As a major
convention hotel, the Orlando Hotel also competes with similar facilities
throughout the country.
MHP Supp-23
<PAGE>
Several new hotel projects are expected to enter the market in the near
future, including hotels by Disney and Loews Corporation. Loews Corporation
has plans to construct two first-class hotels on Universal Studios Florida
property of approximately 800 and 1,300 rooms to be opened by the year 2000.
As a result of the continued expansion of Walt Disney World, the All Star
Resort with 3,840 rooms is going to increase to 5,760 rooms. Additionally, the
Animal Kingdom attraction at Walt Disney World is planning to open a hotel by
January 1999.
Marriott's Harbor Beach Resort, Fort Lauderdale, Florida
The Harbor Beach Hotel is a full-service Marriott hotel located on a 16.5
acre tract of leased beach-front property located in Fort Lauderdale, Florida
and is known as Marriott's Harbor Beach Resort. The Hotel is located
approximately five miles from the Fort Lauderdale/Hollywood International
Airport.
The Harbor Beach Hotel opened in October 1984 with 624 guest rooms,
including 35 suites, in a 15-story building. The Harbor Beach Hotel has
approximately 30,000 square feet of meeting and banquet space, including (i) a
14,900 square foot grand ballroom, (ii) an 8,000 square foot junior ballroom,
(iii) seven meeting rooms and (iv) two boardrooms. Hotel facilities also
include five restaurants, three lounges, a 1,100 foot private ocean beach with
50 private cabanas, an outdoor pool, five tennis courts, a health club, gift
shop, tennis pro shop and parking for 900 cars. The Harbor Beach Partnership,
of which MHP owns 50.5%, purchased the Harbor Beach Hotel in 1982 for
approximately $87 million.
Competition. The primary competition for the Harbor Beach Hotel comes from
the following five first-class hotels: (i) the Hyatt Pier 66 with 388 guest
rooms and 22,000 square feet of meeting space, (ii) the Boca Raton Hotel and
Club with 963 guest rooms and 70,000 square feet of meeting space, (iii) the
Marriott Marco Island Resort and Golf Club with 735 guest rooms and 48,000
square feet of meeting space, (iv) the Sheraton Bal Harbour with 644 guest
rooms and 73,000 square feet of meeting space and (v) the Breakers with 572
guest rooms and 36,000 square feet of meeting space. The Marriott Marco Island
Resort and Golf Club is managed by Marriott International, and other than
limited joint marketing efforts, the Harbor Beach Hotel and the Marriott Marco
Island Resort are direct competitors. Host acquired another competing area
hotel, the Fort Lauderdale Marina Hotel, in January 1994. In addition, other
hotels in the Fort Lauderdale area also compete with the Harbor Beach Hotel;
however, these differ from the Harbor Beach Hotel in terms of size, room
rates, facilities, amenities and services offered, market orientation and/or
location. None of these other hotels are operated as part of the Marriott
International full-service hotel system. As a major resort facility, the
Harbor Beach Hotel also competes with similar facilities throughout the
country. The Loews Miami Beach hotel with 800 rooms and 85,000 square feet of
meeting space is scheduled to open in October 1998.
Ground Lease. The Harbor Beach Hotel is located on a site that is leased
from an unrelated third party for an initial term expiring November 30, 2080.
The Harbor Beach Partnership has the option to extend the term for an
additional 25 years. The lease provides for annual rental of $1,560,000 for
lease years 1995 through 1999. Thereafter, annual rentals for each succeeding
five-year period increase by an amount equal to 10% of the previous annual
rental. Under the lease, the Harbor Beach Partnership pays all costs,
expenses, taxes and assessments relating to the Harbor Beach Hotel and the
underlying land, including real estate taxes. In the event the ground lessor
decides to sell the leased premises, the Harbor Beach Partnership has a right
of first refusal to purchase the leased premises. Upon expiration or
termination of the lease, title to the Harbor Beach Hotel and all improvements
revert to the ground lessor.
AMENDMENTS TO MHP'S PARTNERSHIP AGREEMENT
In order to allow the Hotels of MHP to be leased to Crestline in connection
with the Merger and the REIT Conversion, MHP's partnership agreement must be
amended. Currently, there is no provision in MHP's partnership agreement to
allow MHP's Hotels to be leased. Therefore, Section 5.02B of MHP's partnership
agreement must be amended to add a new paragraph 5.02B(xi) to read as follows:
(xi) lease or consent to the lease, directly or indirectly, in one
transaction or a series of related transactions, any or all of the Hotels.
MHP Supp-24
<PAGE>
Other Amendments. Amendments to certain terms and sections of MHP's
partnership agreement would be made in order to (i) reduce to one the number
of appraisals of the fair market value of MHP's Hotel that MHP must provide to
MHP Limited Partners before the General Partners can cause MHP to sell its
assets to the General Partner or an affiliate and (ii) make any other
amendments to MHP's partnership agreement deemed necessary or advisable, in
the sole discretion of the General Partner, in connection with the
consummation of the Merger and the REIT Conversion. The form of amendment to
the MHP partnership agreement is attached as an exhibit to the Registration
Statement of which this Supplement is a part.
VOTING PROCEDURES
MHP Limited Partners will be asked to vote separately on the Merger and the
proposed amendments to the partnership agreement, but MHP will not participate
in the Merger unless both proposals are approved. The consent of MHP Limited
Partners holding a majority of the outstanding limited partner interests is
required for participation in the Merger and with respect to the related
amendments to the partnership agreement. The General Partner and its affiliate
collectively own 48.33% of the outstanding limited partner interests. The
General Partner and its affiliate are required to vote their limited partner
interests in MHP in the same manner as the majority of the other 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.
At the time of voting, MHP Limited Partners will be asked to indicate
whether they wish to retain OP Units or elect to exchange their OP Units for
Common Shares or a Note in connection with the Merger. The OP Units will be
delivered to the MHP LImited Partners promptly after the twentieth trading day
following the Effective Date of the Merger (which would be promptly after
January 29, 1999 if the Effective Date of the Merger is December 30, 1998).
See "Determination of Exchange Value of MHP and Allocation of OP Units."
An MHP Limited Partner may mark the Consent Form to vote "FOR," "AGAINST" or
"ABSTAIN" with respect to participation in the Merger by MHP and "FOR,"
"AGAINST" or "ABSTAIN" with respect to the amendments to the partnership
agreement. THE FAILURE OF A LIMITED PARTNER OF MHP TO RETURN A SIGNED CONSENT
FORM WILL NOT BE COUNTED FOR PURPOSES OF DETERMINING WHETHER A MAJORITY OF MHP
LIMITED PARTNER PARTNERSHIP INTERESTS ARE PRESENT. AN ABSTENTION OF AN MHP
LIMITED PARTNER WILL BE COUNTED FOR PURPOSES OF ESTABLISHING THE NUMBER OF
LIMITED PARTNER PARTNERSHIP INTERESTS REQUIRED TO RECOGNIZE THE VOTE BUT WILL
BE EFFECTIVELY COUNTED AS A VOTE "AGAINST" THE MERGER AND "AGAINST" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENT. LIMITED PARTNERS WHO RETURN A SIGNED
CONSENT FORM BUT FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY
MATTER (INCLUDING THE MERGER AND THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT)
WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER. The voting procedures
applicable to MHP Limited Partners are set forth in the Consent Solicitation
under the heading "Voting Procedures--Required Vote and Other Conditions."
As of June 19, 1998, MHP Acquisition Corporation holds 47.3% of the total
number of MHP Partnership Units. No other person owned of record, or to the
Partnership's knowledge owned beneficially, more than 5% of the total number
of MHP Partnership Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," MHP Limited Partners should read
carefully the following discussion of federal income tax consequences
applicable specifically to the MHP Limited Partners. The information included
in this discussion is based upon various factual assumptions and information
which are believed by the Operating Partnership and the General Partner to be
reliable. However, some of these assumptions inevitably will not materialize,
and unanticipated events and
MHP Supp-25
<PAGE>
circumstances will occur. Therefore, there likely will be differences between
the information provided herein, including the numerical data and estimates,
and actual results, and the variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the MHP Limited Partners resulting from the Mergers and the
REIT Conversion. The opinion letter is based upon certain assumptions and
certain 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 Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the Mergers and the REIT Conversion and of Host REIT, the
Operating Partnership and the Partnerships following the Mergers and the REIT
Conversion. In addition, prior to 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 to the Consent Solicitation) as to
the qualification and taxation of Host REIT as a REIT under the Code following
the REIT Conversion. The receipt of this opinion is a condition to the REIT
Conversion and each of the Mergers. See "Federal Income Tax Consequences--
Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is
substantially in the form of Appendix C to the Consent Solicitation is
applicable to the MHP Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that, except
for any gain attributable to the sale of personal property by MHP to a Non-
Controlled Subsidiary in connection with the REIT Conversion, the Merger will
not result in the recognition of taxable gain or loss at the time of the
Merger to an MHP Limited Partner (i) who does not elect to receive Common
Shares (the "Common Share Election") or a Note (the "Note Election") in
exchange for his OP Units in connection with the Merger; (ii) 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 Merger; (iii) who does not receive a
cash distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of any repayment of the Orlando Mortgage or
the Harbor Beach Mortgage) in connection with the Merger or the REIT
Conversion in excess of his aggregate adjusted basis in his MHP Partnership
Units at the time of the Merger; (iv) who is not required to recognize gain by
reason of the exercise by another MHP Limited Partner of his right to make the
Common Share Election or the Note Election; and (v) who does not
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have his "at risk" amount fall below zero as a result of the Merger or the
REIT Conversion. See "Federal Income Tax Consequences--Summary of Tax
Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) an MHP
Limited Partner who acquired his MHP Partnership Units in the original
offering of such Partnership Units and who has held such Partnership Units at
all times since would not be considered to receive, as a result of the Merger,
a distribution (or a deemed cash distribution resulting from relief from
liabilities) that exceeds his aggregate adjusted basis in his MHP Partnership
Units at the time of the Merger, and would not have his "at risk" amount fall
below zero as a result of the Merger, and (ii) a portion of the personal
property associated with both of the Hotels owned by MHP will need to be sold
to a Non-Controlled Subsidiary in connection with the REIT Conversion, which
may result in the recognition of a relatively modest amount of income by the
MHP Limited Partners. See "Federal Income Tax Consequences--Tax Consequences
of the Mergers--Overview" in the Consent Solicitation and "Tax Allocations
upon the Sale of Certain Personal Property Associated with the MHP Hotels"
below.
With respect to the effects of an MHP Limited Partner's election to receive
Common Shares or a Note in exchange for his OP Units in connection with the
Merger, Hogan & Hartson is of the opinion that, although the matter is not
free from doubt, an MHP Limited Partner who does not make the Common Share
Election or Note Election should not be required to recognize gain by reason
of another MHP Limited Partner's exercise of such right. With respect to the
exercise of a Unit Redemption Right, Hogan & Hartson is of the opinion that it
is more likely than not that an MHP Limited Partner's exercise of his Unit
Redemption Right more than one year after the date of consummation of the
Merger but less than two years after such date will not cause the Merger
itself to be a taxable transaction for the MHP Limited Partner (or the other
MHP Limited Partners). See "Federal Income Tax Consequences--Summary of Tax
Opinions" in the Consent Solicitation. Opinions of counsel, however, do not
bind the IRS or the courts, and no assurances can be provided that such
opinions will not be challenged by the IRS or will be sustained by a court if
so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his MHP
Partnership Units, an MHP Limited Partner will receive no actual cash
distribution in connection with the Merger but would be deemed to receive a
cash distribution in connection with the Merger to the extent that his share
of Operating Partnership liabilities immediately after the Merger and the REIT
Conversion is less than his share of MHP liabilities immediately prior to the
Merger. For example, any repayment of the Orlando Mortgage or the Harbor Beach
Mortgage or debt encumbering other Hotels may result in a deemed cash
distribution to the MHP Limited Partners. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Relief from Liabilities/Deemed
Cash Distribution" in the Consent Solicitation. Even though the Orlando
Mortgage, the Harbor Beach Mortgage and the debt encumbering other Hotels is
not expected to be repaid or refinanced in connection with the Merger and the
REIT Conversion (except as described in the Consent Solicitation), an MHP
Limited Partner's share of indebtedness following the Merger and the REIT
Conversion may nonetheless decrease in comparison to the Limited Partner's
estimated aggregate share of MHP indebtedness as of December 31, 1998
(calculated based on the assumption that the Merger did not occur) by reason
of the manner in which the debt allocation rules work when multiple assets
with different levels of leverage are consolidated into a single partnership.
An MHP Limited Partner, however, would recognize taxable gain as a result of
any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his MHP Partnership
Units immediately prior to the Merger. As noted above, the Operating
Partnership and the General Partner believe, based upon and subject to the
assumptions and other limitations described below, that an MHP Limited Partner
who acquired his MHP Partnership Units in the original offering of such
Partnership Units and has held the Partnership Units at all times since the
offering will have an adjusted tax basis in excess of the deemed cash
distribution that might occur in connection with the Merger and the REIT
Conversion. Therefore,
MHP Supp-27
<PAGE>
such an MHP Limited Partner should not recognize gain due to such deemed cash
distribution resulting from the relief from liabilities in connection with the
Merger and the REIT Conversion.
The adjusted tax basis of an MHP Limited Partner who did not acquire his MHP
Partnership Units in the original offering of such Partnership Units or who
has not held his MHP Partnership Units at all times since such offering could
vary materially from that of an MHP Limited Partner who did so. If an MHP
Limited Partner has an adjusted tax basis in his MHP Partnership Units (per
MHP Partnership Unit) that is substantially less than the adjusted tax basis
of an MHP Limited Partner who acquired his MHP Partnership Units in the
original offering of such Partnership Units and has held such Partnership
Units at all times since, he could recognize gain due to any deemed cash
distribution resulting from the relief from liabilities in connection with the
Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the Orlando Mortgage or the Harbor Beach Mortgage or, except as
described in the Consent Solicitation, any of the nonrecourse liabilities
encumbering the Hotels owned by the other Partnerships (other than with the
proceeds of indebtedness that would be considered nonrecourse liabilities
allocable to the Hotel being refinanced). 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 secure nonrecourse
mortgage indebtedness secured only by those Hotels in an amount sufficient to
avoid a deemed cash distribution to the former Limited Partners in certain of
those Partnerships, including MHP (although such a deemed distribution of cash
may or may not result in the recognition of taxable income or gain by the
former MHP Limited Partners). Moreover, 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 debt as 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. In view of these considerations and the potential
adverse consequences to Limited Partners in certain Partnerships, including
the MHP Limited Partners, 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 (including the Orlando Mortgage and the Harbor Beach Mortgage),
would be considered to be "secured" by those Hotels for purposes of allocating
the liabilities for tax basis purposes (and thus would be allocable, at least
in substantial part, to the former Limited Partners in the Partnerships owning
those Hotels, including the MHP Limited Partners), 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.
Each MHP Limited Partner will gradually begin to recognize income over the
term of his ownership of OP Units (beginning, perhaps, in his first year of
ownership of OP Units) attributable to deemed cash distributions resulting
from the relief from liabilities, as the aggregate principal amount of
nonrecourse indebtedness encumbering (or deemed to encumber) the Hotels
amortizes in accordance with its terms. The Operating Partnership will make
regular quarterly cash distributions to the MHP Limited Partners that may or
may not be sufficient to allow the MHP Limited Partners to pay the federal and
state income tax owed on the income allocated to such Limited Partners by
reason of the amortization of the debt secured by the MHP Hotels.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner may be required to include in gross income, or
"recapture," losses previously allowed to such
MHP Supp-28
<PAGE>
partner with respect to his investment in a partnership if the amount for
which the partner is "at risk" in relation to his investment in the
partnership is less than zero at the close of the taxable year. The "at risk"
rules 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 his interests before that date
(the "grandfather" rule). Thus, the "at risk" rules have not been applicable
to date to those MHP Limited Partners who acquired their Partnership Units at
the time of the original offering or at any time prior to January 1, 1987 and
who have held those Partnership Units since the date of the acquisition. The
MHP Limited Partners, however, will become subject to the "at risk" rules as a
result of the Merger and their receipt of OP Units in connection therewith
(since the OP Units do not qualify for the "grandfather" rule).
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Mergers
and the REIT Conversion could, singularly or in combination, cause an MHP
Limited Partner's amount at risk in relation to his investment in MHP (and,
after the Mergers, in the Operating Partnership) to be reduced below zero,
resulting in an income inclusion to the Limited Partner under Section 465(e)
of the Code. Currently, a sufficient portion of the current debt of MHP
constitutes "qualified nonrecourse financing" so that the MHP Limited Partners
have positive at risk amounts. The Operating Partnership and the General
Partner believe, based upon and subject to the assumptions and other
limitations described below, that an MHP Limited Partner who acquired his MHP
Partnership Units in the original offering of such Partnership Units and has
held the Partnership Units at all times since will have a positive at risk
amount immediately following the Mergers and the REIT Conversion.
It is possible, however, that a former MHP Limited Partner's at risk amount
could decline in the future, either because of the allocation of losses from
the Operating Partnership to that former MHP Limited Partner or because of
cash distributions by the Operating Partnership to that former MHP Limited
Partner in excess of the taxable income allocable to him with respect to his
OP Partnership Units. Moreover, there can be no assurance that debt incurred
by the Operating Partnership in the future to refinance existing debt would
qualify as "qualified nonrecourse financing." If, however, the Operating
Partnership were to obtain the requested ruling from the IRS and were to
refinance existing mortgage indebtedness of the Partnerships (including the
Orlando Mortgage or the Harbor Beach Mortgage) with the type of indebtedness
described in the rulings, such indebtedness should constitute "qualified
nonrecourse financing" for purposes of the "at risk" rules.
Impact of Assumption of MHP Liabilities by the Operating Partnership. As
described in the Consent Solicitation, see "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Disguised Sale Regulations," an MHP Limited
Partner will recognize gain to the extent he is treated as having sold all or
part of his MHP Partnership Interest in a "disguised sale." 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.
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" also will not be treated as part of
a disguised sale. A "qualified liability" in connection with a transfer of
property to a partnership includes (i) any liability incurred more than two
years prior to the earlier of the transfer of the property or the date the
partner agrees in writing to the transfer, as long as the liability has
encumbered the transferred property throughout the two-year period; (ii) a
liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within the
two-year period prior to the earlier of the date the partner agrees in writing
to transfer the property or the date the partner transfers the property to a
partnership and that has encumbered the transferred property since it was
incurred; (iii) a liability that is traceable under the Treasury Regulations
to capital expenditures with respect to the property; and (iv) a liability
that was incurred in the ordinary course of the trade or business in which
property transferred to the partnership was used or held, but only if all the
assets related to that trade or business are transferred, other than assets
that are not material to a continuation of the trade or business. However, a
recourse liability is not a "qualified liability" unless the amount of the
liability does not
MHP Supp-29
<PAGE>
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.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of MHP fall into one of
the four categories of "qualified liabilities" described in the preceding
paragraph. Based on the aforementioned representations and on certain
numerical estimates provided by the Operating Partnership and the General
Partner, however, approximately $8.8 million of MHP indebtedness ($8,800 per
$100,000 original investment of MHP), 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 Merger but not
in anticipation of the Merger) and, thus, MHP and the MHP Limited Partners
will be required to disclose such indebtedness on a completed IRS Form 8275 or
on a statement attached to their tax returns for the taxable year in which the
Merger occurs. There can be no assurance, however, that the IRS will not
challenge the position of MHP that this indebtedness is a "qualified
liability."
Tax Treatment of MHP Limited Partners Who Hold OP Units Following the Merger
Initial Basis in Units. In general, an MHP Limited Partner will have an
initial tax basis in his OP Units received in the Merger with respect to his
MHP Partnership Units equal to the basis in his MHP Partnership Units at the
time of the Merger, reduced to reflect any deemed cash distributions resulting
from a reduction in his share of MHP liabilities and increased to reflect his
share of other liabilities of the Operating Partnership and any gain required
to be recognized in connection with the Merger and the REIT Conversion
(including income, if any, attributable to the sale of a portion of the
personal property associated with both the MHP Hotels, as described below
under "--Tax Allocations upon the Sale of Certain Personal Property Associated
with the MHP Hotels"). For a discussion of the federal income tax consequences
for an MHP Limited Partner from a reduction in basis that may result from the
Merger and the REIT Conversion, see "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--Initial
Tax Basis of OP Units" in the Consent Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of MHP
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all MHP Limited Partners (but
excluding all of Host's interests) with respect to the MHP Hotels will be
$114,460,769 upon the consummation of the Merger.
If the Operating Partnership were to sell the Orlando World Center and its
interest in the Harbor Beach Hotel, the former partners of MHP (including Host
REIT with respect to Host's indirect interest in MHP) would be specially
allocated by the Operating Partnership an aggregate amount of taxable gain
equal to the aggregate Book-Tax Difference with respect to those MHP Hotels.
The share of such gain allocable to an MHP Limited Partner who acquired his
MHP Partnership Units in the original offering of such Partnership Units and
held such Partnership Units at all times since would be $221,532 per MHP
Partnership Unit. The share of such gain of an MHP Limited Partner who did not
acquire his MHP Partnership Units in the original offering of such Partnership
Units or who has not held his MHP Partnership Units at all times since such
offering could vary materially from this amount. If the Operating Partnership
were to sell one of the MHP Hotels with a Book-Tax Difference, the remaining
Book-Tax Difference at the time the Hotel is sold would be required to be
allocated exclusively to the former MHP Limited Partners and the General
Partner, even though the proceeds of such sale would be allocated
proportionately among all the partners in the Operating Partnership (and would
likely be retained by the Operating Partnership, rather than distributed to
holders of OP Units and Common Shares of Host REIT). The
MHP Supp-30
<PAGE>
MHP Limited Partners would not be entitled to any special distributions from
the Operating Partnership in connection with such a sale, and thus would not
necessarily receive cash distributions from the Operating Partnership
sufficient to pay such additional taxes. Although the Partnership Agreement
does not impose any restrictions upon the Operating Partnership preventing it
from causing the sale of either or both of the MHP Hotels at any time
following the Merger, the Operating Partnership does not have current plans to
pursue a sale of either of the MHP Hotels. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Sale of Individual Hotels" in the Consent Solicitation.
Tax Allocations upon the Sale of Certain Personal Property Associated with
the MHP Hotels. As discussed in the Consent Solicitation, see "Federal Income
Tax Consequences--Federal Income Taxation of Host REIT Following the REIT
Conversion--Income Tests Applicable to REITs" and "--Taxable Income
Attributable to Sales of Personal Property in Connection with the REIT
Conversion," 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
Partner have determined that the percentage of rent attributable to the
personal property to be leased in connection with the lease of the two MHP
Hotels would not satisfy the 15% Personal Property Test. The 15% Personal
Property Test is a mechanical test that is based not on the relative fair
market value of the assets subject to lease, or the relative fair rental value
of those assets, but, rather, is based on the average relative adjusted tax
bases of the assets subject to the lease. Accordingly, immediately prior to
the Merger, the Operating Partnership will require MHP, if it chooses to
participate in the Merger, to sell to a Non-Controlled Subsidiary a portion of
the personal property associated with the MHP Hotels. This sale, which will be
a taxable transaction, may result in the recognition by MHP (and the
allocation to the MHP Limited Partners) of a relatively modest amount of
taxable gain to the extent of the difference, if any, 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. The actual amount of any such gain 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 MHP partnership
agreement, any such taxable gain will be characterized as ordinary recapture
income and will be allocated by MHP to the former MHP Limited Partners in the
same proportions and to the same extent that such Limited Partners were
allocated any deductions directly or indirectly giving rise to the treatment
of such gains as recapture income prior to the Merger. The MHP Limited
Partners would not be entitled to any special distributions from MHP in
connection with such a sale of personal property.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the MHP Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the two MHP Hotels will be
required to be allocated for federal income tax purposes in a manner such that
the MHP Limited Partners are charged with the Book-Tax Difference associated
with the MHP Hotels at the time of the consummation of the Merger.
Consequently, an MHP Limited Partner will be allocated less depreciation with
respect to the MHP Hotels than would be the case if the Mergers had not
occurred and the MHP Limited Partner had continued to hold his MHP Partnership
Units. (On the other hand, a former MHP Limited Partner will be allocated
depreciation with respect to other Hotels acquired by the Operating
Partnership in connection with the Mergers and the REIT Conversion, including
the Hotels owned by the other Hotel Partnerships and the Hotels being
contributed to the Operating Partnership by Host and the Blackstone Entities
in connection with the Mergers and the REIT Conversion.) Second, the Mergers
will cause the technical termination under Section 708(b)(1)(B) of the Code of
MHP and certain of the other Hotel Partnerships that participate in the
Mergers and the REIT Conversion. 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 real estate components of the MHP Hotels
and the Hotels held by the other Hotel Partnerships that terminate will be
depreciated over 39 years, rather than over the remaining current lives of
such Hotels (which range from less than one year to 39 years). See "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--Effect of Mergers on Depreciation" in the Consent
Solicitation.
MHP Supp-31
<PAGE>
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to an MHP Limited
Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for MHP Limited Partners) to the
extent that such losses are not in excess of the taxpayer's income from
passive activities or investments. An MHP Limited Partner would be able to
offset losses from other passive activities 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 Partner 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
limitation rules. In this event, any losses or deductions of the Operating
Partnership allocable to an MHP Limited Partner after the Merger could not be
used to offset passive income from other passive activities. Similarly, losses
from other passive activities (including losses attributable to MHP for
periods prior to the Merger) could not be applied to offset income of the
Operating Partnership allocated to an MHP Limited Partner. An MHP Limited
Partner, however, would be able to offset any passive losses from his
investment in MHP (or other investments) against any gain recognized by the
MHP Limited Partner as a result of the Merger. The Operating Partnership and
the General Partner estimate that, as of December 31, 1998, an MHP Limited
Partner that purchased his Partnership Units at the time of the original
offering has held those Partnership Units continuously since that time, and
whose Partnership Units have been his only investment in a passive activity
would have a passive activity loss carryforward of approximately $1,217, on a
per Partnership Unit basis.
State and Local Taxes. MHP Limited Partners holding OP Units will 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 and the REIT Conversion, the Operating
Partnership expects that it will own properties in 28 states across the United
States and the District of Columbia. Currently, MHP owns, directly and
indirectly, only Florida properties. See "Federal Income Tax Consequences--Tax
Treatment of Limited Partners Who Hold OP Units Following the Mergers--State
and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular MHP
Limited Partner, the tax consequences of the Merger to such MHP Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH MHP LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH MHP LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
First, with respect to an MHP Limited Partner's basis in his MHP Partnership
Units prior to the Merger, the Operating Partnership and the General Partner
assumed that an MHP Limited Partner acquired his MHP Partnership Units in the
original offering of such Partnership Units and has held such Partnership
Units at all
MHP Supp-32
<PAGE>
times since the offering (the "Original Limited Partner's Adjusted Basis"). In
general, each MHP Limited Partner had an initial tax basis in his MHP
Partnership Units ("Initial Basis") equal to his cash investment in MHP (plus
his proportionate share of MHP's nonrecourse liabilities at the time he
acquired his MHP Partnership Units). An MHP Limited Partner's Initial Basis
generally has been increased by (a) such Limited Partner's share of MHP
taxable income and (b) any increases in his or her share of liabilities of
MHP. Generally, such Limited Partner's Initial Basis has been decreased (but
not below zero) by (i) his share of MHP cash distributions, (ii) any decreases
in his share of liabilities of MHP, (iii) his share of losses of MHP and (iv)
his share of nondeductible expenditures of MHP that are not chargeable to
capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for MHP (i) the Original Limited Partner's Adjusted Basis as of December 31,
1997 for each such MHP Limited Partner, and (ii) an estimate of such MHP
Limited Partner's 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 the Consent Solicitation). The General Partner also
has set forth on Appendix E to the Consent Solicitation for each MHP Limited
Partner whose adjusted basis in his MHP Partnership Interest is the same as
the Original Limited Partner's Adjusted Basis (i) the MHP liabilities
allocable to such MHP Limited Partner as of December 31, 1997, and (ii) an
estimate of the MHP 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 the Consent Solicitation).
The adjusted tax basis of an MHP Limited Partner who did not acquire his MHP
Partnership Units in the original offering of such Partnership Units could
vary materially from that of an MHP Limited Partner who did so for various
reasons. If an MHP Limited Partner has an adjusted tax basis in his MHP
Partnership Units that is less than the Original Limited Partner's Adjusted
Tax Basis, the Merger might result in the receipt by the MHP Limited Partner
of a deemed distribution of cash in excess of his adjusted tax basis in his
MHP Partnership Units, which could result in the recognition of income or
gain.
Second, the Operating Partnership and the General Partner assumed that the
method expected to be used by the Operating Partnership to allocate
liabilities among the partners will be respected for federal income tax
purposes. The Operating Partnership will allocate liabilities associated with
the MHP Hotels as described in "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash Distribution"
in the Consent Solicitation. If the method used by the Operating Partnership
were not respected for federal income tax purposes and the nonrecourse
liabilities actually allocable to an MHP Limited Partner are less than the
amount assumed by the Operating Partnership and the General Partner, the
Merger might result in the receipt by such MHP Limited Partner of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by such MHP Limited Partner as described above in "Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain." For an MHP Limited Partner who did not acquire his MHP Partnership
Units in the original offering of such Partnership Units or who did not hold
such Partnership Units at all times since, this deemed distribution of cash
could exceed his adjusted tax basis in his MHP Partnership Units, which could
result in the recognition of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
MHP Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares) and the
subsequent distribution of such OP Units (and possibly Notes and/or Common
Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the MHP Limited Partners likely would be materially affected.
MHP Supp-33
<PAGE>
EACH MHP LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH MHP LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
THE TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER TO A PARTICULAR MHP
LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED
ABOVE.
Tax Treatment of MHP Limited Partners Who Exercise Their Right to Make the
Common Share Election or the Note Election
An MHP Limited Partner who exercises his right to make the Common Share
Election or the Note Election and receive Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $141,074 per MHP Partnership
Unit) plus the portion of MHP's liabilities allocable to the MHP Limited
Partner for federal income tax purposes immediately prior to the disposition
of the OP Units (estimated as $210,276 per MHP Partnership Unit as of December
31, 1998). Generally, the amount realized in connection with such disposition
made pursuant to the exercise of the Note Election will equal the sum of the
"issue price" of the Note (i.e., the face amount of the Note, currently
estimated as $124,261 per MHP Partnership Unit) plus the portion of MHP
liabilities allocable to the MHP Limited Partner for federal income tax
purposes immediately prior to the disposition of the OP Units (estimated as
$210,276 per MHP Partnership Unit as of December 31, 1998). To the extent the
applicable amount realized exceeds the MHP Limited Partner's adjusted basis in
his MHP Partnership Units, the MHP Limited Partner will recognize gain. The
Operating Partnership and the General Partner estimate (assuming the MHP
Limited Partner acquired his MHP Partnership Units at the time of the original
offering and has held such Partnership Units at all times since the offering)
that the amount of gain that would be recognized by an MHP Limited Partner who
made the Common Share Election would be approximately $210,832 per MHP
Partnership Unit and that the amount of gain that would be recognized by an
MHP Limited Partner who made the Note Election would be approximately $194,019
per MHP Partnership Unit, as of December 31, 1998. For a discussion of the
federal income tax rates applicable to the net capital gain from the sale of a
capital asset, see "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Disposition of OP Units by
Limited Partners" in the Consent Solicitation. In this regard, the General
Partner estimates that, as of December 31, 1998, if MHP sold both of its
Hotels in a fully taxable transaction for a net amount, after payment of
liabilities, equal to the Exchange Value of MHP (with respect to a Limited
Partner who makes the Common Share Election) or Liquidation Value of MHP (with
respect to a Limited Partner who makes the Note Election), the "unrecognized
Section 1250 gain" per MHP Partnership Unit would be $133,537 and the gain
subject to tax as ordinary income under Code Section 1245 per MHP Partnership
Unit would be $10,808. An MHP Limited Partner who makes the Common Share
Election or the Note Election would be able to treat any per Partnership Unit
passive activity loss carryforward with respect to the activities of MHP, to
the extent the sum of such losses exceeds his passive activity income for
1998, as losses that are not from a passive activity and, therefore, not
subject to the passive activity loss limitation rules. For purposes of
determining the gain recognized by a Limited Partner as a result of making the
Common Share Election or the Note Election, an Original Limited Partner's
Adjusted Basis reflects such Limited Partner's share of the syndication costs
incurred by his Partnership at formation. An original MHP Limited Partner's
share of syndication costs was $10,700 per MHP Partnership Unit.
An MHP Limited Partner who elects to receive Common Shares will not be
eligible to defer any gain under the "installment sale" rules, while an MHP
Limited Partner who elects to receive a Note may be eligible to defer a
majority of that gain under those rules. Those rules, however, will not permit
the MHP Limited Partner to defer all of the gain, and, to the extent that the
face amount of the Note (and any other installment obligations received by the
taxpayer during the year) outstanding at the end of the taxable year in which
the Merger occurs exceeds $5,000,000, will require that the MHP Limited
Partner who defers gain pay to the IRS interest on the resulting tax that has
been deferred. The MHP Limited Partner will not be eligible to defer gain
recognized upon the receipt of the Note to the extent that his share of MHP
liabilities at the time of the Merger exceeds his
MHP Supp-34
<PAGE>
adjusted tax basis in his MHP Partnership Units immediately prior to the
Merger (that is, to the extent that he has a "negative capital account" for
tax purposes). In addition, the MHP Limited Partner will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income
under Sections 1245 and 1250 of the Code. Lastly, if an MHP Limited Partner
disposes of the Note, any gain that had been deferred would be recognized in
the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR MHP LIMITED PARTNER COULD HAVE A
MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER AND THE SUBSEQUENT
OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT IS
ESSENTIAL THAT MHP LIMITED PARTNERS CONSIDERING ELECTING TO RECEIVE COMMON
SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH MHP LIMITED PARTNERS'
RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
Tax Consequences if MHP Does Not Participate in the Merger
If MHP does not participate in the Merger, the MHP Limited Partners would
not have any tax consequences resulting from the Merger. The consequences of
continued ownership of MHP Partnership Units will be the same as would have
resulted if the Merger had not been proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
MHP Limited Partners in light of their particular circumstances. EACH MHP
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH MHP LIMITED PARTNER'S PARTICULAR TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
MHP Supp-35
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the MHP financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed consolidated
financial statements for the First Two Quarters 1998 and First Two Quarters
1997. The following data should be read in conjunction with MHP's financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (AMOUNTS IN THOUSANDS,
EXCEPT PER PARTNERSHIP UNIT(1))
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $47,968 $45,873 $75,211 $71,834 $66,998 $58,474 $61,347
Operating profit........ 30,115 28,733 42,095 42,185 36,053 28,677 23,338
Income before
extraordinary item(2).. 17,818 15,343 19,477 18,449 13,150 7,311 14,748
Net income.............. 17,818 15,343 16,416 18,449 13,150 7,311 14,748
Distributions:
General partner........ 15 14 78 50 21 -- --
Limited partners....... 1,500 1,500 7,706 4,964 2,084 -- --
------- ------- ------- ------- ------- ------- -------
Total.................. 1,515 1,514 7,784 5,014 2,105 -- --
Per Partnership Unit(1):
Net income (loss)...... 17,640 15,190 16,252 18,265 13,018 7,238 14,600
Distributions.......... 1,500 1,500 7,700 4,970 2,084 -- --
Cash provided by
operating activities... 26,062 25,633 31,758 27,632 25,755 20,884 8,857
Cash used in investing
activities............. (5,417) (5,071) (12,840) (8,911) (6,922) (8,241) (3,174)
Cash used in financing
activities............. (2,972) (7,417) (9,831) (20,664) (18,026) (11,956) (14,225)
Increase (decrease) in
cash and cash
equivalents............ 17,673 13,145 9,087 (1,943) 807 687 (8,542)
Ratio of earnings to
fixed charges(3)
(unaudited)............ 2.89x 2.51x 2.00x 1.92x 1.63x 1.32x --
Deficiency of earnings
to fixed charges(3)
(unaudited)............ -- -- -- -- -- -- 4,590
Total assets at book
value.................. 278,264 256,645 261,109 249,441 251,217 254,058 257,620
Cash and cash
equivalents............ 28,367 14,752 10,694 1,607 3,550 2,743 2,056
Total debt(4)........... 240,809 230,727 240,748 235,146 248,659 260,843 271,879
Total liabilities....... 242,113 231,654 241,261 238,272 253,483 267,369 278,242
Partner's capital
(deficit):
Limited partners....... 35,681 24,632 19,541 10,948 (2,353) (13,287) (20,525)
General partner........ 470 359 307 221 87 (24) (97)
Book value per
Partnership Unit
(unaudited)(1)......... 35,681 24,632 19,541 10,948 (2,353) (13,287) (20,525)
Exchange value per
Partnership Unit
(unaudited)(1)......... 141,074 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP.
(2) In 1997, the Partnership recognized a $3.1 million extraordinary loss
resulting from the prepayment penalty related to the early extinguishment
of the mortgage debt on the Orlando Hotel and the write-off of related
deferred financing costs.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges in 1993 was largely the result of
depreciation and amortization of $14,601,000.
(4) Total debt includes amounts due to Host Marriott of $2,295,000,
$2,294,000, $6,420,000, $9,149,000 and $13,635,000 as of June 20, 1997,
December 31, 1996, 1995, 1994 and 1993, respectively.
MHP Supp-36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The chart below summarizes REVPAR, or revenue per available room, the first
two quarters for 1998 and 1997:
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------
1998 1997 % INCREASE
---- ---- ----------
<S> <C> <C> <C>
Orlando World Center................................. $139 $136 2%
Harbor Beach......................................... $177 $170 4%
Combined Average..................................... $150 $146 3%
</TABLE>
Total consolidated Partnership revenues for the first two quarters 1998,
increased 5% when compared to the comparable period in 1997. Operating results
for the first two quarters 1998 were strong for both the Orlando Hotel and the
Harbor Beach Hotel (the "Hotels"). REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. On a combined basis, for
the first two quarters 1998, REVPAR increased 3% primarily due to increases in
average room rate. For the first two quarters 1998, the combined average room
rate increased 5% over the comparable period in 1997 to $177 while the
combined average occupancy decreased two percentage points to 85%.
Hotel revenues. For the first two quarters 1998, revenues reported by the
Orlando Hotel increased 7% over the same period of 1997. The strong
performance for the first two quarters 1998 was a result of a 2% increase in
REVPAR to $139. This increase was attributed to a 4% increase in average room
rate to $162 offset by a one percentage point decrease in occupancy to 86%.
The hotel achieved its increase in average room rate as a result of rate
increases across all segments and the hotel's ability to restrict discounted
transient room rates. The decrease in occupancy was primarily due to a
decrease in group roomnights.
Rental income. Rental income for the first two quarters from the Harbor
Beach Hotel remained stable over 1997.
For the first two quarters 1998, REVPAR increased 4% to $177 when compared
to the same period in 1997. This increase was due to a 10% increase in average
room rate to $215 offset by a five percentage point decrease in occupancy to
82%. The improvement in REVPAR was primarily a result of a 16% increase in the
group rate.
Operating costs and expenses. The Partnership's operating costs and expenses
decreased 4% to $17.1 million for the first two quarters 1998 when compared to
the same period in 1997. The principal component of this category is discussed
below:
Depreciation and amortization. Depreciation and amortization for the first
two quarters 1998 increased approximately $0.3 million, or 7% as compared to
1997. The increase is primarily due to the completion of the rooms renovation
project at the Orlando Hotel during fourth quarter 1997.
Operating profit. As a result of changes in revenues and expenses discussed
above, operating profit increased by $1.4 million to $30.1 million over the
same period in 1997.
Interest expense. Interest expense for the first two quarters 1998 decreased
7% as compared to the same period in 1997 due to the refinancing of the
Orlando Hotel's mortgage debt at a lower interest rate in 1997.
Minority interest. Based upon its 50.5% ownership interest, the Partnership
controls the Harbor Beach Partnership and, as a result, the condensed
consolidated financial statements of the Partnership include the accounts of
the Harbor Beach Partnership. Minority interest represents the net income from
the Harbor Beach
MHP Supp-37
<PAGE>
Partnership allocable to the co-general partner. Minority interest in income
decreased from $3.8 million for the first two quarters 1997 to $3.6 million
for the first two quarters 1998 primarily due to a slight decrease in net
income from the Harbor Beach Partnership due to an increase in depreciation
expense.
Net income. For the first two quarters 1998, net income increased $2.5
million to $17.8 million over the same period in 1997. This increase was
primarily due to increases in hotel revenues and rental income and the
decrease in interest expense, as discussed above.
1997 Compared to 1996
Hotel Revenues. Hotel revenues increased approximately $3.1 million, or 6%,
over 1996 as a result of continued growth in corporate group business. REVPAR
at the Orlando Hotel increased 11% over 1996 to $118. This higher rate
resulted from increased demand generated by Disney's 25th Anniversary
celebration and an increase in group roomnights from the association and
international markets. Average occupancy increased by two percentage points to
80%. As a result of the increase in REVPAR, room sales at the Orlando World
Center increased $5.0 million, or 8%, over 1996. Food and beverage sales in
1997 increased $3.6 million, or 7.5%, over 1996 primarily due to an 11%
increase in banquet sales. Food and beverage profit increased $1.1 million, or
6%, over 1996 due to the increase in sales combined with continued emphasis on
cost containment. In 1998, the Orlando World Center expects demand will remain
strong and as a result, 1998 hotel revenues are expected to increase.
Direct operating costs and expenses increased $4.9 million, or 7%, over 1996
due to an increase in certain variable costs related to the increase in room
sales and higher food and beverage costs due to the creation of a special
events department at the Orlando World Center.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $326,000, or 2%, when compared to 1996 as a result of the
Hotel's ability to restrict discounted rates and achieve a higher transient
room rate. The Harbor Beach Hotel experienced an increase in corporate group
demand of almost 5,000 roomnights. REVPAR increased 6% over 1996 due to a 6%
increase in the average room rate to $173. As a result of the increase in
REVPAR, room sales and profit increased 4.5% and 4%, or $1.4 million and $1.1
million, respectively, over 1996.
Indirect hotel operating costs and expenses. Indirect hotel operating costs
and expenses increased by $3.5 million, or 13%, from $29.6 million in 1996 to
$33.1 million in 1997. The principal components of this category are discussed
below.
Depreciation and amortization. Depreciation and amortization increased 9%
from $9.7 million in 1996 to $10.6 million in 1997 primarily due to the
addition of furniture and equipment at the Harbor Beach Hotel in 1996.
Incentive management fees. In accordance with the Orlando World Center
Management Agreement, incentive management fees increased by $1.8 million, or
24%, over 1996 as a result of improved operating results at the Orlando World
Center. Cash flow from operations of the Orlando World Center Hotel was
sufficient to pay all incentive management fees earned by the Manager in 1997
and 1996. Additional incentive management fees of $1.4 million were also
earned by the Manager for the first time in 1997.
Base management fees. In accordance with the Orlando World Center Hotel
Management Agreement, base management fees increased 7%, from $3.6 million in
1996 to $3.8 million in 1997, due to improved total sales at the Orlando World
Center Hotel.
Operating Profit. Operating profit remained stable at $42.1 million due to
the increases in depreciation and amortization and incentive management fees,
as discussed above.
MHP Supp-38
<PAGE>
Interest expense. Interest expense decreased 6% from $5.1 million in 1996 to
$4.7 million in 1997 primarily due to principal payments on the Orlando
Mortgage Debt prior to refinancing of $7.0 million and repayment of the entire
Orlando Ballroom Loan in 1997.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the
accounts of the Harbor Beach Partnership are consolidated in the consolidated
financial statements of the Partnership. Minority interest in income
represents the net income from the Harbor Beach Partnership allocable to the
other general partner in that Partnership. Minority interest in income
decreased 3% in 1997 primarily due to an increase in depreciation expense
partially offset by an increase in rental income from the Harbor Beach Hotel,
as discussed above.
Net income. Net income for 1997 decreased $2.0 million, or 11%, over 1996
primarily due to the $3.1 million extraordinary loss resulting from the
prepayment penalty related to the early extinguishment of the mortgage debt on
the Orlando Hotel and the write-off of deferred financing costs related to
that debt. This loss was partially offset by higher hotel revenues in 1997.
1996 Compared to 1995
Hotel Revenues. Hotel revenues increased approximately $3.3 million, or 7%,
over 1995 as a result of continued growth in corporate group and transient
business. REVPAR at the Orlando World Center increased 2% over 1995 to $106.
This increase was a result of the Hotel's ability to restrict discounted rates
and achieve a higher average room rate. The average room rate increased 4%
from 1995 to $137. This increase was slightly offset by a 1.1 percentage point
decrease in average occupancy to 78%. The first half of a rooms renovation
project was completed during 1996, thus decreasing the availability of rooms
for sale. As a result of the increase in REVPAR, room sales at the Orlando
World Center increased $2.4 million, or 4%, over 1995. Food and beverage sales
in 1996 increased $2.1 million, or 5%, over 1995 primarily due to a 6%
increase in banquet sales. Food and beverage profit increased $1.0 million, or
6%, over 1995 due to the increase in revenues combined with continued emphasis
on cost containment.
Direct hotel operating costs and expenses increased $2.7 million, or 4%,
over 1995 due to an increase in certain variable costs related to the increase
in room sales. The ratio of operating costs to room sales declined in 1996 to
58.0% as compared to 1995 at 58.7%.
Rental Income. Rental income from the Harbor Beach Hotel increased by
approximately $1.6 million, or 8%, when compared to 1995 due to increased
transient demand especially in the leisure segment, the highest average room
rate category. The Harbor Beach Hotel experienced record call volume during
prime season and a significant increase in international travelers. REVPAR
increased 7% over 1995 due to a 5% increase in the average room rate to $164
combined with an increase in average occupancy of 1.9 percentage points to
82%. Despite a 3% decline in group roomnights, transient roomnights increased
13% over 1995. As a result of the increase in REVPAR, room sales and profit
increased 9% and 10%, or $2.6 million and $2.3 million, respectively, over
1995.
Indirect hotel operating costs and expenses. Indirect hotel operating costs
and expenses decreased by $1.3 million, or 4%, from $30.9 million in 1995 to
$29.6 million in 1996. The principal components of this category are discussed
below.
Depreciation and amortization. Depreciation and amortization decreased by
$2.0 million, or 17%, when compared to 1995 due to a portion of the Hotels'
furniture and fixtures becoming fully depreciated in 1995.
Incentive management fees. In accordance with the Orlando World Center
Management Agreement, incentive management fees increased by $0.5 million, or
7%, over 1995 as a result of improved operating results at the Orlando World
Center. Cash flow from operations of the Orlando World Center was sufficient
to pay all incentive management fees earned by the Manager in 1996 and 1995.
MHP Supp-39
<PAGE>
Base management fees. In accordance with the Orlando World Center Management
Agreement, base management fees increased 5%, from $3.4 million in 1995 to
$3.6 million in 1996, due to improved total sales at the Orlando World Center.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, operating profit increased by $6.1 million to
$42.2 million, or 59% of revenues, for 1996, from $36.1 million or 54% of
revenues for 1995.
Interest expense. Interest expense increased 1% from $21.9 million in 1995
to $22.0 million in 1996, primarily due to the Orlando Mortgage Debt loan
modification and extension in October 1995. The Orlando Mortgage Debt interest
rate was increased from 7% to 8% in October 1995. The interest rate increase
was offset slightly by principal payments on the Orlando Mortgage Debt of $7.5
million in 1996.
Minority interest in income. Based on its 50.5% ownership interest, the
Partnership controls the Harbor Beach Partnership and as a result, the
accounts of the Harbor Beach Partnership are consolidated in the consolidated
financial statements of the Partnership. Minority interest in income
represents the net income from the Harbor Beach Partnership allocable to the
other general partner in that Partnership. Minority interest in income
increased from $1.7 million in 1995 to $2.6 million in 1996, primarily due to
the increase in rental income from the Harbor Beach Hotel, as discussed above.
Net income. Net income for 1996 increased $5.3 million, or 40%, over 1995
primarily due to higher Hotel revenues and rental income, offset by increased
incentive and base management fees and an increase in minority interest in
income.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions, Host Marriott Corporation
("Host Marriott") and its affiliates or Marriott International, Inc. (the
"Manager") and its affiliates. The general partner believes that the
Partnership will have sufficient capital resources and liquidity to continue
to conduct its business in the ordinary course.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to fund the property improvement funds of the Hotels, to pay
required principal amortization of the mortgage debt and other debt incurred
to fund costs of capital improvements at the Hotels, financing costs and cash
distributions to the partners.
Total consolidated cash provided by operations for the first two quarters
1998 and 1997, was $26.1 million and $25.6 million, respectively. The increase
was primarily due to an increase in hotel revenues and rental income when
compared to the same period in 1997. Total consolidated cash provided by
operations was $31.8 million, $27.6 million and $25.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
For the first two quarters 1998 and 1997, cash used in investing activities
was $5.4 million and $5.1 million, respectively, consisting primarily of an
increase in additions to property and equipment. This is primarily due to the
commencement of the Orlando Hotel expansion project in May 1998. Cash used in
investing activities was $12.8 million, $8.9 million and $6.9 million for the
years ended December 31, 1997, 1996, and 1995, respectively. The Partnership's
investing activities consist primarily of contributions to the property
improvement fund of the Hotels of $9.1 million, $8.7 million and $7.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
For the first two quarters 1998 and 1997, cash used in financing activities
was $3.0 million and $7.4 million, respectively. The decrease in cash used in
financing activities was primarily the result of a decrease in principal
MHP Supp-40
<PAGE>
repayments on the mortgage debt and the receipt of construction loan advances.
During the first two quarters 1998, the Partnership distributed $1.5 million
to its partners ($1,500 per limited partner unit). This distribution
represented $540 per limited partner unit from 1997 operations and $960 per
limited partner unit related to first quarter 1998 operations. In addition, on
August 4, 1998, the Partnership distributed $8,080,808 ($8,000 per limited
partner unit) from 1998 operations. Cash used in financing activities was $9.8
million, $20.7 million and $18.0 million for the years ended December 31,
1997, 1996 and 1995 respectively. Principal repayments made on the mortgage
debt of the Hotels totaled $8.5 million, $8.9 million and $9.0 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Payment of
financing costs related to the mortgage debt of the Partnership Hotels totaled
$2.0 million, $40,000 and $2.3 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash distributed to the partners was $7.8
million, $5.0 million and $2.1 million for the years ended December 31, 1997,
1996 and 1995, respectively. Cash distributions paid to minority interest were
$2.0 million, $2.1 million and $1.5 million for the years ended December 31,
1997, 1996 and 1995, respectively.
Pursuant to the refinancing of the Orlando Mortgage Debt, the Partnership
received proceeds of $152.0 million. Of the proceeds, $139.3 million was used
to repay the outstanding principal balance on the Orlando Mortgage Debt and
accrued interest, $2.0 million was used to pay related refinancing costs and
$1.9 million was used to pay prepayment penalties. The remaining $8.8 million
is held by the Partnership as working capital.
During 1997, Marriott International Capital Corporation ("MICC"), a wholly-
owned subsidiary of Marriott International, advanced $3.5 million to the
Orlando World Center to provide financing for the rooms and suites
refurbishment. Principal repayments to Host Marriott related to the Orlando
Ballroom Loan and the Orlando Rooms Renovation Loan totaled $2.3 million, $4.1
million and $2.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Principal repayments to MICC related to the Harbor Beach Rooms
Renovation Loan totaled $0.6 million, $0.5 million and $0.5 million for each
of the years ended December 31, 1997, 1996 and 1995.
The General Partner believes that cash from operations will provide adequate
funds for the operational needs of the Partnership and the Harbor Beach
Partnership for the foreseeable future. The interest rates on the refinanced
Orlando Mortgage Debt and the Harbor Beach Mortgage Debt are fixed at 7.48%
and 9.13%, respectively. The Harbor Beach Mortgage Debt matures in the year
2000, at which time the loan-to-value ratios and debt service coverage of the
Harbor Beach Hotel is expected to enhance the Harbor Beach Partnership's
ability to secure replacement financing.
Property Improvement Funds
The Orlando World Center Management Agreement and the Harbor Beach Hotel
Operating Lease provide for the establishment of a property improvement fund
for each Hotel. Pursuant to these agreements, contributions to the funds are
equal to a percentage of total sales of each Hotel and are used to provide for
the funding of routine capital expenditures and the replacement of furniture,
fixtures and equipment. Upon maturity of the Orlando World Center Mortgage
Debt on June 16, 1995, contributions to the Orlando World Center fund
increased from 4% to 5% of total sales. Total contributions to the Orlando
World Center fund were $6.4 million, $6.0 million and $5.1 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Total capital
expenditures at the Orlando World Center were $7.9 million, $8.1 million and
$4.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, principal and interest paid to MICC on the Orlando
Rooms Renovation Loan totaled $100,000 in 1997. The balance of the Orlando
World Center fund was $2.9 million as of December 31, 1997.
Contributions to the Harbor Beach Hotel's property improvement fund are
equal to 5% of total hotel sales. Total contributions to the Harbor Beach
Hotel fund were $2.7 million, $2.7 million and $2.6 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Total capital
expenditures at the Harbor Beach Hotel were $2.5 million, $1.6 million and
$1.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance of the Harbor Beach Hotel fund was $3.2 million as
of December 31, 1997.
MHP Supp-41
<PAGE>
INFLATION
For the three fiscal years ended December 31, 1997 and the First Two
Quarters 1998, the rate of inflation has been relatively low and, accordingly,
has not had a significant impact to the Partnership's revenues and net income.
The manager is generally able to pass through increased costs to customers
through higher room rates. In 1997, the increase in average room rates at the
Hotels exceeded those of direct competitors as well as the general level of
inflation. The amount of the Partnership's interest expense under 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, Host Marriott Corporation, the parent company of
the General Partner, has invested in implementing new accounting systems which
are Year 2000 compliant. Accordingly, the General Partner believes that future
costs associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by the
Manager of its properties to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
MHP Supp-42
<PAGE>
FINANCIAL STATEMENTS
MHP Supp-43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Hotel Properties Limited Partnership (a Delaware limited partnership) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1995 financial statements
of Lauderdale Beach Association, which statements reflect total assets and
total revenues of 25 percent and 29 percent in 1995, respectively, of the
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for that entity, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Marriott Hotel Properties Limited
Partnership and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
March 11, 1998
MHP Supp-44
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $222,216 $222,491
Minority interest......................................... 10,042 10,641
Due from Marriott International, Inc. and affiliates...... 7,912 9,114
Property improvement funds................................ 6,056 3,542
Deferred financing costs, net............................. 2,130 1,787
Loan deposit.............................................. 1,800 --
Prepaid ground rent....................................... 259 259
Cash and cash equivalents................................. 10,694 1,607
-------- --------
$261,109 $249,441
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage debt............................................. $235,946 $230,959
Notes payable and amounts due to Marriott International,
Inc. and affiliates...................................... 4,987 4,106
Accounts payable and accrued interest..................... 196 802
Note payable and amounts due to Host Marriott
Corporation.............................................. 132 2,405
-------- --------
Total Liabilities................................... 241,261 238,272
-------- --------
PARTNERS' CAPITAL
General Partner
Capital contribution.................................... 1,010 1,010
Capital distributions................................... (590) (512)
Cumulative net losses................................... (113) (277)
-------- --------
307 221
-------- --------
Limited Partners
Capital contributions, net of offering costs of
$10,978................................................ 89,022 89,022
Investor notes receivable............................... -- (47)
Capital distributions................................... (58,324) (50,618)
Cumulative net losses................................... (11,157) (27,409)
-------- --------
19,541 10,948
-------- --------
Total Partners' Capital............................. 19,848 11,169
-------- --------
$261,109 $249,441
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MHP Supp-45
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)................................. $ 53,574 $ 50,523 $ 47,251
Rental income (Note 8)......................... 21,637 21,311 19,747
-------- -------- --------
75,211 71,834 66,998
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................. 10,601 9,693 11,739
Incentive management fees to Marriott
International and affiliates.................. 9,308 7,518 7,047
Base management fees to Marriott International
and affiliates................................ 3,846 3,609 3,431
Property taxes................................. 3,336 3,059 3,104
Ground rent, insurance and other............... 6,025 5,770 5,624
-------- -------- --------
33,116 29,649 30,945
-------- -------- --------
Operating Profit................................. 42,095 42,185 36,053
Interest expense (including interest paid to
related parties of $0.3 million, $0.7 million
and $1.0 million in 1997, 1996 and 1995,
respectively)................................... (20,842) (22,007) (21,864)
Interest income.................................. 803 919 679
-------- -------- --------
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY
ITEM............................................ 22,056 21,097 14,868
MINORITY INTEREST IN INCOME...................... (2,579) (2,648) (1,718)
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM................. 19,477 18,449 13,150
EXTRAORDINARY ITEM:
Loss on extinguishment of debt................. (3,061) -- --
-------- -------- --------
NET INCOME....................................... $ 16,416 $ 18,449 $ 13,150
======== ======== ========
ALLOCATION OF NET INCOME
General Partner................................ $ 164 $ 184 $ 132
Limited Partners............................... 16,252 18,265 13,018
-------- -------- --------
$ 16,416 $ 18,449 $ 13,150
======== ======== ========
INCOME BEFORE EXTRAORDINARY ITEM PER LIMITED
PARTNER UNIT (1,000 Units)...................... $ 19,282 $ 18,265 $ 13,018
======== ======== ========
NET INCOME PER LIMITED PARTNER UNIT (1,000
Units).......................................... $ 16,252 $ 18,265 $ 13,018
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MHP Supp-46
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994......................... $(24) $(13,287) $(13,311)
Net income....................................... 132 13,018 13,150
Capital distributions............................ (21) (2,084) (2,105)
---- -------- --------
Balance, December 31, 1995......................... 87 (2,353) (2,266)
Net income....................................... 184 18,265 18,449
Capital distributions............................ (50) (4,964) (5,014)
---- -------- --------
Balance, December 31, 1996......................... 221 10,948 11,169
Net income....................................... 164 16,252 16,416
Investor note payments........................... -- 47 47
Capital distributions............................ (78) (7,706) (7,784)
---- -------- --------
Balance, December 31, 1997......................... $307 $ 19,541 $ 19,848
==== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MHP Supp-47
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 16,416 $ 18,449 $ 13,150
Extraordinary item............................ 3,061 -- --
--------- -------- --------
Income before extraordinary item.............. 19,477 18,449 13,150
Noncash items:
Depreciation and amortization............... 10,601 9,693 11,739
Minority interest in income................. 2,579 2,648 1,718
Amortization of deferred financing costs as
interest................................... 519 519 1,041
Loss on disposal of property and equipment.. -- 6 48
Changes in operating accounts:
Payment of deferred incentive management
fees....................................... (2,046) (1,474) (1,972)
Due from Marriott International, Inc. ...... 1,202 (1,964) (360)
Accounts payable and accrued interest....... (595) (292) 325
Due to Host Marriott Corporation............ 21 47 62
Prepaid ground rent and other receivables... -- -- 4
--------- -------- --------
Cash provided by operating activities..... 31,758 27,632 25,755
--------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment........... (10,326) (9,732) (6,123)
Changes in property improvement funds......... (2,514) 821 (1,748)
Withdrawal from capital reserve escrow........ -- -- 949
--------- -------- --------
Cash used in investing activities......... (12,840) (8,911) (6,922)
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from mortgage debt................... 152,000 -- --
Repayments of mortgage debt and capital lease
obligations.................................. (147,013) (8,901) (8,970)
Capital distributions to partners............. (7,777) (5,007) (2,105)
Proceeds from (repayments of) notes payable to
Marriott International, Inc. ................ 2,909 (486) (485)
Repayments to Host Marriott Corporation....... (2,294) (4,126) (2,727)
Payment of financing costs.................... (2,004) (40) (2,254)
Capital distributions to minority interest.... (1,980) (2,104) (1,485)
Payment of prepayment penalty................. (1,919) -- --
Payment of loan deposit....................... (1,800) -- --
Collection of investor notes receivable....... 47 -- --
--------- -------- --------
Cash used in financing activities......... (9,831) (20,664) (18,026)
--------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 9,087 (1,943) 807
CASH AND CASH EQUIVALENTS at beginning of year.. 1,607 3,550 2,743
--------- -------- --------
CASH AND CASH EQUIVALENTS at end of year........ $ 10,694 $ 1,607 $ 3,550
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest..... $ 20,894 $ 21,390 $ 20,893
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
MHP Supp-48
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed on August 22, 1984, to acquire,
construct, own and operate the 1,503-room Marriott Orlando World Center Hotel
(the "Orlando World Center"). The Orlando World Center is managed as part of
the Marriott Hotels, Resorts and Suites full-service hotel system by Marriott
International, Inc. (the "Manager" or "Marriott International").
Between November 1, 1985 and November 27, 1985 (the "Closing Date"), 1,000
limited partnership interests (the "Units"), representing a 99% interest in
the Partnership, were sold in a private placement. The limited partners paid
$10,000,000 in cash on the Closing Date with the remainder due in five annual
installments through May 15, 1990. The limited partners' obligations to make
the installment payments were evidenced by promissory notes totaling
$45,350,000 payable to the Partnership and secured by the Units. The general
partner is Hotel Properties Management, Inc. (the "General Partner"), a
wholly-owned subsidiary of Host Marriott Corporation, with a 1% general
partnership interest.
On the Closing Date, the Partnership purchased from affiliates of Host
Marriott (i) a 99% limited partnership interest in the Warner Center Marriott
Hotel Limited Partnership (the "Warner Center Partnership"), which owned the
473-room Warner Center Marriott Hotel (the "Warner Center Hotel") in Los
Angeles, California and (ii) a 49% general partnership interest in, and a loan
receivable of $3,680,000 from, Lauderdale Beach Association (the "Harbor Beach
Partnership"), a general partnership that owns Marriott's 624-room Harbor
Beach Resort (the "Harbor Beach Hotel") in Ft. Lauderdale, Florida. As a
result of certain transactions, the Partnership now owns a 50.5% interest in
the Harbor Beach Partnership. The Harbor Beach Hotel is leased to Marriott
Hotel Services, Inc. (the "Operating Tenant"), a wholly-owned subsidiary of
Marriott International. On November 17, 1993, the lender foreclosed on the
Warner Center Hotel. The foreclosure was followed by the dissolution of the
Warner Center Partnership.
On January 14, 1997, MHP Acquisition Corporation (the "Company"), a wholly-
owned subsidiary of Host Marriott, completed a tender offer for limited
partnership units in the Partnership. The Company purchased 463.75 units for
an aggregate consideration of $37.1 million or $80,000 per unit. Additionally,
in a Partnership vote held in conjunction with the tender offer, the limited
partners approved all of the proposed amendments to the partnership agreement
that were conditions to the tender offer. Subsequent to the tender offer, the
Company purchased an additional 8 units on March 29, 1997 and one unit on June
21, 1997. Combined with its prior ownership position, Host Marriott now
indirectly owns, through affiliates, 48.84% of the Partnership.
Partnership Allocations and Distributions
The Partnership generally allocates net profits and losses, cash available
for distribution and tax credits as follows: (i) first, 1% to the General
Partner and 99% to the limited partners until cumulative distributions of sale
and refinancing proceeds ("Capital Receipts") equal to 50% of capital
contributions have been distributed; (ii) next, 15% to the General Partner and
85% to the limited partners until cumulative distributions of Capital Receipts
equal to all capital contributions have been distributed; and (iii)
thereafter, 30% to the General Partner and 70% to the limited partners.
Capital Receipts not retained by the Partnership will generally be
distributed (i) first, 1% to the General Partner and 99% to the limited
partners until the General Partner and the limited partners (collectively the
"Partners") have received cumulative distributions of Capital Receipts equal
to their capital contributions; and (ii) thereafter, 30% to the General
Partner and 70% to the limited partners.
MHP Supp-49
<PAGE>
Gains are generally allocated (i) first, to Partners with negative capital
accounts, (ii) next, in amounts necessary to bring each Partner's capital
account balance equal to their invested capital, defined as the excess of
paid-in capital contributions over cumulative distributions of Capital
Receipts, and (iii) thereafter, 30% to the General Partner and 70% to the
limited partners.
Upon the sale of substantially all of the assets, gains and sales proceeds
will be distributed based on a specific allocation, as stated in the
partnership agreement, in order to provide the limited partners (if proceeds
are sufficient) a 15% cumulative return, as defined, to the extent not
previously received from cash distributions.
For financial reporting purposes, net losses of the Partnership are
allocated 1% to the General Partner and 99% to the limited partners.
The Harbor Beach Partnership generally allocates profits and losses, cash
distributions, gains and losses, and Capital Receipts in the ratio of
ownership interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the management agreement discussed in Note 8, the
Partnership is required to provide the Manager with working capital and
supplies to meet the operating needs of the Orlando World Center. The Manager
converts cash advanced by the Partnership into other forms of working capital
consisting primarily of operating cash, inventories, and trade receivables and
payables which are maintained and controlled by the Manager. Upon the
termination of the management agreement, the Manager is required to convert
working capital and supplies into cash and return it to the Partnership. As a
result of these conditions, the individual components of working capital and
supplies controlled by the Manager are not reflected in the accompanying
consolidated balance sheet. As of December 31, 1997 and 1996, $4,707,000 has
been advanced to the Manager for working capital and supplies which is
included in "Due from Marriott International, Inc." on the accompanying
consolidated balance sheet. The supplies advanced to the Manager are recorded
at their estimated net realizable value. As of December 31, 1997 and 1996,
accumulated amortization related to the revaluation of these supplies totaled
$762,000.
Revenues and Expenses
Hotel Revenues represents house profit from the Orlando World Center since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Orlando World Center to the
Manager. House profit reflects hotel operating results which flow to the
Partnership as property owner and represents gross hotel sales less property-
level expenses, excluding depreciation and amortization, base and incentive
management fees, real and personal property taxes, ground and equipment rent,
insurance and certain other costs, which are disclosed separately in the
consolidated statement of operations (see Note 3).
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to
MHP Supp-50
<PAGE>
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Arrangements." EITF 97-2 addresses the circumstances in
which a management entity may include the revenues and expenses of a managed
entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotel. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $74.6 million, $70.0 million and $67.1 million for the year
ended December 31, 1997, 1996 and 1995, respectively, and will have no impact
on operating profit or net income.
Principles of Consolidation
The consolidated financial statements for the years ended December 31, 1997,
1996 and 1995 include the accounts of the Partnership and the Harbor Beach
Partnership (collectively the "Partnerships"). The 49.5% general partnership
interest in the Harbor Beach Partnership owned by an unrelated party is
reported as minority interest. All significant intercompany balances and
transactions have been eliminated.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the following estimated
useful lives of the assets, less a 10% estimated residual value on the
original building cost and land improvements related to the Orlando World
Center:
<TABLE>
<S> <C>
Land improvements............................................. 40 to 50 years
Building and improvements..................................... 40 to 50 years
Leasehold improvements........................................ 40 years
Furniture and equipment....................................... 3 to 10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership and the Harbor Beach Partnership assess the impairment of
their real estate properties based on whether estimated future undiscounted
cash flow from such properties on an individual hotel basis will be less than
their net book value. If a property is impaired, its basis is adjusted to fair
market value.
Deferred Financing Costs
Prior to 1997, deferred financing costs consisted of costs incurred in
connection with the October 31, 1995 refinancing of the Orlando Mortgage Debt,
described in Note 6. Deferred financing costs associated with this refinancing
totaled $2,316,000. On December 31, 1997, the Partnership refinanced the
Orlando Mortgage Debt and incurred financing costs of $2,004,000. The deferred
financing costs are amortized over the period of the debt using the straight-
line method which approximates the effective interest rate method. The net
deferred financing costs associated with the 1995 refinancing of $1,142,000
were amortized on December 31, 1997 and are reflected as part of the
extraordinary loss on the consolidated statement of operations. Deferred
financing costs associated with the restructuring of the Harbor Beach Mortgage
Debt (see Note 6) amounted to $350,000. Accumulated amortization of deferred
financing costs was $224,000 and $879,000 at December 31, 1997 and 1996,
respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather allocates its profits and losses to the individual
MHP Supp-51
<PAGE>
partners. Significant differences exist between the net income for financial
reporting purposes and the net income reported in the Partnership's tax
return. These differences are due primarily to the use, for income tax
purposes, of accelerated depreciation methods, shorter depreciable lives of
the assets, differences in the timing of the recognition of base and incentive
management fee expense and the expensing of certain costs incurred during
construction which have been capitalized in the accompanying financial
statements. As a result of these differences, the excess of the tax basis in
net Partnership liabilities over the net liabilities reported in the
accompanying financial statements amounted to $109,961,000 and $100,739,000 as
of December 31, 1997 and 1996, respectively.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 has not had an
effect on the consolidated financial statements.
NOTE 3. HOTEL REVENUES
Hotel Revenues consist of hotel operating results for the Orlando World
Center for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $64,277 $59,289 $56,881
Food and beverage................................. 51,424 47,852 45,708
Other............................................. 12,517 13,157 11,762
------- ------- -------
128,218 120,298 114,351
------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................... 12,801 12,201 11,665
Food and beverage............................... 32,391 29,968 28,784
Other hotel operating expenses.................... 29,452 27,606 26,651
------- ------- -------
74,644 69,775 67,100
------- ------- -------
HOTEL REVENUES...................................... $53,574 $50,523 $47,251
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land and improvements.................................. $ 31,074 $ 31,074
Building and improvements.............................. 152,560 152,361
Leasehold improvements................................. 82,871 80,841
Furniture and equipment................................ 77,943 69,846
--------- ---------
344,448 334,122
Less accumulated depreciation.......................... (122,232) (111,631)
--------- ---------
$ 222,216 $ 222,491
========= =========
</TABLE>
MHP Supp-52
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage debt.................. $ 235,946 $ 237,725 $ 230,959 $ 233,468
Note payable due to Host
Marriott Corporation.......... -- -- 2,294 2,294
Incentive management fees
payable to
Marriott International, Inc. .. -- -- 2,046 2,046
Notes payable due to Marriott
International, Inc. .......... 4,802 4,748 1,893 1,847
</TABLE>
The estimated fair value of mortgage debt is based on the expected future
debt service payments discounted at estimated market rates. Notes payable due
to Host Marriott Corporation and Marriott International, Inc. and incentive
management fees payable to Marriott International, Inc. are valued based on
the expected future payments from operating cash flow discounted at risk-
adjusted rates.
NOTE 6. DEBT
The Partnerships have entered into various long-term loan agreements to
provide nonrecourse mortgage financing for the Hotels. Combined mortgage debt
maturities, at December 31, 1997 are (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 2,965
1999................................................................ 3,346
2000................................................................ 82,049
2001................................................................ 1,748
2002................................................................ 1,884
Thereafter.......................................................... 143,954
--------
$235,946
========
</TABLE>
Orlando Mortgage
On January 12, 1993 (the "Closing Date"), the General Partner refinanced the
Orlando World Center mortgage debt (the "Orlando Mortgage Debt"). On the
Closing Date, the Partnership paid $29.3 million to the lender which was
applied as follows: $12.0 million to the outstanding principal balance, $13.5
million to interest due through the Closing Date and $3.8 million to financing
costs. The Orlando Mortgage Debt carried a fixed rate of interest of 6.705%
and required semi-annual principal amortization totaling $22 million through
its maturity on June 16, 1995 (the "Maturity Date").
On the Maturity Date, the lender granted the Partnership a forbearance on
the loan extending it from June 16, 1995 through October 31, 1995. The
Partnership paid interest monthly in arrears at a floating rate equal to the
applicable Federal Funds rate plus 225 basis points. During the forbearance
period, the weighted average interest rate was 7.94%. On October 31, 1995, the
Partnership successfully completed a modification and extension of the Orlando
Mortgage Debt. The mortgage debt carried a fixed rate of interest of 8.44% and
required semi-annual amortization of principal. The loan was due to mature on
June 16, 2000 with unamortized principal of $127.0 million due at that time.
No debt service guarantee was provided. As of December 31, 1997 and December
31, 1996, the outstanding principal balance was $138,479,000 and $145,479,000,
respectively. The outstanding principal balance was repaid on December 31,
1997 with proceeds from the refinancing discussed below.
MHP Supp-53
<PAGE>
On October 31, 1997, the General Partner executed a commitment letter with
two new lenders to refinance the Orlando World Center's mortgage debt. The new
loan provides a total borrowing capacity of $240 million.
On December 31, 1997, the Partnership completed the refinancing of the
mortgage debt. The new lenders provided $152 million to pay the outstanding
balance on the existing mortgage and accrued interest of $139.3 million,
related financing costs of $2.0 million, a prepayment penalty of $1.9 million
that has been reflected as part of the extraordinary loss on the accompanying
consolidated statement of operations and the remaining $8.8 million is part of
the Partnership's working capital. The loan requires monthly payments of
interest at a fixed rate of 7.48% and principal based on a 30-year
amortization schedule. The loan matures on January 1, 2008.
The remaining balance of $88 million is available for the construction costs
associated with a 500-room expansion at the Orlando World Center. In
connection with the executed commitment letter, the Partnership advanced $2.4
million to the lender as a good faith deposit. Upon completion of the $152
million portion of the loan, the lender returned $600,000 of this deposit. The
remaining $1.8 million will be returned to the Partnership upon completion of
construction. The General Partner is currently working with the lender to
finalize the documents related to this construction loan.
The refinanced mortgage debt is secured by the Orlando World Center, the
land on which the Orlando World Center and golf course are located and an
assignment of certain operating agreements.
Harbor Beach Mortgage
The original Harbor Beach loan agreement provided $86.6 million for
construction of the Harbor Beach Hotel. On June 30, 1986, this debt was
refinanced with a major insurance company. The $92 million replacement loan
(the "Harbor Beach Mortgage Debt") bore interest at a fixed rate of 9.375% and
required payments of interest only through July 1988 and monthly payments of
principal and interest in the amount of $765,000 thereafter until maturity on
July 1, 1993. Upon maturity, the lender granted the Harbor Beach Partnership a
forbearance of the loan for a fee of $165,000. Under the forbearance
agreement, the Harbor Beach Partnership continued to pay the lender through
March 29, 1994, payments of principal and interest in accordance with the
terms of the Harbor Beach Mortgage Debt.
On March 29, 1994 (the "Closing Date"), the Harbor Beach Partnership
completed the restructuring of the Harbor Beach Mortgage Debt. The
restructured mortgage debt carries a fixed rate of interest of 9.125% (the
"Contract Interest Rate") and is payable monthly in arrears. Interest only at
the Contract Interest Rate was due and payable for the first twelve payments
through and including April 1, 1995. For the period from the Closing Date
through April 1, 1995, the difference between the interest only payment and
$772,600 (the "Payment Amount") was contributed to an escrow account with the
lender to fund capital improvements at the Harbor Beach Hotel. The Payment
Amount represents the amount necessary to amortize the outstanding principal
balance, as of the Closing Date, over a 22-year effective amortization period.
The loan matures on May 1, 2000. The restructured mortgage debt is
collateralized by all property and assets of the Harbor Beach Hotel. No debt
service guarantee was provided. As of December 31, 1997 and 1996, the
outstanding principal balance was $83,946,000 and $85,480,000, respectively.
Orlando Ballroom Loan
During 1990, Host Marriott agreed to provide interim financing of up to $14
million to fund the construction of a new ballroom and exhibition hall at the
Orlando World Center. Construction was completed in February 1990. On December
31, 1990, the interim financing was converted to a permanent loan from Host
Marriott with $13.2 million advanced. Interest only, at the Bankers Trust
Company prime rate, was payable from the Partnership's cash flow after debt
service. On June 16, 1992, in conjunction with the refinancing of the Orlando
Mortgage Debt, the Orlando ballroom loan was converted from a term loan to a
revolving line of credit with a floating interest rate equal to the Bankers
Trust Company prime rate. As of December 31, 1996, the outstanding principal
balance was $2,294,000. The remaining outstanding principal balance was paid
in full on June 24, 1997. The weighted average effective interest rate for the
period from January 1, 1997 through June 24, 1997 and for
MHP Supp-54
<PAGE>
the years ended December 31, 1996 and 1995 was 8.4%, 8.3% and 8.8%,
respectively (rate as of June 24, 1997 and December 31, 1996 was 8.5% and
8.3%, respectively).
Orlando Rooms Renovation Loan
During 1997, the Partnership entered into a loan agreement (the "Orlando
Rooms Renovation Loan") with Marriott International Capital Corporation
("MICC"), a wholly-owned subsidiary of Marriott International, in conjunction
with a rooms and suites refurbishment at the Orlando World Center. The loan
provided financing of $3.5 million. The loan requires payments of principal
and interest to be paid from the Orlando World Center property improvement
fund. This unsecured loan carries a fixed interest rate of 9% and matures on
June 16, 1999. The outstanding principal balance was $3,472,000 on December
31, 1997.
Harbor Beach Rooms Renovation Loan
On July 21, 1994, the Harbor Beach Partnership entered into a loan agreement
with MICC in conjunction with a rooms and suites refurbishment at the Harbor
Beach Hotel. The loan provided financing of up to $2.8 million, plus accrued
interest through December 31, 1994, to fund costs in excess of funds available
in the Harbor Beach Partnership's property improvement fund. This unsecured
loan carries a fixed rate of interest of 8%. Accrued interest totaling $64,000
was rolled into the principal balance at December 31, 1994. Payments of
principal and interest based upon a five-year amortization period commenced in
January 1995. Under the terms of the loan, the debt service payments are
included as a deduction in determining the fees paid to the Operating Tenant,
as described in Note 8. As of December 31, 1997 and 1996, the outstanding
principal balance was $1,330,000 and $1,893,000, respectively. Interest earned
by MICC was $128,000, $171,000 and $211,000 in 1997, 1996 and 1995,
respectively.
NOTE 7. LEASES
The Harbor Beach Partnership, through an assignment of a lease on January
15, 1982, acquired all rights to a 99-year lease with a 25-year renewal option
for the land on which the Harbor Beach Hotel is located. On April 28, 1993,
the lessor sold its rights under the lease to an unrelated party. A provision
under the sale of the lease provided for the early refund to the Harbor Beach
Partnership of the remaining $1,250,000 balance of an initial $2,500,000
security deposit paid to the lessor and a $500,000 payment to facilitate the
modification of the lease.
Lease payments are made quarterly in advance in accordance with a lease year
that operates from December 1 through November 30. The annual rental is
$1,560,000 for lease years 1995 through 1999. After lease year 1999, annual
rentals for each succeeding five-year period increase by an amount equal to
10% of the previous annual rental.
Minimum annual rentals during the term of the ground lease are (in
thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998............................................................... $ 1,560
1999............................................................... 1,573
2000............................................................... 1,716
2001............................................................... 1,716
2002............................................................... 1,716
Thereafter......................................................... 311,043
--------
Total Minimum Lease Payments....................................... $319,324
========
</TABLE>
NOTE 8. MANAGEMENT AND OPERATING LEASE AGREEMENTS
The Partnership has entered into a long-term management agreement with the
Manager, and the Harbor Beach Partnership has entered into a long-term
operating lease with the Operating Tenant. The Hotels are operated as part of
the Marriott Hotels, Resorts and Suites full-service hotel system. Significant
provisions under the agreements are as follows:
MHP Supp-55
<PAGE>
Orlando World Center. The management agreement provides for an initial term
of 25 years, commencing with the opening of the Orlando World Center (March
24, 1986), and five 10-year renewals at the Manager's option. The Manager is
paid a base management fee of 3% of gross hotel sales and is also entitled to
an incentive management fee equal to 20% of operating profit, as defined, and
an additional incentive management fee equal to 30% of the following amount:
(i) 80% of operating profit in each fiscal year less (ii) the greater of (a)
$25,000,000 or (b) debt service plus $7,000,000. Payment of the incentive
management fee is subordinate to debt service and retention of specified
amounts of operating profit by the Partnership. Unpaid incentive management
fees are deferred without interest and are payable from future operating cash
flow, as defined, but are due upon termination of the management agreement
only if the termination is the result of a default by the Partnership. Unpaid
incentive management fees as of December 31, 1996 were $2,046,000 which were
paid in 1997. Therefore, there were no unpaid incentive management fees as of
December 31, 1997. In addition, based on higher cash flow from the Orlando
Hotel, the Manager earned additional incentive management fees in 1997 which
were paid during the year.
Under the management agreement, the Manager is required to furnish the
Orlando World Center with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott full-service 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 full-service
hotels managed, owned or leased by Marriott International or its subsidiaries.
In addition, the Hotel participates in Marriott International's Marriott
Rewards Program ("MRP"). This program was formerly known as the Honored Guest
Awards Program ("HGA"). The cost of this program is charged to all hotels in
the Marriott hotel system based upon the MRP sales at each hotel. The total
amount of Chain Services and MRP costs allocated to the Orlando World Center
was $3,149,000, $3,588,000, and $3,336,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Harbor Beach Hotel. The operating lease provides for an initial 36-year term
commencing with the opening of the Harbor Beach Hotel (October 29, 1984), with
options to renew for six successive 10-year periods based on certain defined
conditions. The annual rental paid to the Harbor Beach Partnership includes
the following:
. basic rental: annual rental payable under the land lease and insurance
costs
. percentage rental: determined by multiplying the applicable percentage
set annually by the Harbor Beach Partnership by revenues
. performance rental: first $9,720,000 of operating profit of the Harbor
Beach Hotel, as defined
. additional performance rental: 50% of operating profit of the Harbor
Beach Hotel, as defined, in excess of $9,720,000
. contingent rental: up to 50% of operating profit of the Harbor Beach
Hotel, as defined, in excess of $9,720,000 if the aggregate annual
rental is otherwise insufficient to cover debt service.
Pursuant to the terms of the Harbor Beach rooms renovation loan (see Note
6), the annual performance rental is adjusted upward by the annual debt
service required under the loan. For the five-year period beginning with 1995
and ending in 1999, annual performance rental is increased by $696,557 to
$10,416,557. Subsequent to year-end 1999, performance rental will return to
$9,720,000.
Percentage rental is intended to cover the cost of utilities, repairs and
maintenance, and the required contribution to the property improvement fund
(5% of sales) and is therefore adjusted annually in order to equal the actual
applicable costs. Any payments of contingent rental reduce future payments of
additional performance rental (subject to limitations) in subsequent years. No
contingent rental has been accrued as of December 31, 1997 and 1996.
MHP Supp-56
<PAGE>
Rental income under the Harbor Beach Partnership operating lease for the
three years ended December 31, 1997 was (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic Rental........................................ $ 1,712 $ 1,694 $ 1,616
Percentage Rental................................... 6,284 6,240 5,921
Performance Rental.................................. 10,417 10,417 10,417
Additional Performance Rental....................... 3,224 2,960 1,793
------- ------- -------
$21,637 $21,311 $19,747
======= ======= =======
</TABLE>
Cost and accumulated depreciation of the rental property were $103,110,000
and $41,299,000 at December 31, 1997, and $100,647,000 and $37,279,000,
respectively, at December 31, 1996.
Property Improvement Funds
The management agreement and the operating lease provide for the
establishment of a property improvement fund for each of the Hotels.
Contributions to the property improvement funds are equal to five percent of
gross sales of each hotel. Contributions to the fund for the Orlando World
Center totaled $6,411,000 and $6,015,000 for the years ended December 31, 1997
and 1996, respectively. Contributions to the fund for the Harbor Beach Hotel
totaled $2,730,000 and $2,729,000 for the years ended December 31, 1997 and
1996, respectively.
NOTE 9. COMPARATIVE LEASED HOTEL OPERATING RESULTS
The Harbor Beach Hotel is a leased property whose income to the Partnership
is included in the consolidated statement of operations as rental income. The
following is a comparative summary of hotel operating results for the Harbor
Beach Hotel for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................. $32,322 $30,939 $28,384
Food and beverage................................. 20,668 20,764 19,366
Other............................................. 5,089 5,016 4,857
------- ------- -------
58,079 56,719 52,607
------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................... 5,882 5,566 5,332
Food and beverage............................... 12,937 12,664 12,140
Other hotel operating expenses.................... 22,395 22,151 21,219
------- ------- -------
41,214 40,381 38,691
------- ------- -------
HOTEL REVENUES...................................... $16,865 $16,338 $13,916
======= ======= =======
</TABLE>
MHP Supp-57
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Hotel................................................... $ 32,957 $ 30,867
Rental income........................................... 15,011 15,006
--------- ---------
47,968 45,873
--------- ---------
OPERATING COSTS AND EXPENSES
Incentive management fees............................... 6,328 6,187
Depreciation and amortization........................... 4,892 4,561
Base management fees.................................... 2,095 2,024
Ground rent, property taxes and other................... 4,538 4,368
--------- ---------
17,853 17,140
--------- ---------
OPERATING PROFIT.......................................... 30,115 28,733
Interest expense........................................ (9,199) (9,893)
Other revenue........................................... 505 285
--------- ---------
INCOME BEFORE MINORITY INTEREST........................... 21,421 19,125
MINORITY INTEREST IN INCOME............................... (3,603) (3,782)
--------- ---------
NET INCOME................................................ $ 17,818 $ 15,343
========= =========
ALLOCATION OF NET INCOME
General Partner......................................... $ 178 $ 153
Limited Partners........................................ 17,640 15,190
--------- ---------
$ 17,818 $ 15,343
========= =========
NET INCOME PER LIMITED PARTNER UNIT (1,000 Units)......... $ 17,640 $ 15,190
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
MHP Supp-58
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $220,939 $222,216
Due from Marriott International, Inc. and affiliates.. 9,012 7,912
Minority interest..................................... 7,924 10,042
Other assets.......................................... 12,022 10,245
Cash and cash equivalents............................. 28,367 10,694
-------- --------
$278,264 $261,109
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt....................................... $237,183 $235,946
Notes payable and amounts due to Marriott Interna-
tional, Inc. and affiliates........................ 3,780 4,987
Accounts payable and accrued interest............... 1,129 196
Amounts due to Host Marriott Corporation............ 21 132
-------- --------
Total Liabilities................................. 242,113 241,261
-------- --------
PARTNERS' CAPITAL
General Partner..................................... 470 307
Limited Partners.................................... 35,681 19,541
-------- --------
Total Partners' Capital........................... 36,151 19,848
-------- --------
$278,264 $261,109
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
MHP Supp-59
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 17,818 $ 15,343
Noncash items.......................................... 8,614 8,582
Changes in operating accounts.......................... (370) 1,708
--------- ---------
Cash provided by operating activities................ 26,062 25,633
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment.................... (3,615) (1,481)
Changes in property improvement funds.................. (1,802) (3,590)
--------- ---------
Cash used in investing activities.................... (5,417) (5,071)
--------- ---------
FINANCING ACTIVITIES
Construction loan advances............................. 2,492 --
Principal repayments of mortgage debt.................. (1,255) (4,122)
Capital distributions to partners...................... (1,515) (1,514)
Capital distributions to minority interest............. (1,485) (1,485)
Repayments to Marriott International, Inc. and affili-
ates.................................................. (1,175) (296)
Payment of financing costs............................. (34) --
--------- ---------
Cash used in financing activities.................... (2,972) (7,417)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................... 17,673 13,145
CASH AND CASH EQUIVALENTS at beginning of period......... 10,694 1,607
--------- ---------
CASH AND CASH EQUIVALENTS at end of period............... $ 28,367 $ 14,752
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.............. $ 8,112 $ 9,660
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
MHP Supp-60
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Hotel Properties Limited Partnership (the "Partnership")
without audit. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the Partnership's
financial statements and notes thereto included in the Partnership's Form 10-K
for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 19, 1998, the results of operations and
cash flows for the first two quarters 1998 and 1997. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
The Partnership owns Marriott's Orlando World Center (the "Orlando Hotel")
and a 50.5% interest in a partnership owning Marriott's Harbor Beach Resort
(the "Harbor Beach Partnership"), whose financial statements are consolidated
herein. The remaining 49.5% general partnership interest in the Harbor Beach
Partnership is reported as minority interest. All significant intercompany
balances and transactions have been eliminated.
For financial reporting purposes, net income and net losses of the
Partnership are allocated 99% to the limited partners and 1% to the general
partner. Significant differences exist between the net income and net losses
for financial reporting purposes and the net income and net losses reported
for Federal income tax purposes. These differences are due primarily to the
use, for income tax purposes, of accelerated depreciation methods, shorter
depreciable lives of the assets, differences in the timing of the recognition
of management fee expense and the deduction of certain costs incurred during
construction which have been capitalized in the accompanying condensed
consolidated financial statements.
2. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
3. Hotel revenues represent house profit from the Orlando Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Orlando Hotel to Marriott
International, Inc. (the "Manager"). House profit reflects hotel operating
results which flow to the Partnership as property owner and represents gross
hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, property taxes and certain
other costs, which are disclosed separately in the condensed consolidated
statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property-level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for
MHP Supp-61
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the year ended December 31, 1998 with retroactive effect in prior periods to
conform to new presentation. Application of EITF 97-2 will increase both
revenues and operating expenses by approximately $36.9 million and $36.6
million for the first two quarters 1998 and 1997, respectively and will have
no impact on operating profit or net income.
increased both revenues and operating costs and expenses by approximately
$36.9 million and would have had no impact on net income.
Hotel revenues consist of hotel operating results for the Orlando Hotel for
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- -------
<S> <C> <C>
HOTEL SALES
Rooms..................................................... $35,167 $34,365
Food and beverage......................................... 28,201 26,476
Other..................................................... 6,480 6,614
------- -------
69,848 67,455
------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................................... 6,392 6,477
Food and beverage....................................... 16,820 16,025
Other hotel operating expenses............................ 13,679 14,086
------- -------
36,891 36,588
------- -------
HOTEL REVENUES.............................................. $32,957 $30,867
======= =======
</TABLE>
4. Rental income under the Harbor Beach Partnership operating lease for the
first two quarters was (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
---------------
1998 1997
------- -------
<S> <C> <C>
Basic rental................................................ $ 806 $ 771
Percentage rental........................................... 3,279 3,513
Performance rental.......................................... 10,417 10,417
Additional performance rental............................... 509 305
------- -------
RENTAL INCOME............................................... $15,011 $15,006
======= =======
</TABLE>
5. On April 15, 1998, the Partnership successfully completed the financing
for the expansion of the Orlando World Center (the "Construction Loan"). The
lender is obligated to provide up to $88 million to fund costs related to the
construction of a 500-room tower, new parking garage, expansion of the
existing JW's Steakhouse restaurant, redesign of the existing golf course and
construction of 15,000 square feet of additional meeting space. During the
construction period, the Partnership is required to make monthly payments of
principal and interest at the fixed interest rate of 7.48% with such interest
payments funded by the Construction Loan. Principal payments will be funded by
hotel operations. Upon completion of the expansion, the Partnership will be
required to pay principal and interest at the fixed interest rate of 7.48%
amortized over the remaining term of the Construction Loan. The Construction
Loan matures on January 1, 2008. As of June 19, 1998, the Partnership has
received Construction Loan advances of $2.5 million which were used to pay
construction costs.
MHP Supp-62
<PAGE>
MARRIOTT HOTEL PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. On April 17, 1998, Host Marriott, parent company of the General Partner
of the Partnership, announced that its Board of Directors authorized Host
Marriott to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999. As part
of the REIT conversion, Host Marriott formed a new operating partnership (the
"Operating Partnership"), and limited partners in certain Host Marriott full-
service hotel partnerships and joint ventures, including the Partnership, are
expected to be given an opportunity to receive, on a tax-deferred basis,
Operating Partnership units in the new Operating Partnership in exchange for
their current limited partnership interests. The Operating Partnership units
would be redeemable by the limited partner for freely traded Host Marriott
shares (or the cash equivalent thereof) at any time after one year from the
closing of the merger. In connection with the REIT conversion, on June 2,
1998, the Operating Partnership filed a Registration Statement on Form S-4
with the Securities and Exchange Commission. Limited partners will be able to
vote on this Partnership's participation in the merger later this year through
a consent solicitation.
MHP Supp-63
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Marriott Hotel Properties II Limited
Partnership, a Delaware limited partnership ("MHP2" or the "Partnership"), and
up to seven other limited partnerships (the "Partnerships") that own full-
service hotels in which Host or its subsidiaries are general partners. As more
fully described in the Consent Solicitation, limited partners of those
Partnerships that participate in the Mergers will receive OP Units 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," and with respect
to MHP2, the "MHP2 Limited Partners"). MHP2 Limited Partners may elect to
exchange such OP Units received in connection with the Merger for either
common shares of beneficial interest, par value $.01 per share, of Host REIT
("Common Shares") or unsecured 6.56% Callable Notes due December 15, 2005
issued by the Operating Partnership ("Notes"). Beginning one year after the
Mergers, Limited Partners who retain OP Units will have the right to redeem
their OP Units at any time and receive, at the election of Host REIT, either
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").
The number of OP Units to be allocated to MHP2 will be based upon (i) its
Exchange Value (as defined herein) and (ii) the price attributed to an OP Unit
following the Merger, determined as described herein (but in no event will it
be less than $ or greater than $ per OP Unit) and will not be known at the
time of voting. The number of Common Shares an MHP2 Limited Partner may elect
to receive in connection with the Merger will equal the number of OP Units
received. The principal amount of Notes that MHP2 Limited Partners may elect
to receive in connection with the Merger will be based upon MHP2's Note
Election Amount (as defined herein). See "Determination of Exchange Value of
MHP2 and Allocation of OP Units." The estimated Exchange Value and Note
Election Amount set forth herein may increase or decrease as a result of
various adjustments, and will be finally calculated shortly before the
Effective Date. Pursuant to the Merger, MHP2 Limited Partners have an
estimated Exchange Value of $237,334 per Partnership Unit and a Note Election
Amount of $205,140 per Partnership Unit.
RISK FACTORS
In deciding whether to approve the Merger, MHP2 Limited Partners should
consider certain risks and other factors. The General Partner believes that
MHP2 Limited Partners should particularly consider the following, which should
be read in conjunction with the information in the Consent Solicitation under
"Risk Factors" and "Federal Income Tax Consequences:"
. 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 such
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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. The benefits to Host of the
REIT Conversion will be materially reduced if one or more of the
Partnerships do not participate in a Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the MHP2 Limited Partners or the
other Limited Partners. Although the General Partner has obtained the
Appraisals and the Fairness Opinion from AAA, AAA has not negotiated
with the General Partner 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 MHP2
Limited Partners or the other 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 Partner involve the following conflicts
of interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partners and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including MHP2, participate and Host REIT will benefit if the value of
OP Units received by the Limited Partners of MHP2 is less than the value
of their Partnership Interests. In addition, the terms of the Leases of
the Hotels, including the MHP2 Hotels, will be determined by Host and
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, including the MHP2 Limited Partners.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the MHP2 Limited
Partners must vote on the Merger, including (i) the exact Exchange Value
for MHP2 (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
Merger, which will be determined by reference to the post-Merger trading
prices of Host REIT's Common Shares (but will not be less than $ or
greater than $ ) and which, together with the Exchange Value, will
determine the number of OP Units the MHP2 Limited Partners 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 Note
Election Amount is determined. For these reasons, the MHP2 Limited
Partners cannot know at the time they vote on the Merger these important
aspects of the Merger.
. Combined REVPAR for the Operating Partnership's Hotels is Significantly
Less than the REVPAR for MHP2's Hotels. The Operating Partnership's pro
forma REVPAR for the First Two Quarters 1998 is significantly lower than
the REVPAR attributable to MHP2's Hotels for the same period.
. Cash Distributions; Reduced Cash Distributions for MHP2 Limited
Partners. There is no assurance as to the amount or source of funds for
the estimated initial cash distributions of the Operating Partnership
and Host REIT. In addition, the expected initial annual cash
distributions of the Operating Partnership or Host REIT to the MHP2
Limited Partners per Partnership Unit ($ ) will be less than the
estimated cash distributions of MHP2 per Partnership Unit ($21,564) made
in 1998 (excluding amounts, if any, to be distributed in 1999 from third
and fourth quarter operations).
. Exchange Value May Not Equal Fair Market Value of MHP2's Hotels. Each
MHP2 Limited Partner who retains OP Units or elects to exchange OP Units
for Common Shares will receive consideration with a deemed value equal
to the Exchange Value of such MHP2 Limited Partner's Partnership
Interest. The determination of the Exchange Value of MHP2 involves
numerous estimates and
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assumptions. There is no assurance that the Exchange Value of MHP2 will
equal the fair market value of the Hotels and other assets contributed
by MHP2. See "Determination of Exchange Value of MHP2 and Allocation of
OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from the MHP2 Limited Partners
and the other Limited Partners who elect to exchange OP Units for Common
Shares in connection with the Mergers) 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. Host REIT's OP Units, in the aggregate, 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 to
Host REIT and the MHP2 Limited Partners and the other Limited Partners
may result in such 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 Value of MHP2 and Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the MHP2 Limited Partners' Partnership Interests. The price of
an OP Unit for purposes of the Merger 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 Merger (but in no event
will it be less than $ or greater than $ per OP Unit). This pricing
mechanism has the effect of fixing the minimum and maximum number of OP
Units to be issued in the Mergers. It is likely that, either initially
or 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 Merger. This could
result in the MHP2 Limited Partners receiving OP Units or Common Shares
with an actual value that is less than either the price of the OP Units
for purposes of the Merger or the fair market value of their Partnership
Interests.
. Inability of MHP2 Limited Partners Who Retain OP Units to Redeem OP
Units for One Year. MHP2 Limited Partners who retain OP Units received
in the Merger will be unable to redeem such OP Units for one year
following the Merger. Until then, MHP2 Limited Partners will bear the
risk of illiquidity and of not being able to sell in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection
with the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of MHP2. Each
MHP2 Limited Partner may elect to receive in exchange for OP Units
received in the Merger an unsecured, seven-year Note of the Operating
Partnership with a principal amount equal to the Note Election Amount of
his Partnership Interest, which is based upon numerous assumptions and
estimates. The deemed value of the OP Units to be received by the MHP2
Limited Partners will exceed the principal amount of the corresponding
Notes (because the Exchange Value will be higher than the Note Election
Amount) and there is no assurance that the Note an MHP2 Limited Partner
receives will have a value equal to either (i) the fair market value of
the MHP2 Limited Partner's share of the Hotels and other assets owned by
MHP2 or (ii) the principal amount of the Note. 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
MHP2 Supp-3
<PAGE>
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
ranks equally with such Notes.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of an MHP2 Limited Partner's investment
from holding an interest in MHP2, which was originally structured as a
tax-sheltered cash flow investment (effective through 1997), is a
finite-life entity, has a fixed portfolio of four Hotels and distributes
the cash flow from the operation of such Hotels to the MHP2 Limited
Partners, to holding a direct or indirect interest in the Operating
Partnership, an ongoing real estate company with a portfolio of
approximately 125 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 and (iii) is able to
reinvest proceeds from sales or refinancings of existing Hotels in other
hotels. In addition, each MHP2 Limited Partner's investment will change
from one that allows an MHP2 Limited Partner to receive a return of
capital in the form of distributions from any net proceeds of a sale or
refinancing of MHP2's assets to an investment in which an MHP2 Limited
Partner who retains OP Units likely would realize a return of capital
only through the exercise of the Unit Redemption Right. Those MHP2
Limited Partners who elect to receive Common Shares in connection with
the Merger will hold an equity interest in a publicly traded REIT that
(i) provides immediate liquidity, (ii) intends to make distributions to
its shareholders in an amount equal to at least 95% of its taxable
income, (iii) allows shareholders to influence management by
participation in the election of Trustees and (iv) realizes substantial
corporate tax savings as long as certain requirements are met. An MHP2
Limited Partner's share of the liquidation proceeds, if any, from the
sale of an MHP2 Hotel or Hotels could be higher than the amount realized
upon exercise of the Unit Redemption Right, the sale of Common Shares
received in connection with the Mergers or payments on any Note received
by an MHP2 Limited Partner who elects to exchange his OP Units for such
Note in connection with the Merger. An investment in the Operating
Partnership or Host REIT may not outperform an investment in MHP2. 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 Merger, MHP2 Limited Partners who retain OP Units or elect to
receive Common Shares in connection with the Merger will own interests
in a much larger enterprise with a broader range of assets than MHP2
individually. A material adverse change affecting the Operating
Partnership's assets will affect all Limited Partners, including MHP2
Limited Partners, regardless of whether a particular Limited Partner
previously was an investor in such affected assets. MHP2 owns discrete
assets and the Mergers and the REIT Conversion will significantly
diversify the types and geographic locations of the Hotels in which the
MHP2 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 the Hotels previously owned by MHP2.
. MHP2 Limited Partners Have No Cash Appraisal Rights. MHP2 Limited
Partners who vote against the Merger have no right to receive cash based
upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The MHP2 Limited Partners cannot know at the time they vote
on the 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,
MHP2 Supp-4
<PAGE>
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 Mergers and the REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term
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. The Operating Partnership
also will not own any of the voting stock of the Non-Controlled
Subsidiaries, which may own up to 20% by value of the Operating
Partnership's assets. 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 and the Non-Controlled
Subsidiaries to operate and manage their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into
new leases with such lessees, which could result in a failure of Host
REIT to qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of MHP2 Limited Partners Binds All MHP2 Limited
Partners. For MHP2, approval by a majority of the Partnership Interests
of MHP2 that are eligible to be voted is required to approve the Merger
and the related amendments to the partnership agreement, as described in
"Voting Procedures--Required Vote and Other Conditions." Such approval
will cause MHP2 to participate in the Merger and will bind all MHP2
Limited Partners, including MHP2 Limited Partners who voted against or
abstained from voting with respect to the Merger and the related
amendments to the partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain
such consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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
MHP2 Supp-5
<PAGE>
Scenario, the Operating Partnership had outstanding indebtedness
totaling approximately $5.1 billion, which represents an approximately
53% 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 $15.00).
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 (including Host REIT), (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 Prior 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 (including Host
REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural
and other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder
Rights Plan to replace the existing stockholder rights plan of Host.
Host REIT also will become subject to the business combination and
control share provisions under Maryland law. "See Description of Shares
of Beneficial Interest" and "Certain Provisions of Maryland Law and Host
REIT's Declaration of Trust and Bylaws."
. 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 substantial
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
MHP2 Limited Partners (other than those who elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger)
generally are not expected to recognize significant taxable gain at the
time of the Merger, there are a variety of events and transactions
(including the sale of one or more of the
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Hotels currently owned by MHP2 or the reduction of indebtedness securing
one or more of the Hotels) that could cause an MHP2 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
Treatment of MHP2 Limited Partners Who Hold OP Units Following the
Merger." Certain Hotels (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. The partnership agreement of the Operating Partnership,
which is substantially in the form attached to the Consent Solicitation
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."
. Election to Exchange OP Units for Common Shares. A MHP2 Limited Partner
who elects to receive Common Shares in exchange for his OP Units in
connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. Such MHP2 Limited Partner may not
defer recognition of any part of the gain realized from the exchange
under the "installment sale" rules. See "Federal Income Tax
Consequences--Tax Treatment of MHP2 Limited Partners Who Exercise Their
Right to Make the Common Share Election or the Note Election." MHP2
Limited Partners who elect to receive Common Shares in connection with
the Merger will not receive the Crestline common stock or any other
portion of the E&P distribution made before they become shareholders of
Host REIT.
. Election to Exchange OP Units for Notes. An MHP2 Limited Partner who
elects to receive a Note in exchange for his OP Units in connection with
the Merger will be treated as having made a taxable disposition of his
OP Units. An MHP2 Limited Partner who receives a Note in connection with
the Merger may be eligible to defer at least a portion, but not all, of
that gain under the "installment sale" rules until principal on the Note
is paid. See "Federal Income Tax Consequences--Tax Treatment of MHP2
Limited Partners Who Exercise Their Right to Make the Common Share
Election or 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 and Common Shares, 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 the leases of the Hotels
to the Lessee were to be disregarded for tax purposes (for example,
because a Lease was determined to lack economic substance), Host REIT
could fail to qualify as a REIT and the Operating Partnership might be
treated
MHP2 Supp-7
<PAGE>
as a corporation for federal income tax purposes, which would have a
material adverse impact on the MHP2 Limited Partners and the value of
the OP Units and the Common Shares.
. 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.
. MHP2 Limited Partners Need to Consult with Their Own Tax Advisors.
Because the specific tax attributes of an MHP2 Limited Partner and the
facts regarding such MHP2 Limited Partner's interest in MHP2 could have
a material impact on the tax consequences to such MHP2 Limited Partner
of the Merger (including the decision whether to elect to receive Common
Shares or Notes in exchange for OP Units in connection with the Merger)
and the subsequent ownership and disposition of OP Units, Common Shares
or Notes, it is essential that each MHP2 Limited Partner consult with
his own tax advisors regarding the application of federal, foreign and
state and local tax laws to such MHP2 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 MHP2 Limited Partners would not be able to use suspended
passive activity losses from other investments to offset income from the
Operating Partnership.
. Host REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
MARRIOTT MHP TWO CORPORATION (THE "GENERAL PARTNER"), THE GENERAL PARTNER OF
MHP2, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS FAIR TO
THE MHP2 LIMITED PARTNERS AND RECOMMENDS THAT ALL MHP2 LIMITED PARTNERS VOTE
FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO THE PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for MHP2
Limited Partners the specific risks, benefits, effects and fairness of the
Merger to them and to provide other information specific to MHP2. Supplements
have also been prepared for each of the other Partnerships. This Supplement,
together with the supplements of the other Partnerships (collectively, the
"Supplements"), are part of the Consent Solicitation. Upon receipt of a
written request by a Limited Partner or his representative so designated in
writing, the General Partner will send a copy of any Supplement without
charge. All requests for a copy of a Supplement should be directed to:
Investor
MHP2 Supp-8
<PAGE>
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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the MHP2 Limited Partners for the reasons set forth below.
This information is qualified by and should be read in conjunction with the
information in the Consent Solicitation under "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of MHP2, are expected to include:
. Exchange Value of MHP2. MHP2 Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will
receive OP Units or Common Shares with an estimated Exchange Value equal
to $237,334 per Partnership Unit.
. Liquidity. The REIT Conversion will offer MHP2 Limited Partners
liquidity with respect to their investments in MHP2 because MHP2 Limited
Partners can receive freely tradeable Host REIT Common Shares by
electing to exchange OP Units for Common Shares in connection with the
Merger or by exercising their Unit Redemption Right at any time after
one year following the Effective Date. Host has approximately 204
million shares of common stock outstanding and is expected to have a
total common equity market capitalization of approximately $3.6 billion
after giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host REIT Common Share). The exercise of the
election to exchange OP Units for Common Shares in connection with the
Merger or the exercise of the Unit Redemption Right, however, generally
would result in recognition of taxable income or gain at the time of
exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. The General Partner
expects that while these distributions will be lower than the estimated
cash distributions of MHP2 to be made in 1998, the ability to receive
distributions quarterly and in regular amounts would be enhanced. For
additional information regarding historical and estimated future
distributions for MHP2 and the other Partnerships, see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the
Mergers."
. Substantial Tax Deferral for MHP2 Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that MHP2 Limited Partners who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 MHP2 or a sale or other disposition of its
assets in a taxable transaction. Thereafter, such MHP2 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, directly or indirectly, by
MHP2 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 Merger are highly complex and, with respect to each MHP2 Limited
Partner, are dependent upon many variables, including the particular
circumstances of such MHP2 Limited Partner. See "Federal Income Tax
Consequences--Tax Consequences of the Merger." Each MHP2 Limited Partner
is urged to consult with his own tax advisors as to the consequences of
the Merger in light of his particular circumstances.
MHP2 Supp-9
<PAGE>
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of MHP2 Limited Partners upon the performance of, and the
exposure to the risks associated with, MHP2's Hotels 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 generally will have a lower leverage to value
ratio, approximately 53%, than MHP2 currently, which has a leverage
ratio of 56% (calculated as a percentage of Exchange Value), resulting
in interest and debt service savings and greater financial stability.
. Growth Potential. The General Partner believes that the MHP2 Limited
Partners, by directly or indirectly 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 MHP2
has 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 MHP2 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 MHP2 individually.
. Public Market Valuation of Assets. The Partnership Units of MHP2
currently trade at a discount to the net asset value of MHP2's assets.
The General Partner believes that by exchanging interests in MHP2, which
is a non-traded, finite-life limited partnership with a fixed portfolio
for interests in an ongoing 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
MHP2 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 (although not currently), has resulted
at various times 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 they will not trade at a discount to private market
values. Also, the benefit of Host's conversion to a REIT will not be
shared by the MHP2 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.
If MHP2 does not participate in the Merger, its business will continue in
its current manner; however, the Operating Partnership may elect to contribute
some or all of its interest in MHP2 to a Non-Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF MHP2 AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of MHP2 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 Partner has 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 MHP2 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
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 MHP2 represents AAA's
estimate, as adopted by the General Partner, of the discounted present
value, as of January 1, 1998, of the MHP2 limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender
MHP2 Supp-10
<PAGE>
reserves), assuming that MHP2 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 MHP2 represents the
General Partner's estimate of the net proceeds to MHP2 limited partners
resulting from the assumed sale as of December 31, 1998 of the Hotels of
MHP2 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 MHP2 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 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 MHP2 after the Initial Valuation Date to perform
deferred maintenance that were previously subtracted in determining the
estimated Adjusted Appraised Value of MHP2 and (iii) to reflect any changes in
MHP2's other reserves, such as for litigation expenses and indemnification
costs and any revised estimates of transfer and recordation taxes and fees.
The General Partner does not believe that any adjustments to the Exchange
Value will be material; however, if any such changes are deemed to be
material, the General Partner will provide the MHP2 Limited Partners with an
opportunity to change their vote on the Merger.
APPRAISED VALUE. MHP2's 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 MHP2 's Hotels.
Each appraisal (an "Appraisal") was reviewed by a Member Appraisal Institute
("MAI") appraiser and certified by such MAI appraiser as having been prepared
in accordance with the requirements of the Standards of Professional Practice
of the Appraisal Institute and the Uniform Standards of Professional Appraisal
Practice of the Appraisal Foundation.
The 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 MHP2's Hotels 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 MHP2 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 each
Hotel, budget information, a survey
MHP2 Supp-11
<PAGE>
with the manager of each 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 NOI 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. 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
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 effective capitalization
rates for 1997 and Projected Year's Adjusted NOI resulting from AAA's
estimated Appraised Values of MHP2's Hotels.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISALS OF MHP2'S HOTELS
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.1-9.6% 9.7-11.6%
</TABLE>
APPRAISED VALUES OF MHP2'S HOTELS
<TABLE>
<CAPTION>
HOTEL APPRAISED VALUES
----- ----------------
(IN THOUSANDS)
<S> <C>
Marriott Rivercenter Hotel.............................. $180,600
New Orleans Marriott Hotel.............................. 184,300
San Ramon Marriott Hotel................................ 35,300
Santa Clara Marriott Hotel.............................. 63,100(1)
--------
Total................................................. $463,300
========
</TABLE>
- --------
(1) Excludes 50% of the $126,200,000 Appraised Value of the Santa Clara
Marriott Hotel.
. 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 the Santa Clara Marriott Hotel, which is only partly owned by
MHP2, the Appraised Value of the Hotel was reduced proportionately to the
amount attributable to MHP2's ownership interest therein (but
MHP2 Supp-12
<PAGE>
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 MHP2's Hotels, three properties were
encumbered by a ground lease as of the date of the Appraisals. Accordingly,
the Appraised Values of such Hotels have been decreased to reflect the
encumbrance of the ground lease and the interest of the ground lessor in the
operating cash flows of the Hotels. The Appraised Value assumes 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 MHP2's Hotels (but estimated deferred maintenance costs have
been deducted in estimating the Adjusted Appraised Value of each of MHP2's
Hotels). The Appraised Value did not take into account the costs that might be
incurred in selling the Hotels (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 MHP2's Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of MHP2.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value is 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 MHP2's Hotels will vary from the
results projected in the Appraisals and the variations may be material.
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of MHP2 was
determined by totaling the Appraised Values of all of the Hotels of MHP2 and
then making various adjustments to the aggregate Appraised Value, as described
below.
. Lender Reserves. MHP2's 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 MHP2 will be
made on the Final Valuation Date and any changes in such reserves will
be reflected in the Adjusted Appraised Value.
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Merger) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of MHP2 has been subtracted
from the Appraised Value.
. Mark to Market Adjustment. 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 MHP2, the estimated
Adjusted Appraised Value for MHP2 has been 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 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.
. 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 Agreements of MHP2 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
MHP2 Hotels have been subtracted from the
MHP2 Supp-13
<PAGE>
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.
The following table sets forth the adjustments to the aggregate Appraised
Values of MHP2's Hotels made to derive the estimated Adjusted Appraised Value
for MHP2 as of the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR MHP2
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value.............................................. $463,300 (1)
Lender reserves.............................................. 6,800
Mortgage debt................................................ (259,945)(1)
Mark to market adjustment.................................... (2,154)
Deferred management fees..................................... (3,184)
Deferred maintenance costs................................... (1,673)
--------
Estimated Adjusted Appraised Value........................... $203,144
========
General Partner's share(2)................................... $ 26,330
Limited partner share of Host subsidiaries(3)................ $ 93,272
Total limited partners' share(4)............................. $176,814
Per Partnership Unit......................................... $237,334
</TABLE>
- --------
(1) 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 wholly responsible.
(2) Excludes amounts attributable to limited partner interest of the General
Partner.
(3) Includes limited partner interests held by the General Partner.
(4) Includes limited partner share of Host subsidiaries.
CONTINUATION VALUE. AAA estimated the Continuation Value of MHP2 using the
following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for MHP2 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 (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 MHP2's 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
MHP2's FF&E reserve was 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 an interest
rate of 8.22% per annum and a 20-year amortization schedule, with
estimated refinancing costs of 2% of the refinanced amount being paid
from operating cash flow.
. Determination of Residual Value. To estimate the residual value of the
MHP2 limited partners' interest in MHP2 at the end of the 12-year
period, AAA assumed that the MHP2 Hotels 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% 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 MHP2's limited
partners under the partnership and debt agreements.
MHP2 Supp-14
<PAGE>
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to MHP2 's limited
partners from operations and estimated net sales proceeds 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner
believe that such 12-year period is within the accepted range of time periods
used in valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for MHP2 are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR MHP2
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED GENERAL LIMITED ESTIMATED
CONTINUATION PARTNER'S PARTNER'S CONTINUATION VALUE
GROWTH RATE EXIT CAPITALIZATION RATE (2009) VALUE SHARE(1) SHARE (PER PARTNERSHIP UNIT)
----------- ------------------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
3.4% 10.4% $167,776 $10,385 $157,391 $205,140
</TABLE>
- --------
(1) Includes amounts attributable to interests of other Host subsidiaries.
LIQUIDATION VALUE. The Liquidation Value of MHP2 was estimated by the
General Partner and represents the estimated value of MHP2 if all of its
assets were sold as of December 31, 1998. Such value was based upon the
Adjusted Appraised Value of MHP2, 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; and (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 MHP2's Hotels was subtracted from the Appraised Value
for estimated liquidation costs, expenses and contingencies. The General
Partner then determined the portion of the estimated Liquidation Value that
would be distributable to MHP2's limited partners under the terms of the
partnership agreement and other contractual arrangements.
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of MHP2 as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF MHP2
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value................................... $ 463,300(1)
Lender reserves................................... 6,800
Mortgage debt..................................... (259,945)(1)
Prepayment/defeasance costs....................... (20,551)
Deferred management fees.......................... (3,184)
Deferred maintenance costs........................ (1,673)
Sales costs....................................... (11,583)
---------
Estimated Liquidation Value....................... $ 173,164
=========
General Partner's share(2)........................ $ 20,335
Limited partner share of Host subsidiaries(3)..... $ 80,620
Total limited partners' share(4).................. $ 152,829
Per Partnership Unit.............................. $ 205,140
</TABLE>
- --------
(1) 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 wholly responsible.
(2) Excludes amounts attributable to limited partner interest of the General
Partner.
(3) Includes limited partner interests held by the General Partner.
(4) Includes limited partner share of Host subsidiaries.
MHP2 Supp-15
<PAGE>
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of MHP2 (based upon the greatest of its estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value), the estimated minimum of OP Units to be received (based upon the
maximum price of $ per share) and the estimated Note Election Amount for
MHP2, all on a per Partnership Unit basis as of the Initial Valuation Date.
The number of Common Shares received in exchange for OP Units in connection
with the Merger will equal the number of OP Units. The estimated Note Election
Amount for MHP2 (which will be received by MHP2 Limited Partners electing to
receive Notes in exchange for OP Units in connection with the Merger) is equal
to the Liquidation Value for MHP2. 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 MHP2 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 (but will not be less than $ or
greater than $ per OP Unit) and will not be finally determined until such
time.
ESTIMATED EXCHANGE VALUE,
NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT
OF MHP2
PER PARTNERSHIP UNIT(/1/)
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED
ADJUSTED ESTIMATED ESTIMATED ESTIMATED MINIMUM NOTE
APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF ELECTION
VALUE VALUE VALUE VALUE(2) OP UNITS(3) AMOUNT(4)
--------- ------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$237,334 $211,263 $205,140 $237,334 15,822 $205,140
</TABLE>
- --------
(1) A Partnership Unit in MHP2 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 Merger and thus results in the minimum number of OP Units
that may be issued.
(4) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
Price of OP Units to Pay Exchange Value to MHP2 Limited Partners. Each MHP2
Limited Partner will receive OP Units with a deemed value equal to the
Exchange Value of such MHP2 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 Merger (but in no event will it be less than $ or
greater than $ per OP Unit). Thus, if the 20-day average trading price is
less than $ , the price per OP Unit in the Merger would be $ , and if such
average trading price is greater than $ , the price per OP Unit in the Merger
would be $ . The OP Units will be delivered to the MHP2 Limited Partners
promptly after the twentieth trading day following the Effective Date of the
Merger (which would be promptly after January 29, 1999 if the Effective Date
of the Merger is December 30, 1998).
MHP2 Limited Partners who retain OP Units will receive cash distributions
from MHP2 for all of 1998 and, if the Merger does not occur in 1998, any
portion of 1999 prior to the Merger for which period they do not receive a
cash distribution from the Operating Partnership. Cash distributions will be
made by MHP2 in accordance with its partnership agreement on or before June 1,
1999 in respect of 1998 operations and, if the Merger does not occur prior to
January 1, 1999, within 90 days after the Effective Date of the Merger in
respect of any 1999 operations. MHP2 Limited Partners at the Effective Date of
the Mergers who elect to receive Common Shares in exchange for OP Units in
connection with the Merger will participate in the same distributions from
MHP2 as MHP2 Limited Partners who retain OP Units and will receive
distributions from Host REIT with respect to periods after the Effective Date
of the Mergers, which distributions are expected to
MHP2 Supp-16
<PAGE>
equal the amount distributed with respect to the OP Units for such periods.
MHP2 Limited Partners at the Effective Date of the Merger who elect to receive
Notes in exchange for OP Units in connection with the Merger will participate
in the same distributions from MHP2 as MHP2 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 Merger because they
will be entitled to receive interest on their Notes for such periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTEREST IN MHP2 AND ALLOCATION OF OP UNITS TO THE GENERAL PARTNER AND OTHER
HOST SUBSIDIARIES
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the MHP2 Limited Partners' Partnership
Interests, by the same methodologies set forth above and giving effect to the
applicable distribution preferences in the MHP2 partnership agreement. The
number of OP Units that will be received by the General Partner will be equal
to the value of its interest in MHP2 divided by the same price per OP Unit
used to determine the number of OP Units to be received by the MHP2 Limited
Partners.
The following table sets forth the estimated value of the interest of the
General Partner and other Host subsidiaries in MHP2 based upon the estimated
aggregate Exchange Value of the MHP2 Limited Partners' Partnership Interests
as of the Initial Valuation Date and the minimum number of OP Units estimated
to be received by the General Partner and other Host subsidiaries in respect
thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S AND OTHER HOST SUBSIDIARIES'
INTERESTS AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value.............................................. $203,144
Limited partners' share of aggregate Exchange Value................... 176,814
--------
Value of General Partner's interest(1)................................ $ 26,330
Value of other Host subsidiaries' interest............................ 93,272
--------
Total interest of General Partner and other Host subsidiaries......... $119,602
========
Number of OP Units:
Minimum(2).......................................................... 7,958
</TABLE>
- --------
(1) Excludes limited partner interests owned by the General Partner.
(2) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of MHP2 and recommends that all Limited
Partners of MHP2 consent to the Merger. The General Partner bases this
recommendation primarily on (i) its view that the expected benefits of the
Merger for the MHP2 Limited Partners outweigh the risks and potential
detriments of the Merger to the MHP2 Limited Partners (see "Background and
Reasons for the Mergers and the REIT Conversion Reasons for the Mergers" and
"Risk Factors"), (ii) its view that the value of the OP Units allocable to the
MHP2 Limited Partners on the basis of the Exchange Value established for MHP2
represents fair consideration for the Partnership Interests held by the MHP2
Limited Partners and is fair to the MHP2 Limited Partners from a financial
point of view and (iii) the Appraisals and Fairness Opinion of AAA. See "--
Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the MHP2 Limited
MHP2 Supp-17
<PAGE>
Partners, individually and as a whole, if it is consummated with any
combination of other Participating Partnerships. The General Partner bases
this belief primarily on the fact that the consideration to be paid to the
MHP2 Limited Partners has been established based upon MHP2's Exchange Value,
without regard to any possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for MHP2
represents fair consideration for the Partnership Interests of the MHP2
Limited Partners in the Merger in relation to MHP2 because the Exchange
Value is equal to the greatest of the Adjusted Appraised Value,
Continuation Value and Liquidation Value, each of which is an acceptable
method for determining the fair market value of a Partnership's assets.
The General Partner also has concluded that the Exchange Value
established for the MHP2 Limited Partners fairly reflects the value of
the assets held by MHP2. In addition, the General Partner's own
analysis, as well as the Fairness Opinion, support these conclusions.
. MHP2 Limited Partners who retain OP Units will be able to defer
recognition of gain until such time as they choose to realize such gain
based on their own personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the MHP2 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 Merger for
the MHP2 Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
MHP2 Limited Partners should consider carefully and does not conclude
that the Exchange Value is the best price that could be obtained. 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 Merger.
. The General Partner believes that the economic terms of the leases of
the MHP2 Hotels are fair and reasonable from the standpoint of the
Operating Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the MHP2 Limited
Partners.
. The General Partner believes that the value of the consideration to be
received by the MHP2 Limited Partners in the Merger 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 MHP2 is equal to its Adjusted
Appraised Value, which is the greatest of the three values--the Adjusted
Appraised Value, the Continuation Value and the Liquidation Value and
the historic prices paid for Partnership Units. The consideration to be
received by MHP2 Limited Partners in the Merger also is greater than the
amounts paid in recent sales of MHP2 Partnership Units, including the
June 1996 tender offer by Host. The General Partner does not believe
that the sale of any of MHP2's Hotels and liquidation of MHP2 would
obtain for MHP2 Limited Partners as much value as the value to be
received by such MHP2 Limited Partners following the Merger. The General
Partner believes that the following benefits are of the greatest value
and importance to the MHP2 Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer MHP2
Limited Partners liquidity with respect to their investment in MHP2
because MHP2 Limited Partners can receive freely tradeable Host REIT
Common Shares in connection with the Merger or, for MHP2 Limited
Partners who retain OP Units, at any time commencing one year
following the Effective Date, by exercising their Unit Redemption
Right, subject to certain limited exceptions. Host has approximately
204 million shares of common stock outstanding and is expected to
have a total
MHP2 Supp-18
<PAGE>
common equity market capitalization of approximately $3.6 billion
after giving effect to the earnings and profits distribution (based
on a price of $15.00 per Host REIT Common Share). The election to
exchange OP Units for Common Shares in connection with the Merger or
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. The General Partner expects
that the Operating Partnership will make regular quarterly cash
distributions to holders of OP Units and that Host REIT will make
regular quarterly cash distributions to holders of Common Shares.
Host expects that distributions by MHP2 would be higher than the
estimated cash distributions by the Operating Partnership for 1998,
but the ability to receive distributions quarterly and in regular
amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each
MHP2 Limited Partner's investment will be converted from an
investment in MHP2, which owns four hotels into an investment in an
enterprise that initially will own or control approximately 125
Hotels and will have a total market capitalization of approximately
$3.6 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 MHP2 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 generally will have a lower leverage to value
ratio, approximately 53%, than MHP2 currently, which has a leverage
ratio of 56% (calculated as a percentage of Exchange Value),
resulting in interest and debt service savings and greater financial
stability.
. Substantial Tax Deferral for MHP2 Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that MHP2 Limited Partners who do not elect to receive Common
Shares or Notes in exchange for OP Units in connection with the
Merger generally should be able to obtain the benefits of the Merger
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 MHP2 or a sale or other
disposition of its assets in a taxable transaction.
The General Partner believes that the factors described above, which support
the fairness of the Merger to the MHP2 Limited Partners, when weighed against
the factors that may be disadvantageous, taken as a whole, indicate that the
Merger is fair to the MHP2 Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 MHP2 and each other
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 MHP2 Limited Partners and
the Limited Partners of each other Partnership and (ii) the methodologies used
to determine the value of an OP Unit and to allocate the equity in the
Operating Partnership to be received by the MHP2 Limited Partners and the
Limited Partners of each other Partnership are fair and reasonable to the MHP2
Limited Partners and the Limited Partners of each other Partnership. The
Fairness Opinion is addressed to each Partnership and it may be relied upon by
each of the MHP2 Limited Partners and the Limited Partners of the other
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 the Consent Solicitation and
should be read in its entirety. The material assumptions and qualifications to
the
MHP2 Supp-19
<PAGE>
Fairness Opinion are summarized below, although this summary does not purport
to be a complete description of the various inquiries and analyses undertaken
by AAA in rendering the Fairness Opinion. Arriving at a fairness opinion is a
complex analytical process not necessarily susceptible to partial analysis or
amenable to summary description. For a more complete description of the
assumptions and Qualifications that limit the scope of the Fairness Opinion,
see "--Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 MHP2 and the other
Partnerships might not have been more favorable to the Limited Partners in
certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of the other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of MHP2's and each other
Partnership's contingent liabilities.
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partner selected AAA, on
the basis of the proposals, 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
MHP2 Supp-20
<PAGE>
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.
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 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
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 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 each of the Hotels) are fair and reasonable, from a financial point of
view, to the MHP2 Limited Partners and the Limited Partners of each other
Partnership and (ii) the methodologies used to determine the value of an OP
Unit and to allocate the equity interest in the Operating Partnership to be
received by the MHP2 Limited Partners and the Limited Partners of each other
Partnership are fair and reasonable to the MHP2 Limited Partners and the
Limited Partners of each other Partnership.
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
MHP2 Supp-21
<PAGE>
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.
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by MHP2. The following table sets forth
the distributions paid to MHP2 Limited Partners (per Partnership Unit) during
the periods indicated. The information below should be read in conjunction
with the information in this Supplement under the caption "Selected Financial
Data."
HISTORICAL CASH DISTRIBUTIONS PAID BY MHP2
(PER PARTNERSHIP UNIT)( 1)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
--------- ---------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
From net income(2).......... $14,864 $25,006 $24,616 $15,000 $15,077 $15,583
Representing return of
capital(3)................. -- -- -- -- -- --
Distribution of excess
General Partner reserve.... -- 4,873 -- -- -- --
------- ------- ------- ------- ------- -------
Total..................... $14,864 $29,879 $24,616 $15,000 $15,077 $15,583
======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP2.
(2) In addition, the Partnership distributed $6,700 per Partnership Unit in
August 1998.
(3) Computed as all distributions in excess of distributions from operating
cash flow.
Compensation and Distributions to the General Partner. Under MHP2's
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of MHP2 but the General
Partner and its affiliates are reimbursed for certain costs and expenses
incurred on behalf of MHP2. The following information has been prepared to
compare the amount of reimbursements paid and cash distributions made by MHP2
to the General Partner and its affiliates to the amounts that would have been
paid if the reimbursement and distribution structure which will be in effect
after the REIT Conversion had been in effect for the periods presented.
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). Marriott
International receives management fees and other reimbursements from MPH2
under the Management Agreement.
MHP2 Supp-22
<PAGE>
The following table sets forth the reimbursements and distributions paid by
MHP2 to its General Partner and its affiliates and payments made to Marriott
International 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 Partner and its affiliates and payments made to Marriott
International 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 $0.81 per year during
such period, which is the expected minimum distribution for 1999.
HISTORICAL AND PRO FORMA REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNER AND ITS AFFILIATES
AND PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
FIRST TWO QUARTERS ------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- ---------- ----------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Reimbursements(1)....... $ 158 $ -- $ 351 $ -- $ 225 $ 89
Distributions(2)(3)..... 5,953 3,223 11,788 6,446 8,047 187
Payments made to
Marriott Internation-
al..................... 10,713 10,713 20,167 20,167 19,319 18,259
------- ------- ------- ------- ------- -------
Total................. $16,824 $13,936 $32,306 $26,613 $27,591 $18,535
======= ======= ======= ======= ======= =======
</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 Partner and its
affiliates on a pro forma basis reflect distributions at a rate of $0.81
per annum per OP Unit (which is the expected minimum distribution per OP
Unit for 1999) with respect to .23 stimated number of OP Units that the
General Partner and its affiliates will receive with respect to its
general and limited partner interests in MHP2. Such number does not
reflect the aggregate number of OP Units Host REIT will receive in
connection with the REIT Conversion.
(3) In 1996, MHP2 Acquisition Corp. purchased a controlling interest in MHP2.
Distributions to the General Partner were $112,000, $225,000, $185,000 and
$113,000 for the first two quarters 1998 and the fiscal years ended
December 31, 1997, 1996 and 1995, respectively and to the Partnership
Units owned by Host were $5,841,000, $11,563,000, $7,862,000 and $74,000
for the first two quarters 1998 and the fiscal years ended December 31,
1997, 1996 and 1995, respectively.
CERTAIN INFORMATION REGARDING THE HOTELS OWNED BY MHP2
<TABLE>
<CAPTION>
NAME OF HOTEL LOCATION OF HOTEL NUMBER OF ROOMS DATE OPENED
------------- ----------------- --------------- -----------
<S> <C> <C> <C>
Marriott Rivercenter Hotel... San Antonio, TX 999 1988
New Orleans Marriott Hotel... New Orleans, LA 1,290 1972
San Ramon Marriott Hotel..... San Ramon, CA 368 1989
Santa Clara Marriott
Hotel(1).................... Santa Clara, CA 754 1976
-----
TOTAL...................... 3,411
=====
</TABLE>
- --------
(1) MHP2 owns a 50% limited partner interest in the partnership that owns the
Santa Clara Marriott Hotel and Host owns the remaining 50% interest.
The table below sets forth certain performance information for MHP2's Hotels
for the indicated periods.
<TABLE>
<CAPTION>
FIRST
TWO QUARTERS FISCAL YEAR
---------------- -------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average daily rate.............. $152.56 $137.85 $133.75 $122.08 $115.53
Occupancy....................... 80.4% 83.3% 80.7% 81.1% 80.6%
REVPAR.......................... $122.66 $114.83 $107.94 $ 99.01 $ 93.12
% REVPAR change................. 7.0% 8.0% 9.0% 6.3% --
</TABLE>
MHP2 Supp-23
<PAGE>
Marriott Rivercenter Hotel, San Antonio, Texas
The San Antonio Hotel is a full-service Marriott hotel located in downtown
San Antonio on a leased parcel of land of approximately 2.7 acres. The Hotel
is situated on the San Antonio Riverwalk and is located one block from the San
Antonio Convention Center and the Alamo. It is located approximately seven
miles from the San Antonio International Airport.
The Hotel opened in October 1988. The Hotel contains 999 guest rooms,
including 86 suites and 40 concierge-level guest rooms, in a 38-story
building. Designed as part of the Marriott International network of convention
hotels, it has extensive meeting and convention facilities, totaling 58,300
square feet, including (i) a 40,000 square foot grand ballroom and (ii) 36
meeting rooms. Hotel facilities also include two restaurants, two lounges, a
health club, an indoor/outdoor pool, a gift shop and a 650-space underground
parking garage.
Capital Improvements. The Hotel is scheduled to complete a refurbishment,
which will include the replacement of the carpeting, bedspreads, upholstery,
drapes and other similar items ("Softgoods") and also the dressers, chairs,
beds and other furniture ("Casegoods") of all of its guest rooms at an
estimated cost of $12.5 million in 2000 and 2001.
Competition. The primary competition for the Hotel comes from the following
two first-class hotels in downtown San Antonio: (i) the Hyatt Regency and (ii)
the Hilton Palacio del Rio Hotel. These two competitors contain an aggregate
of approximately 1,100 rooms and 50,300 square feet of meeting space. The San
Antonio Marriott Riverwalk Hotel, which opened in 1980 and is managed by
Marriott International, is located across the street from the San Antonio
Hotel. Currently, the marketing and sales groups work together and the two
management teams are currently exploring the possibility of working more
closely together to maximize efficiencies. The San Antonio Marriott Riverwalk
Hotel and another area hotel, the Plaza San Antonio Hotel are both owned by
Host Marriott. In addition, other hotels in the San Antonio area also compete
with the San Antonio Hotel; however, these differ from the San Antonio Hotel
in terms of size, room rates, facilities, amenities and services offered,
market orientation and/or location. None of these other hotels are operated as
part of the Marriott International full-service hotel system.
In February 1997, the Residence Inn Alamo Plaza opened with 220 rooms. In
August of 1997, the Adams Mark Hotel opened on the Riverwalk with 410 rooms
and 25,000 square feet of meeting space. Both hotels are in the San Antonio
Hotel's immediate market area and it is expected that the San Antonio Hotel
will compete directly with the Adams Mark Hotel for transient business. The
downtown San Antonio market has experienced a total room increase of 780 rooms
in 1997, of which the only full-service property is the Adams Mark Hotel. In
addition, the demand in this market is at a level that has created interest by
a number of parties in expanding existing properties and/or developing new
full-service hotels. Construction is underway on the expansion of the San
Antonio Convention Center which will bring its size to 500,000 square feet,
thus ranking it as the 12th largest convention center in the country. It is
likely that the expansion to the Convention Center will create demand for
additional hotel rooms in the San Antonio market. While it is difficult to
predict the ultimate outcome of this proposal, it is likely that hotel rooms
will be added to the market and, therefore, increase the San Antonio Hotel's
competition.
Ground Lease. The San Antonio Hotel is located on a site that is leased from
an unrelated third party for an initial term expiring December 31, 2013. To
facilitate the refinancing, the Partnership exercised its option to extend the
land lease for an additional 20-year period. Therefore, the term of the San
Antonio land lease expires on December 31, 2033. The Partnership has the
option to extend the term for up to three successive terms of ten years each.
The lease provides for annual rental during the term of the lease equal to the
greater of $700,000 or 3.5% of annual gross room sales.
New Orleans Marriott Hotel, New Orleans, Louisiana
The New Orleans Hotel is a full-service Marriott hotel located on
approximately 1.88 acres of fee-owned land in the central business district in
downtown New Orleans on the western boundary of the famous French
MHP2 Supp-24
<PAGE>
Quarter. The Hotel is situated on Canal Street, the primary commercial route
through the downtown area. It is located approximately 12 miles from the New
Orleans International Airport.
The Hotel, which opened in July 1972, currently contains 1,290 guest rooms,
including 54 suites and 48 concierge-level guest rooms. The Hotel is comprised
of the original 42-story River Tower and the 20-story Quarter Tower. Designed
as part of the Marriott International network of convention hotels, it has
extensive meeting and convention facilities, totaling 80,000 square feet,
including (i) a 27,100 square foot grand ballroom, which is the largest hotel
ballroom in New Orleans, (ii) a 10,400 square foot junior ballroom and (iii)
25 meeting rooms. Hotel facilities also include three restaurants, three
lounges, a health club, an outdoor pool, a business center, a gift shop and a
475-space parking garage.
Capital Improvements. The Hotel had 924 guest rooms when it originally
opened in 1972. A 400-room expansion was completed in 1979. The Hotel
underwent an $11.4 million renovation in 1988 which included reconfiguring
certain guest rooms, including 54 suites and 48 concierge-level guest rooms.
The completion of these two projects resulted in the 1,290 guest room count
that the Hotel currently contains. The Hotel has recently undergone a combined
renovation of Softgoods and Casegoods complete refurbishment of all of its
guest rooms at an estimated cost of $13.0 million. In addition, the Hotel
recently completed a lobby and restaurant renovation at a cost of $2.1
million.
Competition. The primary competition for the New Orleans Hotel comes from
the following three first-class convention oriented hotels in the central
business district of New Orleans: (i) the Sheraton New Orleans Hotel, (ii) the
Hyatt Regency New Orleans Hotel and (iii) the New Orleans Hilton Riverside and
Towers Hotel. These three competitors contain an aggregate of approximately
3,900 rooms and 254,000 square feet of meeting space. In addition, other
hotels in the New Orleans area also compete with the New Orleans Hotel;
however, these differ from the New Orleans Hotel in terms of size, room rates,
facilities, amenities and services offered, market orientation and/or
location. None of these other hotels are operated as part of the Marriott
International full-service hotel system. As a major convention facility, the
New Orleans Hotel also competes with similar facilities throughout the
country.
A number of smaller hotel products entered the market in 1997 adding a total
of 1,225 rooms and an additional 724 rooms are expected to be completed in
1998. None of these products are direct competitors of the New Orleans Hotel
and no new direct competitors are expected to open in New Orleans in the near-
term. However, the overall increase in room supply will affect the Hotel in
periods of weak demand.
San Ramon Marriott Hotel, San Ramon, California
The San Ramon Hotel is a full-service Marriott hotel located within the
Bishop Ranch Business Park in San Ramon, California approximately 40 miles
east of San Francisco and approximately 20 miles east of Oakland. The Hotel is
located on a leased parcel of land of approximately 11.8 acres. It is located
approximately 18 miles from the Oakland International Airport and 35 miles
from the San Francisco International Airport.
The Hotel opened in June 1989 and contains 368 guest rooms, including six
suites and 72 concierge-level guest rooms, in a six-story building. The Hotel
has approximately 16,300 square feet of meeting and banquet space, including
(i) a 10,000 square foot main ballroom, (ii) a 5,000 square foot junior
ballroom and (iii) six meeting rooms. Hotel facilities also include a
restaurant, a lounge, a heated outdoor pool, an exercise room, a sundry shop
and outdoor parking for over 560 cars.
Capital Improvements. In January 1997, the Hotel completed a $1.2 million
Softgoods renovation project. In addition, during 1997, the Hotel completed a
combined Softgoods and Casegoods refurbishment of its six suites.
Competition. The primary competition for the San Ramon Hotel comes from the
following three hotels: (i) the Pleasanton Hilton Inn, (ii) the Four Points
Hotel by Sheraton and (iii) the Marriott Residence Inn San
MHP2 Supp-25
<PAGE>
Ramon. These three competitors contain an aggregate of approximately 600 rooms
and 21,000 square feet of meeting space. In addition, other hotels in the San
Ramon area also compete with the San Ramon Hotel; however, these differ from
the San Ramon Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. None of these other
hotels are operated as part of the Marriott International full-service hotel
system. In 1997, 225 limited service rooms were added to the market and
another 640 are expected by June 1998. No new full-service competition is
expected to open in the San Ramon area in the near-term.
Ground Lease. The San Ramon Hotel is located on a site that is leased from
an unrelated third party for an initial term expiring in May 2014. To
facilitate the refinancing, the Partnership exercised its option to extend the
land lease for an additional 20-year period. Therefore, the current term of
the San Ramon land lease expires in May 2034. The Partnership has the option
to extend the term for up to three successive terms of ten years each. The
lease provides for annual rental during the term of the lease equal to the
greater of $350,000 or 3% of annual gross sales. The minimum rent of $350,000
may be adjusted upward beginning in June 1995, and every fifth year
thereafter, to an amount equal to 75% of the average rent paid during the
three years immediately preceding the applicable five-year period. No such
adjustment was necessary in June 1995.
Santa Clara Marriott Hotel, Santa Clara, California
The Santa Clara Hotel is a full-service Marriott hotel located in Santa
Clara, California on two leased parcels of land, totaling approximately 21.9
acres. The Hotel is situated in the center of "Silicon Valley," approximately
one mile from the Santa Clara Convention Center. It is located approximately
four miles from the San Jose International Airport and 36 miles from the San
Francisco International Airport.
The Hotel opened in June 1976. The Hotel contains 754 guest rooms, including
25 suites and 76 concierge-level guest rooms. The Hotel consists of two towers
(one 13 stories and one 10 stories) and a series of two- and three-story
buildings, all of which are interconnected. The Hotel has approximately 24,000
square feet of meeting and banquet space, which includes three separate
ballrooms, with a total of 20,200 square feet, and six meeting rooms. Hotel
facilities also include two restaurants, two lounges, an indoor/outdoor pool,
an exercise room, a game room, a gift shop and outdoor parking for over 1,200
cars.
Capital Improvements. In 1998, the Hotel is scheduled to complete a
Softgoods renovation of 202 rooms at an approximate cost of $1.8 million and a
combined Softgoods and Casegoods refurbishment of 264 rooms at an approximate
cost of $2.2 million.
Competition. The primary competition for the Santa Clara Hotel comes from
the following three hotels: (i) the Westin Santa Clara Hotel, (ii) the
Doubletree San Jose and (iii) the Embassy Suites Santa Clara Hotel. These
three competitors contain an aggregate of approximately 1,300 rooms and 46,000
square feet of meeting space. In addition, other hotels in the Santa Clara
area also compete with the Santa Clara Hotel; however, these differ from the
Santa Clara Hotel in terms of size, room rates, facilities, amenities and
services offered, market orientation and/or location. None of these other
hotels are operated as part of the Marriott International full-service hotel
system. No new competition is expected to open in the Santa Clara area in the
near-term.
LEGAL PROCEEDINGS
Two groups of limited partners of Marriott Hotel Properties II Limited
Partnerships ("MHP2"), are each asserting putative class claims in a lawsuit,
filed on April 24, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernie
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
MHP2 Supp-26
<PAGE>
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.
AMENDMENTS TO MHP2'S PARTNERSHIP AGREEMENT
In order to allow the Hotels of MHP2 to be leased to Crestline in connection
with the Merger and the REIT Conversion, MHP2's partnership agreement must be
amended. Currently, there is no provision in MHP2's partnership agreement to
allow MHP2's Hotels to be leased. Therefore, Section 5.02B of MHP2's
partnership agreement must be amended to add a new paragraph 5.02B(xiii) to
read as follows:
(xiii) lease or consent to the lease, directly or indirectly, in one
transaction or a series of related transactions of any or all of the
Hotels.
Other Amendments. Amendments to certain terms and sections of MHP2's
partnership agreement would be made in order to (i) reduce to one the number
of appraisals of the fair market value of MHP2's Hotels that MHP2 must provide
to the MHP2 Limited Partners before the General Partner can cause MHP2 to sell
assets to the General Partner or an affiliate and (ii) make any other
amendments to MHP2's partnership agreement deemed necessary or advisable, in
the sole discretion of the General Partner, in connection with the
consummation of the Merger and the REIT Conversion. The form of amendment to
the MHP2 partnership agreement is attached as an exhibit to the Registration
Statement of which this Supplement is a part.
VOTING PROCEDURES
MHP2 Limited Partners will be asked to vote separately on the Merger and the
proposed amendments to the partnership agreement, but MHP2 will not
participate in the Merger unless both proposals are approved. The consent of
MHP2 Limited Partners holding more than 50% of the outstanding limited partner
interests in MHP2 is required for participation in the Merger and with respect
to the related amendments to the partnership agreement. The General Partner
and its affiliate collectively own 52.7% of the outstanding limited partner
interests. The General Partner and its affiliates are required to vote their
limited partner interests in MHP2 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
submitted ballets or otherwise).
At the time of voting, MHP2 Limited Partners will be asked to indicate
whether they wish to retain OP Units or elect to exchange their OP Units for
Common Shares or a Note in connection with the Merger. The OP Units will be
delivered to the MHP2 Limited Partners promptly after the twentieth trading
day following the Effective Date of the Merger (which would be promptly after
January 29, 1999 if the Effective Date of the Merger is December 30, 1998).
See "Determination of Exchange Value of MHP2 and Allocation of OP Units."
An MHP2 Limited Partner may mark the Consent Form to vote "FOR," "AGAINST"
or "ABSTAIN" with respect to participation in the Merger by MHP2 and "FOR,"
"AGAINST" or "ABSTAIN" with respect to the amendments to the partnership
agreement. THE FAILURE OF A LIMITED PARTNER OF MHP2 TO RETURN A SIGNED CONSENT
FORM WILL NOT BE COUNTED FOR PURPOSES OF DETERMINING WHETHER A MAJORITY OF
MHP2 LIMITED PARTNER PARTNERSHIP INTERESTS ARE PRESENT. AN ABSTENTION OF AN
MHP2 LIMITED PARTNER WILL BE COUNTED FOR PURPOSES OF ESTABLISHING THE NUMBER
OF LIMITED PARTNER PARTNERSHIP INTERESTS REQUIRED TO RECOGNIZE THE VOTE BUT
WILL BE EFFECTIVELY COUNTED AS A VOTE "AGAINST" THE MERGER AND "AGAINST" THE
AMENDMENTS TO THE PARTNERSHIP AGREEMENT. MHP2 LIMITED PARTNERS WHO RETURN A
SIGNED CONSENT FORM BUT FAIL TO INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO
ANY MATTER (INCLUDING THE MERGER AND THE AMENDMENTS TO THE PARTNERSHIP
AGREEMENT) WILL BE DEEMED TO HAVE VOTED TO APPROVE SUCH MATTER. The voting
procedures applicable to MHP2 Limited Partners are set forth in the Consent
Solicitation under the heading "Voting Procedures--Required Vote and Other
Conditions."
MHP2 Supp-27
<PAGE>
As of June 19, 1998, no other person of record, or to the Partnership's
knowledge owns beneficially, more than 5% of the total number of Limited
Partnership Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," MHP2 Limited Partners should read
carefully the following discussion of federal income tax consequences
applicable specifically to the MHP2 Limited Partners. The information included
in this discussion is based upon various factual assumptions and information
which are believed by the Operating Partnership and the General Partner to be
reliable. However, some of these assumptions inevitably will not materialize,
and unanticipated events and circumstances will occur. Therefore, there likely
will be differences between the information provided herein, including the
numerical data and estimates, and actual results, and the variations may be
material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the MHP2 Limited Partners resulting from the Mergers and the
REIT Conversion. The opinion letter is based upon certain assumptions and
certain 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 Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the Mergers and the REIT Conversion and of Host REIT, the
Operating Partnership and the Partnerships following the Mergers and the REIT
Conversion. In addition, prior to 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 to the Consent Solicitation) as to
the qualification and taxation of Host REIT as a REIT under the Code following
the REIT Conversion. The receipt of this opinion letter is a condition to the
REIT Conversion and each of the Mergers. See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the MHP2
Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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 Merger or the
treatment of either the Operating Partnership or Host REIT subsequent to the
REIT Conversion.
MHP2 Supp-28
<PAGE>
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that the
Merger will not result in the recognition of taxable gain or loss at the time
of the Merger to an MHP2 Limited Partner (i) who does not elect to receive
Common Shares (the "Common Share Election") or a Note (the "Note Election") in
exchange for his OP Units in connection with the Merger; (ii) 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 Merger; (iii) who does not receive a
cash distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of any prepayment of the MHP2 Mortgage Debt
or the Santa Clara Mortgage Debt) in connection with the Merger or the REIT
Conversion in excess of his aggregate adjusted basis in his MHP2 Partnership
Units at the time of the Merger; (iv) who is not required to recognize gain by
reason of the exercise by another MHP2 Limited Partner of his right to make
the Common Share Election or the Note Election (which, in counsel's opinion,
described below, should not be the result of such election) and (v) who does
not have his "at risk" amount fall below zero as a result of the Merger or the
REIT Conversion. See "Federal Income Tax Consequences--Summary of Tax
Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) an MHP2
Limited Partner who acquired his MHP2 Partnership Units in the original
offering of such Partnership Units and who has held such Partnership Units at
all times since would not be considered to receive, as a result of the Merger,
a distribution (or a deemed cash distribution resulting from relief from
liabilities) that exceeds his aggregate adjusted basis in his MHP2 Partnership
Units at the time of the Merger, and would not have his "at risk" amount fall
below zero as a result of the Merger, even if all of the MHP2 Mortgage Debt
and Santa Clara Mortgage Debt were to be repaid in connection with the Merger
or the REIT Conversion, and (ii) none of the personal property owned by MHP2
will need to be sold to a Non-Controlled Subsidiary in connection with the
REIT Conversion. See "Federal Income Tax Consequences--Tax Consequences of the
Mergers--Overview" in the Consent Solicitation.
With respect to the effects of an MHP2 Limited Partner's election to receive
Common Shares or a Note in exchange for his OP Units in connection with the
Merger, Hogan & Hartson is of the opinion that although the matter is not free
from doubt, an MHP2 Limited Partner who does not make the Common Share
Election or the Note Election should not be required to recognize gain by
reason of another MHP2 Limited Partner's exercise of either of such rights.
With respect to the exercise of a Unit Redemption Right, Hogan & Hartson is of
the opinion that it is more likely than not that an MHP2 Limited Partner's
exercise of his Unit Redemption Right more than one year after the date of
consummation of the Merger but less than two years after such date will not
cause the Merger itself to be a taxable transaction for the MHP2 Limited
Partner (or the other MHP2 Limited Partners). See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation. Opinions
of counsel, however, do not bind the IRS or the courts, and no assurances can
be provided that such opinions will not be challenged by the IRS or will be
sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
MHP2 Partnership Units, an MHP2 Limited Partner will receive no actual cash
distribution in connection with the Merger but would be deemed to receive a
cash distribution in connection with the Merger to the extent that his share
of Operating Partnership liabilities immediately after the Merger and the REIT
Conversion is less than his share of MHP2 liabilities immediately prior to the
Merger. For example, any prepayment of the MHP2 Mortgage Debt or the Santa
Clara Mortgage Debt or debt encumbering other Hotels may result in a deemed
cash distribution to the MHP2 Limited Partners. See "Federal Income Tax
Consequences--Tax Consequences of the Mergers--Relief from Liabilities/Deemed
Cash Distribution" in the Consent Solicitation. Even though the MHP2 Mortgage
Debt,
MHP2 Supp-29
<PAGE>
the Santa Clara Mortgage Debt and the debt encumbering other Hotels is not
expected to be repaid or refinanced in connection with the Mergers and the
REIT Conversion (except as described in the Consent Solicitation), an MHP2
Limited Partner's share of indebtedness following the Merger and the REIT
Conversion may nonetheless decrease in comparison to the Limited Partner's
estimated aggregate share of MHP2 indebtedness as of December 31, 1998
(calculated based on the assumption that the Mergers did not occur) by reason
of the manner in which the debt allocation rules work when multiple assets
with different levels of leverage are consolidated into a single partnership.
An MHP2 Limited Partner, however, would recognize taxable gain as a result
of any deemed cash distribution discussed in the previous paragraph only to
the extent that the deemed cash distribution were to exceed his adjusted tax
basis in his MHP2 Partnership Units immediately prior to the Merger. As noted
above, the Operating Partnership and the General Partner believe, based upon
and subject to the assumptions and other limitations described below, that an
MHP2 Limited Partner who acquired his MHP2 Partnership Units in the original
offering of such Partnership Units and has held the Partnership Units at all
times since the offering will have an adjusted tax basis in excess of the
deemed cash distribution that might occur in connection with the Merger and
the REIT Conversion, even if all of the MHP2 Mortgage Debt and the Santa Clara
Mortgage Debt were to be repaid in connection with the Merger and the REIT
Conversion, and the MHP2 Limited Partner were to have no share of any
Operating Partnership indebtedness following the Merger and the REIT
Conversion. Therefore, such an MHP2 Limited Partner should not recognize gain
due to such deemed cash distribution resulting from the relief from
liabilities in connection with the Merger and the REIT Conversion.
The adjusted tax basis of an MHP2 Limited Partner who did not acquire his
MHP2 Partnership Units in the original offering of such Partnership Units or
who has not held his MHP2 Partnership Units at all times since such offering
could vary materially from that of an MHP2 Limited Partner who did so. If an
MHP2 Limited Partner has an adjusted tax basis in his MHP2 Partnership Units
(per MHP2 Partnership Unit) that is substantially less than the adjusted tax
basis of an MHP2 Limited Partner who acquired his MHP2 Partnership Units in
the original offering of such Partnership Units and has held such Partnership
Units at all times since, he could recognize gain due to any deemed cash
distribution resulting from the relief from liabilities in connection with the
Merger and the REIT Conversion.
The Operating Partnership has no current plan or intention to cause the
prepayment of the MHP2 Mortgage Debt or the Santa Clara Mortgage Debt or,
except as described in the Consent Solicitation, any of the nonrecourse
liabilities encumbering the Hotels owned by the other Partnerships (other than
with the proceeds of indebtedness that would be considered nonrecourse
liabilities allocable to the Hotel being refinanced). 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 secure nonrecourse mortgage indebtedness secured only by those Hotels in an
amount sufficient to avoid a deemed cash distribution to the former Limited
Partners in those Partnerships, including MHP2 (although such a deemed
distribution of cash may or may not result in the recognition of taxable
income or gain by the former MHP2 Limited Partners). Moreover, 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 debt as
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. 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 (including the MHP2 Mortgage Debt or the Santa Clara Mortgage
Debt), would be considered to be "secured" by these Hotels for purposes of
allocating the liabilities for tax basis purposes (and thus would be
allocable, at least in substantial part, to the former Limited Partners in the
Partnerships owning those Hotels, including the MHP2 Limited Partners), and
(iii) would constitute "qualified nonrecourse financing" secured by such
Hotels for purposes of
MHP2 Supp-30
<PAGE>
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.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of Section 465 of the Code generally
apply to limit the use of partnership losses by a partner. Under Section
465(e) of the Code, a partner would be required to include in gross income, or
"recapture," losses previously allowed to such partner with respect to his
investment in a partnership if the amount for which the partner is "at risk"
in relation to his investment in the partnership is less than zero at the
close of the taxable year.
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Merger
and the REIT Conversion could, singularly or in combination, cause an MHP2
Limited Partner's amount at risk in relation to his investment in MHP2 (and,
after the Mergers, in the Operating Partnership) to be reduced below zero,
resulting in an income inclusion to the Limited Partner under Section 465(e)
of the Code. Currently, all of the current debt of MHP2 constitutes "qualified
nonrecourse financing" so that the MHP2 Limited Partners have positive at risk
amounts. The Operating Partnership and the General Partner believe, based upon
and subject to the assumptions and other limitations described below, that an
MHP2 Limited Partner who acquired his MHP2 Partnership Units in the original
offering of such Partnership Units and has held the Partnership Units at all
times since will have a positive at risk amount immediately following the
Mergers and the REIT Conversion, even if all of the MHP2 Mortgage Debt and the
Santa Clara Mortgage Debt were to be repaid in connection with the Mergers and
the REIT Conversion and the MHP2 Limited Partners were to have no share of any
other "qualified nonrecourse financing" following the Mergers and the REIT
Conversion.
It is possible, however, that a former MHP2 Limited Partner's at risk amount
could decline in the future, either because of the allocation of losses from
the Operating Partnership to that former MHP2 Limited Partner or because of
cash distributions by the Operating Partnership to that former MHP2 Limited
Partner in excess of the taxable income allocable to him with respect to his
OP Units. In that event, it may be necessary for the former MHP2 Limited
Partner to have a share of "qualified nonrecourse financing" from the
Operating Partnership in order to avoid recognizing income by reason of his at
risk amount falling below zero. Moreover, there can be no assurance that debt
incurred by the Operating Partnership in the future to refinance the MHP2
Mortgage Debt, the Santa Clara Mortgage or outstanding mortgage debt of the
other Hotel Partnerships or the Hotels contributed by the Blackstone Entities
will qualify as "qualified nonrecourse financing." If, however, the Operating
Partnership were to obtain the requested ruling from the IRS and were to
refinance existing mortgage indebtedness of the Partnerships with the type of
indebtedness described in the ruling, such indebtedness should constitute
"qualified nonrecourse financing" for purposes of the "at risk" rules.
Impact of Assumption of MHP2 Liabilities by the Operating Partnership. As
described in the Consent Solicitation, see "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Disguised Sale Regulations," an MHP2 Limited
Partner will recognize gain to the extent he is treated as having sold all or
part of his MHP2 Partnership Interest in a "disguised sale." 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.
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" also will not be treated as part of
a disguised sale. 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
MHP2 Supp-31
<PAGE>
partner within the two-year period prior to the earlier of the date the
partner agrees in writing to transfer the property or the date the partner
transfers the property to a partnership and that has encumbered the
transferred property since it was incurred; (iii) a liability that is
traceable under the Treasury Regulations to capital expenditures with respect
to the property; and (iv) a liability that was incurred in the ordinary course
of the trade or business in which property transferred to the partnership was
used or held, but only if all the assets related to that trade or business are
transferred, other than assets that are not material to a continuation of the
trade or business. However, a recourse liability is not a "qualified
liability" unless the amount of the liability does not exceed the fair market
value of the transferred property (less any other liabilities that are senior
in priority and encumber such property or any allocable liabilities described
in (iii) or (iv), above) at the time of transfer.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of MHP2 fall into one of
the four categories of "qualified liabilities" described above and,
accordingly, that the mere assumption by the Operating Partnership of the
outstanding liabilities of MHP2 will not give rise to a "disguised sale" by
any of the MHP2 Limited Partners.
Tax Treatment of MHP2 Limited Partners Who Hold OP Units Following the Merger
Initial Basis in Units. In general, an MHP2 Limited Partner will have an
initial tax basis in his OP Units received in the Merger with respect to his
MHP2 Partnership Units equal to the basis in his MHP2 Partnership Units at the
time of the Merger, reduced to reflect any deemed cash distributions resulting
from a reduction in his share of MHP2 liabilities and increased to reflect his
share of other liabilities of the Operating Partnership and any gain required
to be recognized in connection with the Merger and the REIT Conversion. For a
discussion of the federal income tax consequences for an MHP2 Limited Partner
from a reduction in basis that may result from the Merger and the REIT
Conversion, see "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Initial Tax Basis of OP
Units" in the Consent Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of MHP2
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all MHP2 Limited Partners (but
excluding all of Host's interests) with respect to the MHP2 Hotels will be
$67,512,745 upon the consummation of the Merger.
If the Operating Partnership were to sell all of the MHP2 Hotels, the former
partners of MHP2 (including Host REIT with respect to Host's interest in MHP2
held through the General Partner) would be specially allocated by the
Operating Partnership an aggregate amount of taxable gain equal to the
aggregate Book-Tax Difference with respect to the MHP2 Hotels. The share of
such gain allocable to an MHP2 Limited Partner who acquired his MHP2
Partnership Units in the original offering of such Partnership Units and held
such Partnership Units at all times since would be $189,981 per MHP2
Partnership Unit if such Partnership Unit were acquired for cash, and $189,071
if such Partnership Unit were acquired pursuant to the installment purchase
plan. The share of such gain of an MHP2 Limited Partner who did not acquire
his MHP2 Partnership Units in the original offering of such Partnership Units
or who has not held his MHP2 Partnership Units at all times since such
offering could vary materially from this amount. If the Operating Partnership
were to sell an MHP2 Hotel with a Book-Tax Difference, the remaining Book-Tax
Difference at the time the Hotel is sold would be required to be allocated
exclusively to the former MHP2 Limited Partners and the General Partner, even
though the proceeds of such sale would be allocated proportionately among all
the partners in the Operating Partnership (and would likely be retained by the
Operating Partnership, rather than distributed to holders of OP Units and
Common Shares of Host REIT). The MHP2 Limited Partners would not be entitled
MHP2 Supp-32
<PAGE>
to any special distributions from the Operating Partnership in connection with
such a sale, and thus would not necessarily receive cash distributions from
the Operating Partnership sufficient to pay such additional taxes. Although
the Partnership Agreement does not impose any restrictions upon the Operating
Partnership preventing it from causing the sale of any or all of the MHP2
Hotels at any time following the Mergers, the Operating Partnership does not
have current plans to pursue a sale of any of the MHP2 Hotels. See "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--Sale of Individual Hotels" in the Consent Solicitation.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the MHP2 Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the MHP2 Hotels will be required
to be allocated for federal income tax purposes in a manner such that the MHP2
Limited Partners are charged with the Book-Tax Difference associated with the
MHP2 Hotels at the time of the consummation of the Merger. Consequently, an
MHP2 Limited Partner will be allocated less depreciation with respect to the
MHP2 Hotels than would be the case if the Mergers had not occurred and the
MHP2 Limited Partner had continued to hold his MHP2 Partnership Units. (On the
other hand, a former MHP2 Limited Partner will be allocated depreciation with
respect to other Hotels acquired by the Operating Partnership in connection
with the Mergers and the REIT Conversion, including the Hotels owned by the
other Hotel Partnerships and the Hotels being contributed to the Operating
Partnership by Host and the Blackstone Entities in connection with the Mergers
and the REIT Conversion.) Second, the Mergers will cause the technical
termination under Section 708(b)(1)(B) of the Code of certain of the Hotel
Partnerships that participate in the Mergers and the REIT Conversion. The
Operating Partnership will take certain steps intended to prevent such a
termination of MHP2, but there can be no assurance that the IRS will not
determine that MHP2 experienced a termination as a result of the Merger.
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 his property. As a result, the remaining bases of
the real estate components of the Hotels held by the Hotel Partnerships that
terminate will be depreciated over 39 years, rather than over the remaining
current lives of such Hotels (which range from less than one year to 39
years). See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Effect of Mergers on
Depreciation" in the Consent Solicitation.
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to an MHP2 Limited
Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for MHP2 Limited Partners) to
the extent that such losses are not in excess of the taxpayer's income from
passive activities or investments. An MHP2 Limited Partner would be able to
offset losses from other passive activities 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 Partner 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
limitation rules. In this event, any losses or
MHP2 Supp-33
<PAGE>
deductions of the Operating Partnership allocable to an MHP2 Limited Partner
after the Merger could not be used to offset passive income from other passive
activities. Similarly, losses from other passive activities could not be
applied to offset income of the Operating Partnership allocated to an MHP2
Limited Partner. An MHP2 Limited Partner, however, would be able to offset any
passive losses from his investments against any gain recognized by the MHP2
Limited Partner as a result of the Merger.
State and Local Taxes. MHP2 Limited Partners holding Partnership Units will
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 and the REIT Conversion, the
Operating Partnership expects that it will own properties in approximately 28
states across the United States and the District of Columbia. Currently, MHP2
owns, directly and indirectly, properties in only three states. See "Federal
Income Tax Consequences--Tax Treatment of Limited Partners Who Hold OP Units
Following the Mergers--State and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular MHP2
Limited Partner, the tax consequences of the Merger to such MHP2 Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH MHP2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH MHP2 LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
First, with respect to an MHP2 Limited Partner's basis in his MHP2
Partnership Units prior to the Merger, the Operating Partnership and the
General Partner assumed that an MHP2 Limited Partner acquired his MHP2
Partnership Units in the original offering of such Partnership Units and has
held such Partnership Units at all times since the offering (the "Original
Limited Partner's Adjusted Basis"). In general, each MHP2 Limited Partner had
an initial tax basis in his MHP2 Partnership Units ("Initial Basis") equal to
his cash investment in MHP2 (plus his proportionate share of the partnership's
nonrecourse liabilities at the time he acquired his MHP2 Partnership Units).
An MHP2 Limited Partner's Initial Basis generally has been increased by (a)
such Limited Partner's share of MHP2 taxable income and (b) any increases in
his share of liabilities of MHP2. Generally, such Limited Partner's Initial
Basis has been decreased (but not below zero) by (i) his share of MHP2 cash
distributions, (ii) any decreases in his share of liabilities of MHP2, (iii)
his share of losses of MHP2 and (iv) his share of nondeductible expenditures
of MHP2 that are not chargeable to capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for MHP2 (i) the Original Limited Partner's Adjusted Basis as of December 31,
1997 for each such MHP2 Limited Partner, and (ii) an estimate of such MHP2
Limited Partner's 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 the Consent Solicitation). The General Partner also
has set forth on Appendix E to the Consent Solicitation for each MHP2 Limited
Partner whose adjusted basis in his MHP2 Partnership Interest is the same as
the Original Limited Partner's Adjusted Basis (i) the MHP2 liabilities
allocable to such MHP2 Limited Partner as of December 31, 1997, and (ii) an
estimate of the MHP2 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 the Consent Solicitation). Each of
these estimates is shown separately for those MHP2 Limited Partners who
acquired their Partnership Units at the time of the original offering pursuant
to an installment purchase plan.
The adjusted tax basis of an MHP2 Limited Partner who did not acquire his
MHP2 Partnership Units in the original offering of such Partnership Units
could vary materially from that of an MHP2 Limited Partner who did so for
various reasons. If an MHP2 Limited Partner has an adjusted tax basis in his
MHP2 Partnership Units that is less than the Original Limited Partner's
Adjusted Tax Basis, the Merger might result in the receipt by the
MHP2 Supp-34
<PAGE>
MHP2 Limited Partner of a deemed distribution of cash in excess of his
adjusted tax basis in his MHP2 Partnership Units, which could result in the
recognition of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
MHP2 Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares) and the
subsequent distribution of such OP Units (and possibly Notes and/or Common
Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the MHP2 Limited Partners likely would be materially affected.
EACH MHP2 LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH MHP2 LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
THE TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER TO A PARTICULAR MHP2
LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED
ABOVE.
Tax Treatment of MHP2 Limited Partners Who Exercise Their Right to Make the
Common Share Election or the Note Election
An MHP2 Limited Partner who exercises his right to make the Common Share
Election or the Note Election and receive Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $237,334 per MHP2
Partnership Unit) plus the portion of MHP2's liabilities allocable to the MHP2
Limited Partner for federal income tax purposes immediately prior to the
disposition of the OP Units (estimated as $257,539 per MHP2 Partnership Unit
as of December 31, 1998). Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Note Election will equal
the sum of the "issue price" of the Notes (i.e., the face amount of the Note,
currently estimated as $205,140 per MHP2 Partnership Unit) plus the portion of
the MHP2 liabilities allocable to the MHP2 Limited Partner for federal income
tax purposes immediately prior to the disposition of the MHP2 OP Units
(estimated as $257,539 per MHP2 Partnership Unit as of December 31, 1998). To
the extent the applicable amount realized exceeds the MHP2 Limited Partner's
adjusted basis in his MHP2 Partnership Units, the MHP2 Limited Partner will
recognize gain. The Operating Partnership and the General Partner estimate
(assuming the MHP2 Limited Partner acquired his MHP2 Partnership Units at the
time of the original offering and has held such Partnership Units at all times
since the offering) that the amount of gain that would be recognized by an
MHP2 Limited Partner who made the Common Share Election would be approximately
$178,671 per MHP2 Partnership Unit, as of December 31, 1998 if such
Partnership Unit were acquired for cash, and $177,761 per Partnership Unit if
such Partnership Unit were acquired pursuant to the installment purchase plan.
The amount of gain that would be recognized by an MHP2 Limited Partner who
made the Note Election would be approximately $146,477 per MHP2 Partnership
Unit, as of December 31, 1998 if such Partnership Unit were acquired for cash,
and $145,567 per Partnership Unit if such Partnership Unit were acquired
pursuant to the installment purchase plan. For a discussion of the federal
income tax rates applicable to the net capital gain from the sale of a capital
asset, see "Federal Income Tax Consequences--Tax Treatment of Limited Partners
Who Hold OP Units Following the Mergers--Disposition of OP Units by Limited
Partners" in the Consent Solicitation. In this regard, the General Partner
estimates that, as of December 31, 1998, if MHP2 sold all of its Hotels in a
fully taxable transaction for a net amount, after payment of liabilities,
equal to the Exchange Value of MHP2 (with respect to a Limited Partner who
makes the Common Share Election) or Liquidation Value of
MHP2 Supp-35
<PAGE>
MHP2 (with respect to a Limited Partner who makes the Note Election), the
"unrecognized Section 1250 gain" per MHP2 Partnership Unit would be $70,652 if
such Partnership Unit were acquired for cash, and $70,652 per MHP2 Partnership
Unit if such Partnership were acquired pursuant to the installment purchase
plan. The gain subject to tax as ordinary income under Code Section 1245 per
MHP2 Partnership Unit would be $3,269 if such Partnership Unit were acquired
for cash, and $3,269 per MHP2 Partnership Unit if such Partnership were
acquired pursuant to the installment purchase plan. An MHP2 Limited Partner
who makes the Note Election would be able to treat any per Partnership Unit
passive activity loss carryforward with respect to the activities of MHP2, to
the extent the sum of such losses exceeds his passive activity income for
1998, as losses that are not from a passive activity and, therefore, not
subject to the passive activity loss limitation rules. For purposes of
determining the gain recognized by a Limited Partner as a result of making the
Common Share Election or the Note Election, an Original Limited Partner's
Adjusted Basis reflects such Limited Partner's share of the syndication costs
incurred by his Partnership at formation. An original MHP2 Limited Partner's
share of syndication costs was $11,310 per MHP2 Partnership Unit.
An MHP2 Limited Partner who elects to receive Common Shares will not be
eligible to defer any gain under the "installment sale" rules, while an MHP2
Limited Partner who elects to receive a Note may be eligible to defer at least
a portion of that gain under those rules. Those rules, however, will not
permit the MHP2 Limited Partner to defer all of the gain, and, to the extent
that the face amount of the Note (and any other installment obligations
received by the taxpayer during the year) outstanding at the end of the
taxable year in which the Merger occurs exceeds $5,000,000, will require that
the MHP2 Limited Partner who defers gain pay to the IRS interest on the
resulting tax that has been deferred. The MHP2 Limited Partner will not be
eligible to defer gain recognized upon the receipt of the Note to the extent
that his share of MHP2 liabilities at the time of the Merger exceeds his
adjusted tax basis in his MHP2 Partnership Units immediately prior to the
Merger (that is, to the extent that he has a "negative capital account" for
tax purposes). In addition, the MHP2 Limited Partner will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income
under Section 1245 and 1250 of the Code. Lastly, if an MHP2 Limited Partner
disposes of his Note, any gain that had been deferred would be recognized in
the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR MHP2 LIMITED PARTNER COULD HAVE
A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER AND THE SUBSEQUENT
OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT IS
ESSENTIAL THAT MHP2 LIMITED PARTNERS CONSIDERING ELECTING TO RECEIVE COMMON
SHARES OR NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH MHP2 LIMITED PARTNERS'
RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
Tax Consequences if MHP2 Does Not Participate in the Merger
If MHP2 does not participate in the Merger, the MHP2 Limited Partners would
not have any tax consequences resulting from the Merger. The consequences of
continued ownership of MHP2 Partnership Units will be the same as would have
resulted if the Merger had not been proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
MHP2 Limited Partners in light of their particular circumstances. EACH MHP2
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH MHP2 LIMITED PARTNER'S PARTICULAR TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
MHP2 Supp-36
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and the First Two Quarters 1997.
The following data should be read in conjunction with audited financial
statements and the notes thereto, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT)(1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 37,946 $ 36,584 $ 69,014 $ 66,292 $ 64,002 $ 58,703 $ 57,003
Operating profit........ 18,894 18,609 31,782 30,280 28,579 25,929 24,581
Net income.............. 12,756 11,851 17,014 14,811 13,045 8,428 6,869
Distributions:
General partner....... 112 99 225 185 113 113 117
Limited partners...... 11,074 9,776 22,260 18,339 11,175 11,232 11,609
--------- --------- ---------- ---------- ---------- ---------- ----------
Total............... 11,186 9,875 22,485 18,524 11,288 11,345 11,726
Per Partnership Unit:(1)
Net income............ 16,952 15,748 22,609 19,682 17,336 11,200 9,128
Distributions......... 14,864 13,123 29,879 24,616 15,000 15,077 15,583
Cash provided by 14,130 17,484 29,979 28,664 27,008 20,895 22,688
operating activities...
Cash used in investing
activities............. (4,622) (3,704) (8,034) (5,722) (11,883) (7,925) (5,024)
Cash used in financing
activities............. (11,971) (12,048) (27,954) (28,171) (11,288) (11,345) (11,695)
(Decrease) increase in
cash and cash
equivalents............ (2,463) 1,732 (6,009) (5,229) 3,837 1,625 5,969
Ratio of earnings to
fixed charges
(unaudited)(2)......... 2.19x 2.09x 1.72x 1.66x 1.50x 1.40x 1.33x
Total assets at book
value.................. 245,957 255,053 249,418 251,740 254,113 250,461 254,184
Cash and cash
equivalents............ 7,900 18,104 10,363 16,372 21,601 17,764 16,139
Total debt.............. 219,644 222,500 221,814 222,500 222,500 222,500 222,500
Total liabilities....... 233,250 236,469 238,281 235,132 233,792 231,897 232,703
Partner's capital:
Limited partners...... 12,435 18,253 10,881 16,297 19,973 18,233 21,121
General partner....... 272 331 256 311 348 331 360
Book value per
Partnership Unit
(unaudited)(1)......... 16,691 24,501 14,605 21,875 26,809 24,474 28,350
Exchange value per
Partnership Unit
(unaudited)(1)......... 237,334 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $100,000 original investment in MHP2.
(2) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest.
MHP2 Supp-37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
REVPAR, or revenue per available room, represents the combination of the
average daily room rate charged and the average daily occupancy achieved and
is a commonly used indicator of hotel performance. The following charts
summarize REVPAR and the percentage change from the prior year for each
Partnership Hotel for the first two quarters 1998 and 1997:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS
-------------------------------
1998 1997
--------------- ---------------
REVPAR % CHANGE REVPAR % CHANGE
------ -------- ------ --------
<S> <C> <C> <C> <C>
San Antonio..................................... $136 8% $126 5%
New Orleans..................................... 109 -- 109 5%
San Ramon....................................... 105 15% 91 12%
Santa Clara..................................... 138 14% 121 24%
---- --- ---- ---
Combined Average................................ $123 8% $114 8%
==== === ==== ===
</TABLE>
Revenues. Partnership revenues for the first two quarters 1998 increased by
4% when compared to 1997 results. The increase in overall revenues is
primarily due to a 5% increase in total room sales. For the first two quarters
1998, REVPAR increased 8% as a result of a 11% increase in the combined
average room rate over the same period last year to approximately $153 from
$137 partially offset by a two percentage point decline in combined average
occupancy.
The MARRIOTT RIVERCENTER IN SAN ANTONIO reported a 10%, or $1.7 million,
increase in revenues for the first two quarters 1998 compared to the same
period in 1997. This increase is primarily due to a 9% increase in room
revenues to $22.8 million. Room revenues increased due to an 8% increase in
REVPAR to $136, resulting from a 7% increase in the average room rate to
approximately $154 combined with a slight increase in average occupancy. The
increase in the average room rate is primarily due to more emphasis being
placed on higher-rated transient business versus group business. Hotel
management has accomplished the increase in revenues by monitoring the number
of special corporate accounts and by replacing this business with higher-rated
transient business. The Hotel has begun a major renovation of its ballroom
which will position it to compete more effectively for banquet business in the
future.
Revenues at the NEW ORLEANS MARRIOTT HOTEL decreased 6%, or $990,000, for
first two quarters 1998 when compared to the same period in 1997. The decrease
is primarily due to a 9% decrease in food and beverage revenues and an
increase in other Hotel operating costs. For the first two quarters 1998,
average room rate increased by 6% as compared to the same period in 1997 due
to rate increases in both group and transient room rates. Average occupancy
for the first two quarters 1998 declined by five percentage points to 75%
primarily due to city wide convention group traffic being down significantly
during the first two quarters 1998. Additionally, the rooms renovation project
contributed to the shortfall by creating a lack of room availability. The
lobby and restaurant renovations have now been completed, and the rooms
renovation was completed over the July 4th weekend. In a continuing effort to
replace lost roomnights due to the major conventions rotating to other cities
in 1998, Hotel management is targeting small groups which will also enable
them to increase the average room rate.
Revenues for the first two quarters 1998 at the SAN RAMON MARRIOTT HOTEL
increased 21%, or $637,000 when compared to the same period in 1997. The
increase is due to a 19%, or $820,000, increase in room revenues. Room
revenues increased due to a significant increase in REVPAR. REVPAR increased
15% when compared to 1997 which was attributable to a 21% increase in the
average room rate to approximately $131, while average occupancy fell by four
percentage points to the low-80's. The increase in the average room rate is
MHP2 Supp-38
<PAGE>
due to Hotel management's continued success in increasing the corporate rate.
Room margins continue to maintain a 2% premium over the same period in 1997
due to an increase in room rates and cost efficiencies. In addition, sales
promotion efforts instituted an Events Booking Center to capture more of the
group business market.
The SANTA CLARA MARRIOTT HOTEL reported a 22%, or $2.2 million, increase for
the first two quarters 1998 revenues when compared to the same period in 1997.
The increase is primarily due to a 14% increase in room revenues and a 14%
increase in food and beverage revenues. Room revenues increased due to a 19%
increase in the average room rate to approximately $172, deriving a 14%
increase in REVPAR, while average occupancy decreased four percentage points
to the low-80's. The overall increase in the average room rate is supported by
an increase in regular corporate rates. Hotel management is striving to
improve occupancy by offering special corporate rates and pursuing room
contracts with local technology companies. Food and beverage revenues
increased primarily due to heavier utilization of the catering facilities by
existing groups, the implementation of a new service charge for meeting room
rental, and effective menu pricing in the Hotel's restaurant. A major rooms
renovation is planned for the Hotel this year with work scheduled to commence
in November and conclude in early 1999.
Operating Costs and Expenses. For the first two quarters 1998, operating
costs and expenses increased by $1.1 million to $19.1 million over the same
period in 1997. Operating costs and expenses increased primarily due to
increases in depreciation expense and property taxes expense.
Operating Profit. For the first two quarters 1998, operating profit
increased $285,000 to $18.9 million primarily due to an increase in revenues
which was partially offset by the increase in operating costs and expenses
discussed above.
Interest Expense. Interest expense decreased slightly for the first two
quarters 1998 compared to the same period in 1997 due to principal
amortization of the Partnership's Mortgage Debt during the first two quarters
1998
Equity in Income of Santa Clara Partnership. For the first two quarters
1998, equity in income of the Santa Clara Partnership increased by $744,000 to
$1.9 million primarily due to improved hotel operations at the Santa Clara
Hotel combined with a slight decrease in interest expense on the Santa Clara
Mortgage Debt.
Net Income. For the first two quarters 1998, net income increased by
$905,000 to $12.8 million. This increase primarily resulted from an increase
in operating profit and in equity in income of the Santa Clara Partnership.
1997 Compared to 1996
Revenues. For 1997, Partnership revenues increased to $69.0 million in 1997
from $66.3 million in 1996 due to significant increases in revenues at the San
Antonio and San Ramon Hotels. REVPAR increased 7% as a result of an 8%
increase in the combined average room rate to $132 while the combined average
occupancy remained stable at 81%. Net income for 1997 increased 15% to $17.0
million from $14.8 million in 1996. The Partnership's equity in income of the
Santa Clara Partnership increased $1.4 million in 1997 when compared to 1996
due to improved operations at the Santa Clara Hotel.
Individual hotel operating results are discussed below:
Marriott Rivercenter in San Antonio
The Marriott Rivercenter in San Antonio reported an 8%, or $2.4 million,
increase in revenues during 1997. This increase in revenues was primarily due
to an 8% increase in REVPAR to approximately $120 coupled with a 12%, or
$789,000, increase in food and beverage revenues. REVPAR increased due to a 7%
increase in the average room rate to approximately $140 combined with a 1.2
percentage point increase in average occupancy
MHP2 Supp-39
<PAGE>
to the mid-80's. The increase in the average room rate was due to an increase
in the transient average rate. Because demand has remained strong in the group
business segment, Hotel management has been able to hold out for premium rates
in the transient business segment. Group roomnights increased 6%, or 12,600
roomnights, when compared to the prior year primarily due to the major
conventions rotating back into San Antonio this year. Food and beverage
revenues increased primarily due to an increase in banquet sales as a result
of a shift in customer mix to corporate business. Although faced with the
challenge of increased competition with the openings of the Adams Mark Hotel
and the Residence Inn Alamo Plaza, Hotel management is optimistic that 1998
will be another strong year for the Hotel.
Santa Clara Marriott Hotel
The Partnership's Northern California Hotels both reported significant
increases in revenues during 1997. The Santa Clara Marriott Hotel reported a
25%, or $4.4 million, increase in revenues during 1997 when compared to 1996
results. The increase in revenues is primarily due to a 23% increase in REVPAR
to $118 as the average room rate increased 24% to approximately $147 with
average occupancy remaining stable in the low-80's. The increase in the
average room rate is the result of strong transient demand throughout the
market which has allowed the Hotel to maximize room rates in both the
transient and group business segments. Transient roomnights increased by
approximately 9,000 roomnights, a 6% increase when compared to the prior year.
Hotel management is optimistic that demand in the Silicon Valley region will
remain high throughout 1998. With no new full-service competition expected in
the coming year, Hotel management will continue its strategies of maximizing
rates and effectively managing their customer mix.
San Ramon Marriott
The San Ramon Marriott reported a 12% increase in revenues, or $706,000, for
1997 when compared to 1996. This increase was due to a 14% increase in REVPAR
to $92 as the average room rate increased 15% to approximately $111 partially
offset by a slight decrease in average occupancy to the low-80's. The increase
in the average room rate was achieved primarily as a result of an increase in
the corporate rate. In 1997, 225 limited service rooms were added to the
market and another 640 are expected to be added by June 1998. However, a
number of companies are filling the existing office space in the area and the
space currently under construction is already substantially committed. Hotel
management is optimistic that 1998 will be another successful year.
New Orleans Marriott Hotel
The New Orleans Marriott Hotel reported a slight decrease in revenues in
1997 when compared to 1996 results due to a 2%, or $904,000, decrease in room
revenues which was significantly offset by a 20%, or $783,000, increase in
food and beverage revenues. REVPAR remained stable at $97 due to a 2% increase
in the average room rate to approximately $127 partially offset by a 1.3
percentage point decrease in average occupancy to the mid-70's. The increase
in the average room rate is due to growth in the group business segment. While
group roomnights were down 8,300 roomnights in 1997 when compared to 1996, the
group mix shifted to higher-rated association business. The decrease in
average occupancy is due to the lack of city-wide groups over the summer
months. This cycle generally repeats itself every three years as it is
affected by the tradition of the conventions, which meet in different cities
on an alternating basis. Food and beverage revenues increased when compared to
the prior year primarily as a result of Super Bowl XXXI taking place in New
Orleans in January 1997. This event generated significant catering and audio
visual revenues. In addition, food and beverage revenues increased due to the
shift in customer mix to association business which more heavily utilized the
catering facilities. The Hotel is currently undergoing a complete rooms
refurbishment at an approximate cost of $13.0 million which is scheduled to be
completed in July 1998.
Operating Costs and Expenses: In 1997, operating costs and expenses
increased $1.2 million to $37.2 million primarily due to an increase in ground
rent, insurance and other. In 1997, ground rent, insurance and other increased
to $1.8 million in 1997 from $893,000 in 1996 primarily due to a loss on the
retirement of assets as a significant number of assets were retired at the New
Orleans Hotel in conjunction with the refurbishment of
MHP2 Supp-40
<PAGE>
the guest rooms, an increase in general and administrative expenses and an
increase in ground rent expense associated with improved hotel operations. As
a percentage of revenues, operating costs and expenses represented 54% of
revenues for 1997 and 1996.
Operating Profit: In 1997, operating profit increased $1.5 million to $31.8
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 46% in 1997 and 1996.
Equity in Income of Santa Clara Partnership: In 1997, equity in income of
the Santa Clara Partnership increased to $2.0 million in 1997 from $665,000 in
1996 primarily due to improved hotel operations at the Santa Clara Hotel,
while interest expense increased only slightly from year to year on the Santa
Clara Mortgage Debt.
Net Income: In 1997, net income increased to $17.0 million in 1997 from
$14.8 million in 1996 primarily due to improved Hotel revenues and an increase
in equity in income of the Santa Clara Partnership.
1996 Compared to 1995
Revenues. For 1996, Partnership revenues increased from $64.0 million in
1995 to $66.3 million in 1996 due to a 4% increase in REVPAR. REVPAR increased
primarily due to a 5% increase in the combined average room rate to $123 while
the combined average occupancy remained stable at 81%. Net income for 1996
increased 14% to $14.8 million from $13.0 million in 1995. Interest expense
increased slightly due to refinancing expenses incurred with the extension of
the Original Mortgage Debt which are reflected as interest expense in the
accompanying statement of operations. The Partnership's equity in income of
the Santa Clara Partnership increased $546,000 in 1996 when compared to 1995
due to improved operations at the Santa Clara Hotel.
Individual hotel operating results are discussed below:
New Orleans Marriott
The New Orleans Marriott reported a 4% increase in revenues during 1996. The
increase was due to a 3% increase in REVPAR partially offset by a 3% decrease
in food and beverage revenues. REVPAR increased due to a 4% increase in
average room rate to approximately $125 while average occupancy remained
stable in the high-70's. The decline in food and beverage revenues was
primarily due to decreases in banquet sales.
Marriott Rivercenter in San Antonio
The Marriott Rivercenter in San Antonio reported a slight increase in
revenues during 1996 due to a 2% increase in REVPAR. REVPAR increased due to a
2% increase in average room rate to approximately $130 partially offset by a
1.0 percentage point decrease in average occupancy to the mid-80's.
San Ramon Marriott Hotel
Revenues at the Northern California Hotels increased significantly in 1996
when compared to 1995 results. The San Ramon Marriott Hotel reported a 15%
increase in revenues primarily due to an 11% increase in REVPAR. REVPAR
increased primarily due to an 8% increase in average room rate to
approximately $95 combined with a 1.8 percentage point increase in average
occupancy to the mid-80s.
Santa Clara Marriott Hotel
The Santa Clara Marriott Hotel reported a 19% increase in revenues in 1996.
This increase in revenues was primarily due to an 18% increase in REVPAR as
average room rate increased 14% to approximately $120 combined with a 2.8
percentage point increase in average occupancy to the low-80's.
Operating Costs and Expenses: In 1996, operating costs and expenses
increased $589,000 to $36.0 million. As a percentage of revenues, operating
costs and expenses represented 54% of revenues for 1996 and 55% for 1995.
MHP2 Supp-41
<PAGE>
Operating Profit: In 1996, operating profit increased $1.7 million to $30.3
million primarily due to the changes in revenues and operating costs and
expenses discussed above. As a percentage of total revenues, operating profit
represented 46% in 1997 and 45% in 1996.
Interest Expense: In 1996, interest expense increased to $18.3 million from
$17.8 million in 1995, primarily due to the inclusion financing costs incurred
in obtaining the extension of Original Mortgage Debt in March 1996 which were
included as interest expense in 1996.
Equity in Income of Santa Clara Partnership: In 1996, equity in income of
Santa Clara Partnership increased to $665,000 from $119,000 in 1995, primarily
due to improved hotel operations at the Santa Clara Hotel while interest
expense increased only slightly from year to year on the Santa Clara Mortgage
Debt.
Net Income: In 1996, net income increased to $14.8 million from $13.0
million in 1995, primarily due to improved Hotel revenues and an increase in
equity in income of the Santa Clara Partnership.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its operations in the ordinary course of
business.
Mortgage Debt
The Partnership is financed with mortgage debt of $222.5 million which is
nonrecourse to the Partnership and is secured by first mortgages on the
Hotels, as well as a pledge of its limited partner interest in the Santa Clara
Partnership. The mortgage debt bears interest at a fixed rate of 8.22% for an
11-year term expiring October 11, 2007. During the first loan year (October
1996 through September 1997), the mortgage debt required payments of interest
only. Subsequently, principal amortization based upon a 20-year amortization
schedule began. As a result of the required principal amortization, at the end
of the 11-year term, the mortgage debt's principal balance outstanding will
have been reduced $64.4 million. Partnership debt service was $19.2 million
for 1997 and will be $22.6 million annually thereafter until the end of the
11-year term.
The General Partner expects cash flow from the Partnership's Hotels and the
Santa Clara Hotel will be sufficient to provide for the Partnership's and the
Santa Clara Partnership's debt service.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations and
distributions from the Santa Clara Partnership. Its principal uses of cash are
to pay debt service on the Partnership's Mortgage Debt, to fund the property
improvement funds of the Hotels, to establish reserves required by the lender
and to make cash distributions to the partners. Additionally, in 1996, the
Partnership received cash from the General Partner Reserve and, in 1996 and
1997, utilized cash to pay financing costs incurred in connection with the
refinancing of the Partnership's Mortgage Debt and the Santa Clara Mortgage
Debt.
Total cash provided from operations was $30.0 million, $28.7 million and
$27.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The General Partner Reserve provided total cash of $25.7 million
for the year ended December 31, 1996. Debt service paid on the Partnership's
Mortgage Debt was $19.2 million, $17.2 million and $17.3 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Total cash provided by
operating activities was $14.1 million and $17.5 million for the first two
quarters 1998 and 1997, respectively. This decrease was due to a change in
operating accounts partially offset by an increase in net income.
Cash used in investing activities increased to $8.0 million in 1997 from
$5.7 million in 1996 primarily due to an increase in property and equipment
expenditures at the New Orleans Hotel associated with the rooms
MHP2 Supp-42
<PAGE>
refurbishment. Investing activities for the three years ended December 31,
1997, included the following activities. Distributions from the Santa Clara
Partnership were $2.4 million, $781,000 and $1.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Contributions to the property
improvement funds of the Hotels were $8.2 million, $6.6 million and $6.3
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Contributions to the Santa Clara Partnership property improvement fund were
$2.4 million, $2.0 million and $1.8 million for 1997, 1996 and 1995,
respectively. Cash used in investing activities increased to $4.6 million for
the first two quarters 1998 from $3.7 million for the first two quarters 1997.
Property and equipment expenditures have increased to $2.9 million as compared
to $2.8 million over the same period last year, and the net change in the
property improvement funds of the Hotels was $2.5 million and $1.9 million for
the first two quarters 1998 and 1997, respectively. Contributions to the
property improvement funds of the Hotels were $4.2 million and $4.1 million
for the first two quarters 1998 and 1997, respectively.
Cash used in financing activities decreased slightly to $28.0 million in
1997 from $28.2 million in 1996. Financing activities for the three years
ended December 31, 1997, included the following activities. The various
reserves required by the lender pursuant to the terms of the Partnership's
Mortgage Debt and the Santa Clara Mortgage Debt totaled $6.9 million and $12.8
million for the years ended December 31, 1997 and 1996, respectively. The
change in the reserve accounts includes the $6.9 million deposited into the
reserve accounts for the payment of insurance premiums and real estate taxes
as well as $854,000 of interest earned on the lender reserves reduced by $2.7
million of accrued real estates tax liabilities and $239,000 of capital
expenditure reimbursements. Cash distributed to the partners was $22.5
million, $18.5 million and $11.3 million for the years ended December 31,
1997, 1996 and 1995, respectively. Financing costs related to the refinancing
of the Partnership's Mortgage Debt and the Santa Clara Mortgage Debt totaled
$34,000 and $6.0 million for the years ended December 31, 1997 and 1996,
respectively. There were no financing costs paid in 1995. Cash used in
financing activities were $12.0 million for the first two quarters 1998 and
1997. A net increase in restricted lender reserves was partially offset by
cash utilized to make principal payments of $2.2 million on the Partnership's
Mortgage Debt. Additionally, capital distributions increased to $11.2 million
from $9.9 million for the first two quarters 1998 and 1997, respectively.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational capital needs of the Partnership. In
August 1998, the Partnership will make a cash distribution of $6,700 per
limited partner unit from second quarter 1998 operating cash flow bringing
total distributions year to date from 1998 operating cash flow to $11,700 per
limited partner unit.
The Partnership is required to maintain the Hotels and the Santa Clara Hotel
in good condition. Under each of the Partnership Hotels and the Santa Clara
Hotel management agreements, the Partnership is required to make annual
contributions to the property improvement funds which provide funding for
replacement of furniture, fixtures and equipment. The General Partner believes
the property improvement funds, as adjusted in the case of the New Orleans
Hotel, and the capital reserves established in conjunction with the
refinancing will be adequate for the future capital repairs and replacement
needs of the Hotels and the Santa Clara Hotel. As previously reported, the
escrow contribution percentage for the New Orleans Marriott Hotel increased
from 5% to 7% in late 1997 and will continue at 7% through 1998 to allow for
adequate funding of the total rooms refurbishment of its guest rooms. This
project was completed in July 1998, and during the refurbishment, the Hotel
replaced the carpeting, bedspreads, upholstery, drapes and other similar items
as well as the dressers, chairs, beds and other furniture in the guest rooms.
The General Partner believes that cash from Hotel operations and the
reserves established in conjunction with the refinancing will continue to meet
the short and long-term operational needs of the Partnership. Including the
final 1997 distribution made in April 1998 of $9,864 per limited partner unit,
the Partnership distributed $26,621 per limited partner unit from 1997
operating cash flow. This represents a 26.6% annual return on invested
capital. In addition, in May 1998, the Partnership made a cash distribution of
$5,000 per limited partner unit from the First Quarter 1998 operating cash
flow. Prospectively, the Partnership expects to increase
MHP2 Supp-43
<PAGE>
distribution frequency from its historic bi-annual distributions if operating
results and forecasts indicate it is warranted. In addition, the General
Partner believes the property improvement funds, as adjusted in the case of
the New Orleans Hotel, and the capital reserves established in conjunction
with the refinancing will be adequate for the future capital repairs and
replacement needs of the Hotels.
INFLATION
The rate of inflation has been relatively low since the inception of the
Partnership and accordingly, has not had a significant impact on operating
results. However, the Hotels and the Santa Clara's room rates and occupancy
are inflation sensitive. The Manager is generally able to pass through
increased costs to customers through higher room rates. In 1997, the increase
in average room rates at the San Antonio, San Ramon and Santa Clara Hotels
exceeded those of direct competitors as well as the general level of
inflation. As stated above, the Mortgage Debt bears a fixed interest rate,
thereby eliminating exposure to the impact of future increases in interest
rates.
YEAR 2000 ISSUES
Over the last few years, Host Marriott, the parent company of the General
Partner, has invested in implementing new accounting systems which are Year
2000 compliant. Accordingly, the General Partner believes that future costs
associated with Year 2000 issues will be minimal and not material to the
Partnership's financial statements.
However, the Partnership does rely upon accounting software used by MHS, the
Manager of its properties to obtain financial information. The General Partner
believes that the manager has begun to implement changes to the property
specific software to ensure the software will function properly in the Year
2000 and does not expect to incur significant costs related to these
modifications.
MHP2 Supp-44
<PAGE>
FINANCIAL STATEMENTS
MHP2 Supp-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Hotel Properties
II Limited Partnership (a Delaware limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
capital and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Hotel Properties
II Limited Partnership as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
March 18, 1998
MHP2 Supp-46
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net............................... $ 197,512 $ 198,826
Due from Marriott Hotel Services, Inc..................... 7,063 7,447
Deferred financing and organization costs, net............ 5,663 5,932
Other assets.............................................. 8,510 10,348
Restricted cash reserves.................................. 20,307 12,815
Cash and cash equivalents................................. 10,363 16,372
--------- ---------
$ 249,418 $ 251,740
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................... $ 221,814 $ 222,500
Investment in Santa Clara Partnership................... 8,737 8,360
Due to Marriott Hotel Services, Inc..................... 3,567 2,882
Accounts payable and accrued expenses................... 4,163 1,390
--------- ---------
Total Liabilities..................................... 238,281 235,132
========= =========
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $22...... 731 731
Capital distributions................................... (1,036) (811)
Cumulative net income................................... 561 391
--------- ---------
256 311
--------- ---------
Limited Partners
Capital contribution, net of offering costs of $8,426... 64,689 64,689
Capital distributions................................... (109,378) (87,118)
Cumulative net income................................... 55,570 38,726
--------- ---------
10,881 16,297
--------- ---------
Total Partners' Capital............................... 11,137 16,608
--------- ---------
$ 249,418 $ 251,740
========= =========
</TABLE>
See Notes to financial statements.
MHP2 Supp-47
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES (Note 3)............................... $ 69,014 $ 66,292 $ 64,002
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................. 13,087 13,456 13,364
Incentive management fees..................... 9,925 9,813 9,412
Property taxes................................ 5,712 5,208 5,526
Base management fees.......................... 4,649 4,471 4,281
Ground rent, insurance and other.............. 3,859 3,064 2,840
-------- -------- --------
37,232 36,012 35,423
-------- -------- --------
OPERATING PROFIT................................ 31,782 30,280 28,579
Interest expense.............................. (18,841) (18,305) (17,803)
Interest income............................... 2,047 2,171 2,150
-------- -------- --------
INCOME BEFORE EQUITY IN INCOME OF SANTA CLARA
PARTNERSHIP.................................... 14,988 14,146 12,926
-------- -------- --------
EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP..... 2,026 665 119
-------- -------- --------
NET INCOME...................................... $ 17,014 $ 14,811 $ 13,045
======== ======== ========
ALLOCATION OF NET INCOME
General Partner............................... $ 170 $ 148 $ 130
Limited Partners.............................. 16,844 14,663 12,915
-------- -------- --------
$ 17,014 $ 14,811 $ 13,045
======== ======== ========
NET INCOME PER LIMITED PARTNER UNIT (745
Units)......................................... $ 22,609 $ 19,682 $ 17,336
======== ======== ========
</TABLE>
See Notes to financial statements.
MHP2 Supp-48
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1994.......................... $ 331 $ 18,233 $ 18,564
Capital distributions............................. (113) (11,175) (11,288)
Net income........................................ 130 12,915 13,045
----- -------- --------
Balance, December 31, 1995.......................... 348 19,973 20,321
Capital distributions............................. (185) (18,339) (18,524)
Net income........................................ 148 14,663 14,811
----- -------- --------
Balance, December 31, 1996.......................... 311 16,297 16,608
Capital distributions............................. (225) (22,260) (22,485)
Net income........................................ 170 16,844 17,014
----- -------- --------
Balance, December 31, 1997.......................... $ 256 $ 10,881 $ 11,137
===== ======== ========
</TABLE>
See Notes to financial statements.
MHP2 Supp-49
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 17,014 $ 14,811 $ 13,045
Noncash items:
Depreciation and amortization............... 13,087 13,456 13,364
Deferred incentive management fees.......... 161 414 461
Equity in income of Santa Clara
Partnership................................ (2,026) (665) (119)
Amortization of deferred financing costs as
interest................................... 303 206 489
Loss on retirement of assets................ 473 27 10
Changes in operating accounts:
Due from Marriott Hotel Services, Inc....... 384 (172) (426)
Accounts payable and accrued expenses....... 30 957 61
Other assets................................ 29 (223) --
Due to Marriott Hotel Services, Inc......... 524 (147) 123
-------- --------- --------
Cash provided by operating activities..... 29,979 28,664 27,008
-------- --------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net...... (12,250) (8,300) (5,566)
Distributions from Santa Clara Partnership.... 2,403 781 1,370
Change in property improvement funds.......... 1,813 1,797 (1,341)
Additions to restricted cash reserve.......... -- -- (6,346)
-------- --------- --------
Cash used in investing activities......... (8,034) (5,722) (11,883)
-------- --------- --------
FINANCING ACTIVITIES
Capital distributions......................... (22,485) (18,524) (11,288)
Additions to restricted lender reserves, net.. (4,749) (12,815) --
Principal payments on mortgage debt........... (686) -- --
Payment of financing costs.................... (34) (6,025) --
Proceeds from mortgage loan................... -- 222,500 --
Repayment of mortgage debt.................... -- (213,307) --
-------- --------- --------
Cash used in financing activities......... (27,954) (28,171) (11,288)
-------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................... (6,009) (5,229) 3,837
CASH AND CASH EQUIVALENTS at beginning of year.. 16,372 21,601 17,764
-------- --------- --------
CASH AND CASH EQUIVALENTS at end of year........ $ 10,363 $ 16,372 $ 21,601
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............... $ 18,541 $ 17,173 $ 17,267
======== ========= ========
</TABLE>
See Notes to financial statements.
MHP2 Supp-50
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties II Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire and operate (i) the 1,290-
room New Orleans Marriott Hotel and underlying land in New Orleans, Louisiana
(the "New Orleans Hotel"); (ii) the 999-room Marriott Rivercenter Hotel in San
Antonio, Texas (the "San Antonio Hotel"); (iii) the 368-room Bishop Ranch
Marriott Hotel in San Ramon, California (the "San Ramon Hotel");
(collectively, the "Hotels") and (iv) a 50% limited partner interest in the
Santa Clara Marriott Hotel Limited Partnership (the "Santa Clara
Partnership"), a Delaware limited partnership, which owns the 754-room Santa
Clara Marriott Hotel in Santa Clara, California (the "Santa Clara Hotel"). The
remaining 50% interest in the Santa Clara Partnership is owned by Marriott MHP
Two Corporation (the "General Partner") with a 1% interest, and HMH
Properties, Inc., a wholly-owned indirect subsidiary of Host Marriott
Corporation ("Host Marriott") with a 49% limited partner interest.
The sole general partner of the Partnership, with a 1% interest, is MHP Two
Corporation, a wholly-owned subsidiary of Host Marriott. The General Partner
made a capital contribution of $752,525 for its 1% general partner interest.
On March 20, 1989 (the "Partnership Closing Date"), 745 limited partner
interests (the "Units"), representing a 99% interest in the Partnership, were
sold in a private placement. The offering price per Unit was $100,000, payable
in three annual installments through June 1, 1991 (the "Investor Notes"), or
as an alternative, $89,247 in cash on the Partnership Closing Date as full
payment of the subscription price. On the Partnership Closing Date, the
Partnership executed purchase agreements (the "Purchase Agreements") with Host
Marriott to acquire the Hotels and the 50% limited partner interest in the
Santa Clara Partnership for $319.5 million. Of the total purchase price,
$222.5 million was paid from proceeds of the mortgage loan (the "Original
Mortgage Debt"), $43.4 million was evidenced by a promissory note payable to
Host Marriott (the "Deferred Purchase Note"), $43.5 million was paid from a
cash distribution by the Santa Clara Partnership and the remainder from the
initial payment on the sale of the Units. The principal outstanding on the
Deferred Purchase Note was fully repaid in 1991 with the proceeds of the
Investor Notes.
The New Orleans and San Antonio Hotels and the limited partner interest in
the Santa Clara Partnership were conveyed to the Partnership on the
Partnership Closing Date and the San Ramon Hotel was conveyed to the
Partnership upon completion of its construction on May 31, 1989. The Hotels
and the Santa Clara Hotel are managed by Marriott International, Inc. under
long-term management agreements. In conjunction with the refinancing of the
Partnership's Mortgage Debt described in Note 7, Marriott International, Inc.
assigned all of its interests in the management agreements to Marriott Hotel
Services, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("Marriott International").
On June 13, 1996, MHPII Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed a tender offer for the limited
partnership Units in the Partnership. The Company purchased 377 Units for an
aggregate consideration of $56,550,000 or $150,000 per Unit. Subsequent to the
tender offer, the Company purchased an additional ten Units in the
Partnership. As a result of these transactions, the Company became the
majority limited partner in the Partnership, owning 387 Units. In 1997, the
Company acquired an additional Unit bringing its total ownership to 388 Units,
or approximately 52% of the total Units outstanding. Additionally, in a
Partnership vote held in conjunction with the tender offer, the limited
partners approved certain amendments to the Partnership Agreement that were
conditions to the tender offer. The amendments: (i) revised the provisions
limiting the voting rights of the General Partner and its affiliates to permit
the General Partner and its affiliates (including the Company) to have full
voting rights with respect to all Units currently held by the General Partner
or acquired by its affiliates except on matters where the General Partner or
its affiliates have an actual economic interest other than as a Limited
Partner or General Partner (an "Interested Transaction") and
MHP2 Supp-51
<PAGE>
(ii) modified the voting provisions with respect to Interested Transactions to
permit action to be taken if approved by limited partners holding a majority
of the outstanding Units, with all Units held by the General Partner and its
affiliates being voted in the same manner as a majority of the Units actually
voted by limited partners other than the General Partner and its affiliates.
As a result of the approval of this and the other minor amendments, the
Partnership Agreement was amended and restated effective June 14, 1996.
Partnership Allocations and Distributions
Pursuant to the terms of the Partnership Agreement, Partnership allocations,
for Federal income tax purposes, and distributions are generally made as
follows:
a. Cash available for distribution is distributed for each fiscal year
semi-annually as follows: (i) 100% to the limited partners until the
limited partners have received with respect to such fiscal year a non-
cumulative 10% preferred distribution on their Invested Capital, as
defined; (ii) 100% to the General Partner until the General Partner has
received an amount equal to 1/99th of the amount distributed to the limited
partners; (iii) 1% to the General Partner and 99% to the limited partners
until such time as the limited partners have received the 15% Preferred
Distribution, as defined, plus $50,000 per Unit, payable only from Capital
Receipts, as defined, to the extent available after the payment of the 15%
Preferred Distribution; and (iv) thereafter, 20% to the General Partner and
80% to the limited partners.
b. Refinancing and sales proceeds ("Capital Receipts") available for
distribution to the partners will be distributed as follows: (i) 1% to the
General Partner and 99% to the limited partners until the limited partners
have received cumulative distributions from Capital Receipts equal to the
15% Preferred Distribution plus $100,000 per Unit; and (ii) 20% to the
General Partner and 80% to the limited partners.
c. Net profits generally will be allocated to the partners in proportion
to the distributions of cash available for distribution.
d. Net losses generally will be allocated 75% to the General Partner and
25% to the limited partners.
e. Gains recognized by the Partnership will be allocated in the following
order of priority: (i) to all partners up to the amount necessary to bring
the limited partners' capital account balances to an amount equal to the
limited partners' 15% Preferred Distribution plus the limited partners'
Invested Capital and to bring the General Partner's capital account balance
to an amount equal to 1/99th of the capital account balance of the limited
partners; and (ii) 20% to the General Partner and 80% to the limited
partners.
For financial reporting purposes, profits and losses are generally allocated
among the partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property
owner and represents gross
MHP2 Supp-52
<PAGE>
hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, property taxes, ground rent,
insurance and other costs, which are disclosed separately in the statement of
operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $85.9 million, $82.7 million and $78.7 million for the year
ended December 31, 1997, 1996 and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Land improvements.......................................... 40 years
Building and improvements.................................. 30 to 40 years
Leasehold improvements..................................... 40 years
Furniture and equipment.................................... 3 to 10 years
</TABLE>
All property and equipment is pledged as security against the Mortgage Debt
described in Note 7.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing and organization costs consist of loan fees and legal and
accounting costs incurred in connection with obtaining Partnership financing
and the formation of the Partnership. Deferred financing costs totaling
$3,280,000 were fully amortized at March 21, 1996. Additional financing costs
of $34,000 and $6,025,000 were incurred in 1997 and 1996, respectively, in
connection with the refinancing of the Partnership's mortgage loan. Financing
costs are amortized using the straight-line method, which approximates the
effective interest method, over the 20 year loan term. At December 31, 1997
and 1996, accumulated amortization of deferred financing and organization
costs totaled $396,000 and $92,000, respectively.
Restricted Cash Reserve
In 1994, a restricted cash reserve consisting of funds generated in excess
of an annual 17.5% return on partners' invested capital, as defined, was
established in an escrow account maintained by the lender. Through October of
1995, deposits were made in conjunction with the bi-annual distributions to
the limited partners. At the time the mortgage debt matured on March 21, 1996,
the Partnership applied the balance in the reserve as of December 31, 1995,
$9,193,000, to the principal balance of the mortgage loan as a condition to
the extension of the loan agreement.
MHP2 Supp-53
<PAGE>
On September 23, 1996, the General Partner refinanced the Partnership's
mortgage debt. On this date, the Partnership was required to establish certain
reserves which are held by an agent of the lender including:
. $7.0 million Owner Funded Capital Expenditure Reserve--The funds will be
expended for various renewals, replacements and site improvements that
are the Partnership's obligation pursuant to the management agreement. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds
during 1998.
. $1.1 million Capital Expenditure Reserve--The funds will be expended for
Americans with Disabilities Act of 1990 modifications and environmental
remediation projects identified during the course of the appraisals and
environmental studies undertaken in conjunction with the refinancing. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds
during 1998.
. $4.5 million Debt Service Reserve--Based upon current forecasts, it is
expected that cash from operations will be sufficient for the required
payment terms of the Mortgage Debt. However, due to seasonality of the
four hotels' operations, the timing of debt service payments and the
lender's desire for additional security, the Partnership was required to
establish a debt service reserve for both the Partnership Mortgage Debt
and the Santa Clara Partnership mortgage debt totaling two months of
debt service.
. $155,000 Ground Rent Reserve--This reserve is equal to one month of
ground rent.
These reserves were funded by using $12.2 million from the General Partner
Reserve and $634,000 from the Partnership and the Santa Clara Partnership
property improvement funds.
The loan agreement also requires that the Partnership deposit into the
Capital Expenditure Reserve $1.0 million in December of each calendar year
commencing in December 1997 until a total of $5.0 million has been deposited
to be used for air conditioning system maintenance at the New Orleans Hotel.
In addition, the loan agreement requires that should the long-term senior
unsecured debt of Marriott International be downgraded by Standard and Poors
Rating Services from an A- to a BBB+, additional reserves would need to be
established by the Partnership. In March 1997, Marriott International acquired
the Renaissance Hotel Group N.V., adding greater geographic diversity and
growth potential to its lodging portfolio. The assumption of additional debt
associated with this transaction resulted in a single downgrade of Marriott
International's long-term senior unsecured debt effective April 1, 1997.
Accordingly, at that time, the Partnership transferred $1.3 million from the
Manager's existing tax and insurance reserve account and $465,000 from
Partnership cash to the lender to establish a separate escrow account for the
payment of the next succeeding insurance premiums and real estate taxes for
the Hotels and the Santa Clara Hotel. In the future, the Partnership will make
deposits to the reserve account each period and the insurance premiums and
real estate taxes will continue to be paid by the lender until such time as
Marriott International's debt is upgraded to A-. In addition, the Partnership
was required to deposit an additional month's debt service for both the
Partnership and the Santa Clara Partnership into the Debt Service Reserve
account totaling $2.3 million. The money to fund these reserves had been set
aside by the General Partner prior to the distribution of the excess of the
General Partner reserve made to the partners in April 1997. The tax and
insurance reserves and the Debt Service Reserve are included in restricted
cash reserves and the resulting tax and insurance liability is included in
accounts payable and accrued expenses in the accompanying balance sheet.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Investment in Santa Clara Partnership
The Partnership's earnings from the Santa Clara Partnership are recorded
based on the equity method of accounting. Equity in earnings from the Santa
Clara Partnership includes 100% of the interest expense related to
MHP2 Supp-54
<PAGE>
the debt incurred by the Santa Clara Partnership, the proceeds of which were
distributed to the Partnership. The $28.4 million excess of the purchase price
of the Santa Clara Partnership interest over the Partnership's proportionate
share of the net book value of the assets acquired is being amortized over the
related remaining lives of those assets. Amortization is included in Equity in
Income of Santa Clara Partnership in the accompanying statement of operations.
At December 31, 1997 and 1996, accumulated amortization of the excess purchase
price of the Santa Clara Partnership investment was $11,917,000 and
$11,006,000, respectively.
Pursuant to the terms of the Santa Clara partnership agreement, the
Partnership has an obligation to make capital contributions to fund certain
debt service shortfalls to the extent debt service is greater than 50% of cash
flow available before debt service (the "Debt Service Advances"). No
contributions were made in 1997 and 1996. Any outstanding Debt Service
Advances, together with accrued interest, would have been repayable prior to
certain distributions and would have been due, in any event, ten years after
the date of each advance. There have been no Debt Service Advances since
inception of the Santa Clara Partnership.
Interest Rate Swap Agreements
As of December 31, 1995, the Partnership was a party to an interest rate
swap agreement to reduce the Partnership's exposure to floating interest
rates. The Partnership accounted for the swap arrangement as a hedge of an
obligation to pay floating rates of interest and accordingly, recorded
interest expense based upon its payment obligation at a fixed rate. This
agreement terminated at the initial maturity of the Partnership's mortgage
loan on March 21, 1996.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets
and differences in the timing of recognition of incentive management fee
expense. As a result of these differences, the deficit of the net assets
reported in the accompanying financial statements over the tax basis in net
Partnership assets is $85.9 million and $87.9 million as of December 31, 1997
and 1996, respectively. Following the Company's acquisition of limited partner
interests in the Partnership in 1996, the Partnership underwent a termination
and constructive liquidation for tax purposes. All partners were then deemed
to recontribute their assets to a newly reconstituted partnership. Upon
recontribution the Partnership recorded the fixed assets at their fair market
value for tax reporting purposes, as represented by the Company's purchase
price for limited partner units resulting in a significant change in the 1996
tax basis when compared to the prior year.
Statement of Financial Accounting Standards
In the First Quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior year's financial statements
to conform to the 1997 presentation.
MHP2 Supp-55
<PAGE>
NOTE 3. REVENUES
Partnership revenues consist of the Hotels' operating results for the three
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................ $101,603 $98,436 $93,292
Food and beverage................................ 44,877 42,427 42,198
Other............................................ 8,483 8,171 7,215
-------- ------- -------
154,963 149,034 142,705
======== ======= =======
HOTEL EXPENSES
Departmental direct costs
Rooms.......................................... 19,676 18,878 18,416
Food and beverage.............................. 31,439 30,496 28,975
Other hotel operating expenses................. 34,834 33,368 31,312
-------- ------- -------
85,949 82,742 78,703
-------- ------- -------
REVENUES........................................... $ 69,014 $66,292 $64,002
======== ======= =======
</TABLE>
NOTE 4. PROPERTY AND IMPROVEMENTS
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and improvements.................................... $ 17,091 $ 17,091
Building and improvements................................ 107,826 105,382
Leasehold improvements................................... 118,978 111,197
Furniture and equipment.................................. 51,848 61,206
-------- --------
295,743 294,876
Less accumulated depreciation............................ (98,231) (96,050)
-------- --------
$197,512 $198,826
======== ========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage debt............................ $221,814 $230,700 $222,500 $222,500
Incentive management fees due to Marriott
Hotel
Services, Inc........................... 2,739 800 2,578 170
</TABLE>
The 1996 and 1997 estimated fair value of the mortgage debt obligation is
based on the expected future debt service payments discounted at risk adjusted
rates. Incentive management fees due are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
MHP2 Supp-56
<PAGE>
NOTE 6. SANTA CLARA PARTNERSHIP
Summarized financial information for the Santa Clara Partnership consists of
the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
BALANCE SHEET
Property and equipment..................................... $28,688 $30,144
Due from Marriott International, Inc....................... 2,059 2,170
Property improvement fund.................................. 2,619 1,230
Cash and cash equivalents.................................. 3,177 1,933
------- -------
Total Assets........................................... $36,543 $35,477
======= =======
Mortgage debt.............................................. $43,366 $43,500
Due to Marriott International, Inc......................... 970 749
Accounts payable and accrued expenses...................... 482 522
Partners' Deficit.......................................... (8,275) (9,294)
------- -------
Total Liabilities and Partners' Deficit................ $36,543 $35,477
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES................................... $ 21,709 $ 17,347 $ 14,516
OPERATING COSTS AND EXPENSES
Depreciation and amortization............ 3,013 2,927 2,765
Interest................................. 3,625 3,318 3,063
Incentive management fees................ 3,401 2,652 2,175
Base management fees..................... 1,420 1,224 1,079
Property taxes........................... 470 499 508
Ground rent, insurance and other......... 281 264 201
---------- ---------- ----------
12,210 10,884 9,791
---------- ---------- ----------
NET INCOME................................. $ 9,499 $ 6,463 $ 4,725
========== ========== ==========
</TABLE>
NOTE 7. MORTGAGE DEBT
As of December 31, 1995, the Partnership's debt consisted of a $222.5
million mortgage loan (the "Original Mortgage Debt"). The Original Mortgage
Debt was nonrecourse to the Partnership and was secured by a first mortgage on
each of the Hotels including the grant of a security interest in the
Partnership's furniture, fixtures and equipment, contracts and other
intangibles and an assignment of the Partnership's rights under the Management
and Purchase Agreements.
At the option of the Partnership, the Original Mortgage Debt loan agreement
provided for interest rate options which were tied to a Eurodollar rate, an
adjusted CD rate or the fluctuating corporate base rate. For Eurodollar or CD
elections, the Partnership paid the applicable rate plus an increment equal to
0.9 percentage points. In April 1992, the Partnership entered into an interest
rate swap agreement for the entire loan amount with the primary lender to
effectively fix the interest rate on the Original Mortgage Debt at 7.8% per
annum from May 1992 through loan maturity. The Partnership's obligations under
the swap agreement were secured by a pledge of collateral by the General
Partner. The weighted average interest rate on the Original Mortgage Debt for
the year ended December 31, 1995 was 7.8%. The interest rate swap agreement
expired on March 21, 1996.
On March 21, 1996, the Original Mortgage Debt and the Santa Clara mortgage
debt matured, at which time the lender granted the Partnership an extension of
the two loans for an additional six months until replacement
MHP2 Supp-57
<PAGE>
financing could be finalized with another lender. Under the terms of the
extension, interest accrued at the London interbank offered rate ("LIBOR")
plus 1.875 percentage points for the first three months and accrued at LIBOR
plus 2.25 percentage points for the second three months. No principal
amortization was required during the extension period. However, under the
terms of the extension, the Partnership applied the $9.2 million accumulated
in the primary lender reserve account to pay down the principal balance of the
Original Mortgage Debt to $213.3 million and deposited $19.1 million into the
primary lender reserve account. The primary lender reserve account was
established in 1994 to provide funds for a principal paydown on the Original
Mortgage Debt at maturity. The $19.1 million deposit represented the balance
($16.8 million) from the unrestricted reserve account included in cash in the
accompanying balance sheet as of December 31, 1995, previously established by
the General Partner in 1992 (the "General Partner Reserve") and cash flow from
the Partnership for the first two accounting periods of 1996 ($2.3 million).
During the extension period, the Partnership also was required to deposit into
the primary lender reserve account all cash flow from the Hotels plus all of
the Partnership's cash flow from the Santa Clara Partnership, net of (i)
$500,000 per accounting period, (ii) debt service and (iii) current incentive
management fees paid. The $500,000 per accounting period was deposited into a
separate expense reserve account which was used by the Partnership to fund
administrative expenses and refinancing costs, any owner funded capital
expenditures, as well as the Partnership's share of any such costs incurred by
the Santa Clara Partnership during the six month extension period.
On September 23, 1996 (the "Closing Date"), the General Partner refinanced
the Partnership's Original Mortgage Debt, as well as the $43.5 million
mortgage debt of the Santa Clara Partnership. A total of $266.0 million was
borrowed from a new third party lender, $222.5 million of which is recorded on
the Partnership's financial statements (the "Mortgage Debt"). The
Partnership's Mortgage Debt is nonrecourse to the Partnership and is secured
by first mortgages on the Hotels, as well as a pledge of its limited partner
interest in the Santa Clara Partnership. The two loans are cross-defaulted.
The debt bears interest at a fixed rate of 8.22% for an 11-year term expiring
October 11, 2007, requires payments of interest only during the first loan
year (October 1996 through September 1997). Subsequently, principal
amortization based upon a 20-year amortization schedule beginning with the
second loan year. The mortgage debt balance was $221.8 million as of December
31, 1997. The weighted average interest rate on the Mortgage Debt for the
years ended December 31, 1997 and 1996 was 8.2% and 7.7%, respectively. On the
Closing Date, the Partnership was required to establish certain reserves. In
addition, a new reserve was established in 1997 and additional amounts were
deposited into the existing reserves. All reserves are discussed in Note 2.
The required principal payments of the Mortgage Debt at December 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 4,379
1999................................................................ 4,759
2000................................................................ 5,119
2001................................................................ 5,614
2002................................................................ 6,100
Thereafter.......................................................... 195,843
--------
$221,814
========
</TABLE>
NOTE 8. LAND LEASES
The San Antonio and San Ramon Hotels are located on sites with ground leases
from unrelated third parties. The initial lease terms expire in 2013 and 2014,
respectively. To facilitate the refinancing, the Partnership exercised its
option to extend the land leases of both properties for an additional twenty-
year period. Therefore, the current terms of the San Antonio and San Ramon
land leases expire in 2033 and 2034, respectively. The Partnership is
obligated to pay annual rent equal to the greater of a minimum rent or a
percentage rent and has the option to extend the terms for up to three
successive ten-year terms each. Ground rent on the San Antonio Hotel is equal
to the greater of $700,000 or 3.5% of annual gross room sales. Ground rent on
the San Ramon Hotel is equal to the greater of $350,000 or 3% of annual gross
sales for the first five years, after which minimum
MHP2 Supp-58
<PAGE>
rent was adjusted upward every five years, beginning in 1989, to an amount
equal to 75% of the average rent paid during the three years immediately
preceding the applicable five-year period. No such adjustment was necessary at
that time. Ground rent expense for the San Antonio and San Ramon Hotels
totaled $2,122,000, $1,982,000 and $1,879,000, for the years ended December
31, 1997, 1996 and 1995, respectively.
Future minimum annual rental commitments for all land leases entered into by
the Partnership, as described above, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR LAND LEASES
----------- -----------
<S> <C>
1998............................................................. $ 1,050
1999............................................................. 1,050
2000............................................................. 1,050
2001............................................................. 1,050
2002............................................................. 1,050
Thereafter....................................................... 32,900
-------
Total Minimum Lease Payments................................... $38,150
=======
</TABLE>
NOTE 9. MANAGEMENT AGREEMENTS
The Partnership entered into long-term hotel management agreements (the
"Management Agreements") with the Manager to manage the Hotels as part of the
Marriott International, Inc. full service hotel system. The Management
Agreement for each Hotel has an initial term expiring on December 31, 2008. To
facilitate the refinancing, the Manager exercised its option to renew the
Management Agreements for each Hotel for an additional 10-year term.
Therefore, the current terms of the Management Agreements for each Hotel
expire on December 31, 2018. This, as well as the assignment of the Management
Agreements described in Note 1, and other minor changes were documented in an
amendment to each of the Management Agreements. The Manager has the option to
renew the Management Agreements for up to three additional 10-year terms. The
Manager also manages the Santa Clara Hotel on behalf of the Santa Clara
Partnership. The Manager is paid a base management fee equal to 3% of gross
hotel sales. Base management fees paid in 1997, 1996 and 1995 were $4,649,000,
$4,471,000 and $4,281,000, respectively.
In addition, the Manager is entitled to an incentive management fee equal to
20% of each Hotel's Operating Profit, as defined. The incentive management fee
with respect to each Hotel is payable only out of 55% of each Hotel's
Operating Profit after the Partnership's payment or retention for such fiscal
year of the following: (i) the Ground Rent, if any, with respect to such
Hotel; (ii) the Qualifying Debt Service, as defined, with respect to such
Hotel; (iii) such Hotel's Pro-Rata Share of Total Mortgage Debt Service
Shortfall, as defined, if any, with respect to all Hotels; and (iv) the
Partnership's non-cumulative 10% Priority Return on the Adjusted Contributed
Capital, as defined, with respect to such Hotel.
Unpaid incentive management fees are accrued without interest and are paid
from cash flow available for incentive management fees following payment of
any then current incentive management fees. Incentive management fees earned
for the years ended December 31, 1997, 1996 and 1995 were $9,925,000,
$9,813,000 and $9,412,000, respectively. Deferred incentive management fees
for the years ended December 31, 1997 and 1996 were $2,739,000 and $2,578,000,
respectively, and are included in Due to Marriott Hotel Services, Inc. in the
accompanying balance sheet.
Pursuant to the Management Agreements, the Manager is required to furnish
the Hotels with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in the Manager's full-
service hotel system. Chain Services include central training, advertising and
promotion, a national reservations 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 full-service hotels managed,
owned or leased by the Manager or its subsidiaries.
MHP2 Supp-59
<PAGE>
In addition, the Hotels also participate in the Manager's Marriott Rewards
Program ("MRP"). This program succeeded the Manager's Honored Guest Awards
Program. The cost of this program is charged to all hotels in the Manager's
hotel system based upon the MRP sales at each hotel. The total amount of Chain
Services and MRP costs charged to the Partnership for the years ended December
31, 1997, 1996 and 1995 were $5,593,000, $5,433,000 and $5,151,000,
respectively, and are included in Revenues (as defined in Note 3) in the
accompanying statement of operations.
The Management Agreements provide for the establishment of a property
improvement fund for each Hotel to cover the cost of certain non-routine
repairs and maintenance to the Hotels which are normally capitalized and the
cost of replacements and renewals to the Hotels' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund for the San
Antonio Hotel are 4% in 1991 through 1998 and 5% thereafter. Contributions to
the property improvement fund for the San Ramon Hotel are 4% in 1994 through
1998 and 5% thereafter. Contributions to the property improvement fund for the
New Orleans Hotel are 5% each year; however, the contribution percentage was
increased to 7% for 1997 and 1998. Commencing with fiscal year 2003, the
Manager shall have the right, but not the obligation, to increase the amount
it transfers into the fund to any amount greater than 5% but not exceeding 6%
of gross sales. Total contributions to the property improvement fund for the
years ended December 31, 1997, 1996 and 1995 were $8,193,000, $6,622,000 and
$6,342,000, respectively.
Pursuant to the terms of the Management Agreements, the Partnership is
required to provide the Manager with working capital and supplies to meet the
operating needs of the Hotels. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of any of the
Management Agreements, the working capital and supplies of the related Hotel
will be returned to the Partnership. The individual components of working
capital and supplies controlled by the Manager are not reflected in the
Partnership's balance sheet. As of December 31, 1997 and 1996, $6,633,000 has
been advanced to the Manager for working capital and supplies which is
included in Due from Marriott Hotel Services, Inc. in the accompanying balance
sheet. The supplies advanced to the Manager are recorded at their estimated
net realizable value.
Each of the Management Agreements also provides that the Partnership may
terminate any of the Management Agreements and remove the Manager if, during
any three consecutive fiscal years after fiscal year 1992, with respect to any
Hotel, the sum of the operating profit before real and personal property
taxes, fails to equal or exceed 8% of the sum of the original cost of the
Hotel plus certain additional hotel investments by the Partnership. The
Manager may, however, prevent termination by paying to the Partnership such
amounts as are necessary to achieve the above performance standards.
MHP2 Supp-60
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
----------------
1998 1997
------- -------
<S> <C> <C>
REVENUES..................................................... $37,946 $36,584
------- -------
OPERATING COSTS AND EXPENSES
Depreciation............................................... 6,285 6,042
Incentive management fees.................................. 5,550 5,410
Property taxes............................................. 3,178 2,760
Base management fees....................................... 2,390 2,303
Ground rent................................................ 1,090 993
Insurance and other........................................ 559 467
------- -------
19,052 17,975
------- -------
OPERATING PROFIT............................................. 18,894 18,609
Interest expense........................................... (8,708) (8,827)
Interest income............................................ 714 957
------- -------
INCOME BEFORE EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP.... 10,900 10,739
------- -------
EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP.................. 1,856 1,112
------- -------
NET INCOME................................................... $12,756 $11,851
======= =======
ALLOCATION OF NET INCOME
General Partner............................................ $ 127 $ 119
Limited Partners........................................... 12,629 11,732
------- -------
$12,756 $11,851
======= =======
NET INCOME PER LIMITED PARTNER UNIT
(745 Units)................................................. $16,952 $15,748
======= =======
</TABLE>
See Notes to Condensed Financial Statements.
MHP2 Supp-61
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net............................ $194,173 $197,512
Due from Marriott Hotel Services, Inc.................. 10,208 7,063
Other assets........................................... 11,031 8,510
Deferred financing costs, net.......................... 5,523 5,663
Restricted cash reserves............................... 17,122 20,307
Cash and cash equivalents.............................. 7,900 10,363
--------- ---------
$245,957 $249,418
========= =========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................ $ 219,644 $ 221,814
Investment in Santa Clara Partnership................ 7,726 8,737
Due to Marriott International, Inc................... 4,203 3,567
Accounts payable and accrued expenses................ 1,677 4,163
--------- ---------
Total Liabilities.................................. 233,250 238,281
--------- ---------
PARTNERS' CAPITAL
General Partner...................................... 272 256
Limited Partners..................................... 12,435 10,881
--------- ---------
Total Partners' Capital............................ 12,707 11,137
--------- ---------
$245,957 $249,418
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
MHP2 Supp-62
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 12,756 $ 11,851
Noncash items............................................. 4,647 5,087
Change in operating accounts.............................. (3,273) 546
-------- --------
Cash provided by operating activities................... 14,130 17,484
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net.................. (2,946) (2,764)
Change in property improvement fund....................... (2,521) (1,922)
Distributions from Santa Clara Partnership................ 845 982
-------- --------
Cash used in investing activities....................... (4,622) (3,704)
-------- --------
FINANCING ACTIVITIES
Capital distributions to partners......................... (11,186) (9,875)
Repayment of mortgage debt................................ (2,170) --
Change in restricted lender reserves, net................. 1,385 (2,139)
Payment of financing costs................................ -- (34)
-------- --------
Cash used in financing activities....................... (11,971) (12,048)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (2,463) 1,732
CASH AND CASH EQUIVALENTS at beginning of period............ 10,363 16,372
-------- --------
CASH AND CASH EQUIVALENTS at end of period.................. $ 7,900 $ 18,104
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest........................... $ 9,181 $ 9,246
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
MHP2 Supp-63
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Marriott Hotel Properties II Limited Partnership (the "Partnership") without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the accompanying
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included in the Partnership's Form 10-K for the
fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, net income of the Partnership is allocated
99% to the limited partners and 1% to the General Partner. Significant
differences exist between the net income for financial reporting purposes and
the net income reported for Federal income tax purposes. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods and shorter depreciable lives of assets and differences in the timing
of recognition of incentive management fee expense.
2. The Partnership owns the New Orleans, San Antonio Rivercenter and San
Ramon Marriott Hotels (the "Hotels"). In addition, the Partnership owns a 50%
limited partnership interest in the Santa Clara Marriott Hotel Limited
Partnership (the "Santa Clara Partnership") which owns the Santa Clara
Marriott Hotel (the "Santa Clara Hotel"). The sole general partner of the
Partnership and the Santa Clara Partnership, with a 1% interest in each, is
Marriott MHP Two Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"). The remaining 49%
interest in the Santa Clara Partnership is owned by HMH Properties, Inc., a
wholly-owned subsidiary of Host Marriott. The Partnership's income from the
Santa Clara Partnership is reported as Equity in Income of the Santa Clara
Partnership. In arriving at Equity in Income from the Santa Clara Partnership,
the Partnership is allocated 100% of the interest expense related to the debt
incurred to purchase the Santa Clara Partnership interest. Summarized
financial information for the Santa Clara Partnership is presented in Note 5.
3. Certain reclassifications were made to the prior year condensed financial
statements to conform to the current year presentation.
4. Hotel revenues represent house profit of the Partnership's Hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, Inc. (the "Manager"). House profit reflects hotel operating results
which flow to the Partnership as property owner and represents gross hotel
sales less property-level expenses, excluding depreciation and amortization,
base and incentive management fees, property taxes, ground rent, insurance and
certain other costs, which are disclosed separately in the condensed statement
of operations
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
MHP2 Supp-64
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $41.7 million and $40.1 million for the first two quarters of
1998 and 1997, respectively, and will have no impact on operating profit or
net income.
Partnership revenues generated by the Hotels for 1998 and 1997, consist of
(in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
-------- --------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $ 52,920 $ 50,384
Food and beverage.......................................... 22,223 22,072
Other...................................................... 4,514 4,320
-------- --------
79,657 76,776
-------- --------
HOTEL EXPENSES
Departmental direct costs
Rooms...................................................... 9,499 9,151
Food and beverage.......................................... 15,315 14,952
Other hotel operating expenses............................. 16,897 16,089
-------- --------
41,711 40,192
-------- --------
HOTEL REVENUES............................................... $ 37,946 $ 36,584
======== ========
</TABLE>
5. Summarized financial information for the Santa Clara Partnership for 1998
and 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
CONDENSED STATEMENT OF OPERATIONS
REVENUES.................................................... $ 12,490 $ 10,247
-------- --------
OPERATING COSTS AND EXPENSES
Incentive management fees................................. 2,008 1,610
Depreciation and amortization............................. 1,424 1,134
Base management fees...................................... 760 668
Property taxes............................................ 245 244
Ground rent, insurance and other.......................... 257 230
-------- --------
4,694 3,886
-------- --------
OPERATING PROFIT............................................ 7,796 6,361
Interest expense.......................................... (1,675) (1,699)
Interest income........................................... 107 102
-------- --------
NET INCOME.................................................. $ 6,228 $ 4,764
======== ========
</TABLE>
MHP2 Supp-65
<PAGE>
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
CONDENSED BALANCE SHEET
Property and equipment, net.......................... $ 27,623 $ 28,688
Property Improvement Fund............................ 3,554 2,619
Due from Marriott Hotel Services, Inc................ 2,649 2,059
Cash and cash equivalents............................ 4,949 3,177
-------- --------
Total Assets....................................... $ 38,775 $ 36,543
======== ========
Mortgage debt........................................ $ 42,942 $ 43,366
Due to Marriott Hotel Services, Inc.................. 475 970
Accounts payable and accrued expenses................ 322 482
Partners' deficit.................................... (4,964) (8,275)
-------- --------
Total Liabilities and Partners' Deficit............ $ 38,775 $ 36,543
======== ========
</TABLE>
6. As previously reported, Host Marriott, parent company of the General
Partner of the Partnership, announced on April 17, 1998, that its Board of
Directors authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership"), and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Marriott Hotel Properties II Limited Partnership, are expected
to be given an opportunity to receive, on a tax-deferred basis, Operating
Partnership units in the Operating Partnership in exchange for their current
limited partnership interests. The Operating Partnership units would be
redeemable by the limited partner for freely traded Host Marriott shares (or
the cash equivalent thereof) at any time after one year from the closing of
the merger. In connection with the REIT conversion, the Operating Partnership
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission on June 2, 1998. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
MHP2 Supp-66
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
SUPPLEMENT DATED SEPTEMBER 11, 1998 FOR
PROSPECTUS/CONSENT SOLICITATION STATEMENT DATED SEPTEMBER , 1998 FOR
POTOMAC HOTEL LIMITED PARTNERSHIP
On the terms described in the Prospectus/Consent Solicitation Statement (the
"Consent Solicitation"), dated September 11, 1998, of which this Supplement
(the "Supplement") is a part, 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 taxable year commencing after closing of
the REIT Conversion, which Host REIT currently expects to be the year
beginning January 1, 1999.
As part of the REIT Conversion, the Operating Partnership is proposing to
acquire by merger (the "Mergers") Potomac Hotel Limited Partnership, a
Delaware limited partnership ("PHLP" or the "Partnership"), and up to seven
other limited partnerships (the "Partnerships") that own full-service hotels
in which Host or its subsidiaries are general partners. As more fully
described in the Consent Solicitation, limited partners of those Partnerships
that participate in the Mergers will receive OP Units in exchange for their
partnership interests in such Partnerships (with respect to the Partnerships,
those limited partners who are unaffiliated with Host are referred to herein
as the "Limited Partners," and with respect to PHLP, the "PHLP Limited
Partners"). PHLP Limited Partners may elect to exchange such OP Units received
in connection with the Merger for either common shares of beneficial interest,
par value $.01 per share, of Host REIT ("Common Shares") or unsecured 6.56%
Callable Notes due December 15, 2005 issued by the Operating Partnership
("Notes"). Beginning one year after the Mergers, Limited Partners who retain
OP Units will have the right to redeem their OP Units at any time and receive,
at the election of Host REIT, either 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").
The number of OP Units to be allocated to PHLP will be based upon (i) its
Exchange Value (as defined herein) and (ii) the price attributed to an OP Unit
following the Merger, determined as described herein (but in no event will it
be less than $ or greater than $ per OP Unit) and will not be known at the
time of voting. The number of Common Shares a PHLP Limited Partner may elect
to receive in connection with the Merger will equal the number of OP Units
received. The principal amount of the Notes that PHLP Limited Partners may
elect to receive in connection with the Merger will be based upon PHLP's Note
Election Amount (as defined herein). See "Determination of Exchange Value of
PHLP and Allocation of OP Units." The estimated Exchange Value and Note
Election Amount set forth herein may increase or decrease as a result of
various adjustments, and will be finally calculated shortly before the
Effective Date. Pursuant to the Merger, PHLP Limited Partners have an
estimated Exchange Value of $5,040 per Partnership Unit and a Note Election
Amount of $4,032 per Partnership Unit.
RISK FACTORS
In deciding whether to approve the Merger, PHLP Limited Partners should
consider certain risks and other factors. The General Partner believes that
PHLP Limited Partners should particularly consider the following, which should
be read in conjunction with the information in the Consent Solicitation under
"Risk Factors" and "Federal Income Tax Consequences:"
. 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
PHLP Supp-1
<PAGE>
corporate-level income taxes expected as a result of the REIT
Conversion. To the extent that such 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. The benefits to Host of the REIT Conversion will be materially
reduced if one or more of the Partnerships do not participate in a
Merger.
. Absence of Arm's Length Negotiations. No independent representative was
retained to negotiate on behalf of the PHLP Limited Partners or the
other Limited Partners. Although the General Partner has obtained the
Appraisals and the Fairness Opinion from AAA, AAA has not negotiated
with the General Partner 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 PHLP Limited Partners or the
other 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 Partner involve the following conflicts
of interest because of the relationships among Host, Host REIT, the
Operating Partnership, the General Partners and Crestline. The General
Partners, which are all subsidiaries of Host (except for PHLP, in which
Host is the General Partner), must assess whether a Merger is fair and
equitable to and advisable for the Limited Partners of its Partnership.
This assessment involves considerations that are different from those
relevant to the determination of whether the Mergers and the REIT
Conversion are advisable for Host and its shareholders. The
considerations relevant to that determination include Host's belief that
the REIT Conversion is advisable for its shareholders, the benefits of
the REIT Conversion to Host will be greater if the Partnerships,
including PHLP, participate and Host REIT will benefit if the value of
the OP Units received by the Limited Partners of PHLP is less than the
value of their Partnership Interests. In addition, the terms of the
Leases of the Hotels, including PHLP's Hotels, will be determined by
Host and 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, including the PHLP Limited Partners.
. Uncertainties at the Time of Voting Include the Number of OP Units to be
Received. There are several uncertainties at the time the PHLP Limited
Partners must vote on the Merger, including (i) the exact Exchange Value
for PHLP (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
Merger, which will be determined by reference to the post-Merger trading
prices of Host REIT's Common Shares (but will not be less than $ or
greater than $ ) and which, together with the Exchange Value, will
determine the number of OP Units the PHLP Limited Partners 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 Note
Election Amount is determined. For these reasons, the PHLP Limited
Partners cannot know at the time they vote on the Merger these important
aspects of the Merger.
. Sale of Personal Property May Result in Gain to PHLP Limited
Partners. In order to facilitate the participation of PHLP in the Merger
without adversely affecting Host REIT's qualification as a REIT, the
Operating Partnership will require, as part of the Merger, that PHLP
sell a portion of the personal property associated with its Hotels to a
Non-Controlled Subsidiary. This sale will be a taxable transaction and
may result in an allocation of a relatively modest amount of ordinary
recapture income by PHLP to PHLP Limited Partners. This income, if any,
will be allocated to each PHLP Limited Partner in the same proportion
and to the same extent that such PHLP Limited Partner was allocated any
deductions directly or indirectly giving rise to the treatment of such
income as recapture income. A PHLP Limited Partner who receives such an
allocation of recapture income would not be entitled to any special
distribution from PHLP in connection with the sale of personal property.
. Cash Distributions. There is no assurance as to the amount or source of
funds for the estimated initial cash distributions of the Operating
Partnership and Host REIT.
PHLP Supp-2
<PAGE>
. Exchange Value May Not Equal Fair Market Value of PHLP's Hotels. Each
PHLP Limited Partner who retains OP Units or elects to exchange OP Units
for Common Shares will receive consideration with a deemed value equal
to the Exchange Value of such PHLP Limited Partner's Partnership
Interest. The determination of the Exchange Value of PHLP involves
numerous estimates and assumptions. There is no assurance that the
Exchange Value of PHLP will equal the fair market value of the Hotels
and other assets contributed by PHLP. See "Determination of Exchange
Value of PHLP and Allocation of OP Units."
. Allocation of OP Units to Host REIT is Different from Allocation of OP
Units to the Partnerships. Following the REIT Conversion, Host REIT will
own a number of OP Units equal to the number of shares of Host common
stock outstanding on the Effective Date (including the OP Units to be
received by the General Partners and other subsidiaries of Host in the
Mergers and the OP Units to be acquired from PHLP Limited Partners and
the other Limited Partners who elect to receive Common Shares in
connection with the Mergers) 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.
Host REIT's OP Units, in the aggregate, 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 to Host REIT
and the Partnerships may result in such 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 of PHLP and
Allocation of OP Units."
. Price of OP Units or Common Shares Might Be Less than the Fair Market
Value of the PHLP Limited Partners' Partnership Interests. The price of
an OP Unit for purposes of the Merger 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 Merger (but in no event
will it be less than $ or greater than $ per OP Unit). This pricing
mechanism has the effect of fixing the minimum and maximum number of OP
Units to be issued in the Mergers. It is likely that, either initially
or 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 Merger. This could
result in the PHLP Limited Partners receiving OP Units or Common Shares
with an actual value that is less than either the price of the OP Units
for purposes of the Merger or the fair market value of their Partnership
Interests.
. Inability of PHLP Limited Partners Who Retain OP Units to Redeem OP
Units for One Year. PHLP Limited Partners who retain OP Units received
in the Merger will be unable to redeem such OP Units for one year
following the Merger. Until then, PHLP Limited Partners will bear the
risk of illiquidity and of not being able to sell in a falling market.
. 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 Crestline common stock and
possibly cash or other consideration to be distributed in connection
with the REIT Conversion) and not the business and assets of Host REIT
following the REIT Conversion. Host's current stock price also is
affected by general market conditions.
. Value of the Notes Will Be Less than the Exchange Value of PHLP. Each
PHLP Limited Partner may elect to receive, in exchange for OP Units
received in the Merger, an unsecured, seven-year Note of the Operating
Partnership with a principal amount equal to the Note Election Amount of
his Partnership Interest, which is based upon numerous assumptions and
estimates. The deemed value of the OP Units to be received by the PHLP
Limited Partners will exceed the principal amount of the corresponding
Notes (because the Exchange Value will be higher than the Note Election
Amount) and there is no
PHLP Supp-3
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assurance that the Note a PHLP Limited Partner receives will have a
value equal to either (i) the fair market value of the PHLP Limited
Partner's share of the Hotels and other assets owned by PHLP or (ii) the
principal amount of the Note. 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
face 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
ranks equally with such Notes.
. Fundamental Change in Nature of Investment; Potential
Underperformance. The Merger and the REIT Conversion involve a
fundamental change in the nature of a PHLP Limited Partner's investment
from holding an interest in PHLP, which was structured as a tax shelter
investment, is a finite-life entity, has a fixed portfolio of eight
Hotels and has never distributed cash flow from the operation of such
Hotels to its Limited Partners, to holding a direct or indirect interest
in the Operating Partnership, an ongoing real estate company with a
portfolio of approximately 125 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 and (iii) is able to
reinvest proceeds from sales or refinancings of existing Hotels in other
hotels. In addition, each PHLP Limited Partner's investment will change
from one that allows a PHLP Limited Partner to receive a return of
capital in the form of distributions from any net proceeds of a sale or
refinancing of PHLP's assets to an investment in which a PHLP Limited
Partner who retains OP Units likely would realize a return of capital
only through the exercise of the Unit Redemption Right. Those PHLP
Limited Partners who elect to receive Common Shares in connection with
the Merger will hold an equity interest in a publicly traded REIT that
(i) provides immediate liquidity, (ii) intends to make distributions to
its shareholders in an amount equal to at least 95% of its taxable
income, (iii) allows shareholders to influence management by
participation in the election of Trustees and (iv) realizes substantial
corporate tax savings as long as certain requirements are met. A PHLP
Limited Partner's share of the liquidation proceeds, if any, from the
sale of PHLP's Hotels could be higher than the amount realized upon
exercise of the Unit Redemption Right, the sale of Common Shares
received in connection with the Merger or payments on any Note received
by a PHLP Limited Partner who elects to exchange his OP Units for such
Note. An investment in the Operating Partnership or Host REIT may not
outperform an investment in PHLP. 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 Merger, PHLP Limited Partners who retain OP Units or elect to
receive Common Shares in connection with the Merger will own interests
in a much larger enterprise with a broader range of assets than PHLP
individually. A material adverse change affecting the Operating
Partnership's assets will affect all Limited Partners, including PHLP
Limited Partners, regardless of whether a particular Limited Partner
previously was an investor in such affected assets. PHLP owns discrete
assets and the Mergers and the REIT Conversion will significantly
diversify the types and geographic locations of the Hotels in which the
PHLP 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 the Hotels owned by PHLP.
. PHLP Limited Partners Have No Cash Appraisal Rights. PHLP Limited
Partners who vote against the Merger have no right to receive cash based
upon an appraisal of their Partnership Interests.
. Uncertainties as to the Size and Leverage of the Operating
Partnership. The PHLP Limited Partners cannot know at the time they vote
on the Merger the exact size and amount of leverage of the Operating
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<PAGE>
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, 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
Mergers and the REIT Conversion.
. Lack of Control over Hotel Operations and Non-Controlled
Subsidiaries. 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 existing long-term
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. The Operating Partnership
also will not own any of the voting stock of the Non-Controlled
Subsidiaries, which may own up to 20% by value of the Operating
Partnership's assets. 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 and the Non-Controlled
Subsidiaries to operate and manage their businesses.
. Expiration of Leases and Possible Inability to Find Other Lessees. The
Leases generally will expire seven to ten years after the Effective Date
and there can be no assurance that the affected Hotels will be relet to
the Lessees (or if relet, will be relet on terms as favorable to the
Operating Partnership). If the Hotels are not relet to the Lessees, the
Operating Partnership will be required to find other lessees, which
lessees must meet certain requirements set forth in the Management
Agreements and the Code. 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 relet the Hotels or enter into
new leases with such lessees, which could result in a failure of Host
REIT to qualify as a REIT or in reduced cash available for distribution.
. Requisite Vote of PHLP Limited Partners Binds All PHLP Limited
Partners. For PHLP, approval by a majority of the Partnership Interests
that are eligible to be voted is required to approve the Merger and the
related amendments to the partnership agreement, as described in "Voting
Procedures--Required Vote and Other Conditions." Such approval will
cause PHLP to participate in the Merger and will bind all PHLP Limited
Partners, including PHLP Limited Partners who voted against or abstained
from voting with respect to the Merger and the related amendments to the
partnership agreement.
. Inability to Obtain Third-Party Consents May Have a Material Adverse
Effect. There are numerous third-party consents which are required to be
obtained in order to consummate the Mergers and the REIT Conversion. The
inability of Host, the Operating Partnership and Host REIT to obtain
such consents may cause a default under cross-default provisions of the
Company's principal credit facilities or otherwise have a material
adverse effect on the Operating Partnership and Host REIT and thus could
reduce the value of the OP Units and Common Shares.
. 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
PHLP Supp-5
<PAGE>
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 an approximately 53% 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 $15.00). 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 (including Host REIT), (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 Prior 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 (including Host
REIT).
. 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.
. Anti-Takeover Effect of Certain Provisions of Maryland Law, the
Declaration of Trust and Bylaws and the Shareholder Rights Plan. The
Amended and Restated Declaration of Trust (the "Declaration of Trust")
and Bylaws of Host REIT to be effective upon completion of the merger of
Host with and into Host REIT, as well as provisions of Maryland law,
contain certain provisions that could have the effect of delaying,
deferring or preventing a change in control of Host REIT. These
provisions could limit the price that certain investors might be willing
to pay in the future for Common Shares. Certain of these provisions
provide for a staggered board and allow Host REIT to issue, without
shareholder approval, preferred shares having rights senior to those of
the Common Shares. The Board of Trustees also is authorized, without a
vote of shareholders, to amend the Declaration of Trust to increase or
decrease the number of authorized common or preferred shares and to
classify or reclassify unissued common or preferred shares into another
class or series of shares. Other provisions impose various procedural
and other requirements that could make it difficult for shareholders to
effect certain corporate actions. The Declaration of Trust also provides
that no person or persons acting as a group may own more than 9.8% (in
number or value) of the outstanding shares of any class or series of
shares of Host REIT. Host REIT also intends to adopt a Shareholder
Rights Plan to replace the existing stockholder rights plan of Host.
Host REIT also will become a subject to the business combination and
control share provisions under Maryland law. See "Description of Shares
of Beneficial Interest" and "Certain Provisions of Maryland Law and Host
REIT's Declaration of Trust and Bylaws."
PHLP Supp-6
<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 substantial
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
PHLP Limited Partners (other than those who elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger)
generally are not expected to recognize significant taxable gain at the
time of the Merger, there are a variety of events and transactions
(including the sale of one or more of the Hotels currently owned by PHLP
or the reduction of indebtedness securing one or more of the Hotels)
that could cause a PHLP Limited Partner to recognize all or a part of
the gain that otherwise has been deferred through the REIT Conversion.
In this regard, the refinancing of the existing debt secured by six of
PHLP's Hotels (the "Mitsui Bank Debt"), which matures in December 1999,
could result, depending upon the circumstances, in the recognition of
significant taxable gain by PHLP Limited Partners. See "Federal Income
Tax Consequences--Tax Treatment of PHLP Limited Partners Who Hold OP
Units Following the Merger." Certain Hotels (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 Merger, 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. The partnership agreement of the Operating
Partnership, which is substantially in the form attached to the Consent
Solicitation 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."
. Election to Exchange OP Units for Common Shares. A PHLP Limited Partner
who elects to receive Common Shares in exchange for his OP Units in
connection with the Merger will be treated as having made a fully
taxable disposition of his OP Units. If he has a "negative capital
account" with respect to his Partnership Interest, he will recognize
"phantom income" (i.e., the income recognized would exceed the value of
the Common Shares by the amount of his negative capital account). Such
PHLP Limited Partner may not defer recognition of any part of the gain
realized from the exchange under the "installment sale" rules. See
"Federal Income Tax Consequences--Tax Treatment of PHLP Limited Partners
Who Exercise Their Right to Make the Common Share Election or the Note
Election." PHLP Limited Partners who elect to receive Common Shares will
not receive the Crestline common stock or any other portion of the E&P
distribution made before they become shareholders of Host REIT.
. Election to Exchange OP Units for Notes. A PHLP Limited Partner who
elects to receive a Note in connection with the Merger in exchange for
his OP Units will be treated as having made a taxable disposition of his
OP Units. A PHLP Limited Partner who receives a Note in connection with
the Merger may be eligible to defer a portion of that gain under the
"installment sale" rules until principal on the Note is paid. A PHLP
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 in any event. See "Federal Income Tax
Consequences--Tax Treatment of PHLP Limited Partners Who Exercise Their
Right to Make the Common Share Election or 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
PHLP Supp-7
<PAGE>
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 and Common Shares, 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 could fail to qualify as a REIT and the Operating
Partnership might be treated as a corporation for federal income tax
purposes, which would have a material adverse impact on the PHLP Limited
Partners and the value of the OP Units and the Common Shares.
. 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.
. PHLP Limited Partners Need to Consult with Their Own Tax Advisors.
Because the specific tax attributes of a PHLP Limited Partner and the
facts regarding such PHLP Limited Partner's interest in PHLP could have
a material impact on the tax consequences to such PHLP Limited Partner
of the Merger (including the decision whether to elect to receive Common
Shares or Notes in exchange for OP Units in connection with the Merger)
and the subsequent ownership and disposition of OP Units, Common Shares
or Notes, it is essential that each PHLP Limited Partner consult with
his own tax advisors regarding the application of federal, foreign and
state and local tax laws to such PHLP 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 PHLP Limited Partners would not be able to use suspended
passive activity losses from other investments to offset income from the
Operating Partnership.
. Host REIT's Substantial Deferred Tax and Contingent Liabilities. Host
REIT will have substantial deferred tax liabilities attributable to
Host's assets and operations 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.
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 subsidiaries of Crestline, which currently is a wholly owned
subsidiary of Host. Crestline will become a separate public company when Host
distributes the common stock of Crestline and any cash and other consideration
to its existing shareholders and the Blackstone Entities in connection with
Host's distribution of its accumulated earnings and profits, which Host REIT
is required to do in order to qualify as a REIT. Shares of Host REIT and
Crestline will become separately traded securities and the companies will
operate independently. There will be no overlap between the boards of Host
REIT and Crestline. There will be a substantial overlap of shareholders of the
two companies initially, but this overlap will diverge over time.
HOST MARRIOTT CORPORATION (THE "GENERAL PARTNER"), THE GENERAL PARTNER OF
PHLP, BELIEVES THAT THE MERGER PROVIDES SUBSTANTIAL BENEFITS AND IS FAIR TO
THE PHLP LIMITED PARTNERS AND RECOMMENDS THAT ALL
PHLP Supp-8
<PAGE>
PHLP LIMITED PARTNERS VOTE FOR THE MERGER AND FOR THE RELATED AMENDMENTS TO
THE PARTNERSHIP AGREEMENT.
The effects of the Mergers may be different for Limited Partners of the
various Partnerships. This Supplement has been prepared to highlight for PHLP
Limited Partners the specific risks, benefits, effects and fairness of the
Merger to them and to provide other information specific to PHLP. Supplements
have also been prepared for each of the other Partnerships. This Supplement,
together with the supplements of the other Partnerships (collectively, the
"Supplements"), are part of the Consent Solicitation. Upon receipt of a
written request by a Limited Partner or his representative so designated in
writing, the General Partner will send a copy of any Supplement without
charge. All requests for a copy of a Supplement should be directed to:
Investors 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).
All cross-references refer to the Consent Solicitation unless the context
indicates otherwise. Capitalized terms not defined herein shall have the
meaning set forth in the Consent Solicitation. The information contained
herein, unless otherwise indicated, assumes the REIT Conversion occurs with
all Partnerships participating and no Common Shares or Notes being issued (the
"Full Participation Scenario").
EXPECTED BENEFITS OF THE MERGER
The General Partner believes that participating in the Merger would likely
be beneficial to the PHLP Limited Partners for the reasons set forth below.
This information is qualified by and should be read in conjunction with the
information in the Consent Solicitation under "Background and Reasons for the
Mergers and the REIT Conversion--Reasons for the Mergers." These benefits,
which should be viewed as alternatives to continuing the business and
operations of PHLP, are expected to include:
. Exchange Value of PHLP. PHLP Limited Partners who retain OP Units or
elect to receive Common Shares in connection with the Merger will
receive OP Units or Common Shares with an estimated Exchange Value equal
to $5,040 per Partnership Unit.
. Liquidity. The REIT Conversion will offer PHLP Limited Partners
liquidity with respect to their investments in PHLP because PHLP Limited
Partners can receive freely tradeable Host REIT Common Shares by
electing to exchange OP Units for Common Shares in connection with the
Merger or by exercising their Unit Redemption Right at any time after
one year following the Effective Date. Host has approximately 204
million shares of common stock outstanding and is expected to have a
total common equity market capitalization of approximately $3.6 billion
after giving effect to the earnings and profits distribution (based on a
price of $15.00 per Host Reit Common Share). The exercise of the
election to exchange OP Units for Common Shares in connection with the
Merger or the exercise of the Unit Redemption Right, however, generally
would result in recognition of taxable income or gain at the time of
exercise.
. Regular Quarterly Cash Distributions. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. PHLP has never
distributed cash to its Limited Partners, thus the ability of the PHLP
Limited Partners to receive quarterly and regular distributions would be
enhanced. For additional information regarding historical and estimated
future distributions for PHLP and the other Partnerships, see
"Background and Reasons for the Mergers and the REIT Conversion--Reasons
for the Mergers."
. Substantial Tax Deferral for PHLP Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner
expects that PHLP Limited Partners who do not elect to receive Common
Shares or a Note in exchange for OP Units in connection with the Merger
generally should be able to obtain the benefits of the Merger 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 PHLP or a sale or other disposition of its
assets in a taxable transaction (although PHLP Limited Partners may
recognize a relatively modest amount of ordinary income as the result of
required sales of personal property to a Non-Controlled Subsidiary in
order to facilitate Host REIT's qualification as a REIT). Thereafter,
such
PHLP Supp-9
<PAGE>
PHLP 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 PHLP are sold or otherwise disposed of in a taxable transaction by
the Operating Partnership or the Mitsui Bank Debt now secured by such
Hotels is repaid, prepaid or substantially reduced. The federal income
tax consequences of the Merger are highly complex and, with respect to
each PHLP Limited Partner, are dependent upon many variables, including
the particular circumstances of such PHLP Limited Partner. See "Federal
Income Tax Consequences--Tax Consequences of the Merger." Each PHLP
Limited Partner is urged to consult with his own tax advisors as to the
consequences of the Merger in light of his particular circumstances.
. Enhanced Ability of Operating Partnership to Refinance the Mitsui Bank
Debt. The Mitsui Bank Debt of $172.7 million as of December 31, 1997,
must be refinanced no later than December 1999. There is no assurance,
however, that such refinancing, either by PHLP on a standalone basis or
the Operating Partnership following the Merger, will not require that
PHLP Limited Partners recognize at least a substantial portion of the
taxable gain that otherwise has been deferred through the Merger. In
connection with an IRS ruling that the Operating Partnership has
requested, see "Federal Income Tax Consequences--Tax Consequences of the
Merger--Deemed Cash Distribution and Resulting Taxable Gain," it is
expected that the former PHLP Limited Partners will reduce the amount of
"phantom income" they are allocated, thereby reducing their taxable
gains. There can be no assurance, however, that the Operating
Partnership will receive the ruling and, if received, the exact impact
it will have on an individual PHLP Limited Partner.
. Risk Diversification. Participation in the Merger, as well as future
hotel acquisitions by the Operating Partnership, will reduce the
dependence of PHLP Limited Partners upon the performance of, and the
exposure to the risks associated with, its Hotels 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 generally will have a lower leverage to value
ratio, approximately 53%, than PHLP currently, which has outstanding
debt balances in excess of the Appraised Values of its Hotels, resulting
in significant interest and debt service savings and greater financial
stability. In addition, the Mitsui Bank Debt matures in December 1999.
There can be no assurance, however, that PHLP can either extend the debt
maturity beyond December 1999 or refinance such debt on favorable terms
in the absence of the Merger or the Operating Partnership could extend
or refinance such debt if the Merger is consummated. The Operating
Partnership and the General Partner believe, however, that PHLP will
face greater difficulties in finding a satisfactory replacement for such
debt than the Operating Partnership, given the Operating Partnership's
larger size, greater diversity of assets and extent of its relationship
with lenders.
. Growth Potential. The General Partner believes that the PHLP Limited
Partners, by directly or indirectly owning interests in a publicly
traded real estate company focused primarily on a more diverse and
growing luxury and upscale 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 PHLP
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 PHLP 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 PHLP individually.
. Public Market Valuation of Assets. Trading has been extremely limited in
the Partnership Units of PHLP. The General Partner believes that by
exchanging interests in PHLP, which is a non-traded, finite-life limited
partnership with a fixed portfolio for interests in an ongoing real
estate company
PHLP Supp-10
<PAGE>
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 PHLP 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 (although not
currently), has resulted at various times 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 they will not trade at a
discount to private market values. Also, the benefit of Host's
conversion to a REIT will not be shared by the PHLP 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.
If PHLP does not participate in the Merger, its business will continue in
its current manner; however, the Operating Partnership may elect to contribute
some or all of its interest in PHLP to a Non-Controlled Subsidiary.
DETERMINATION OF EXCHANGE VALUE OF PHLP AND ALLOCATION OF OP UNITS
GENERAL. The Exchange Value of PHLP 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 Partner has 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 PHLP 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
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 PHLP represents AAA's
estimate, as adopted by the General Partner, of the discounted present
value, as of January 1, 1998, of the PHLP limited partners' share of
estimated future cash distributions and estimated net sales proceeds
(plus lender reserves), assuming that PHLP 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 PHLP represents the
General Partner's estimate of the net proceeds to PHLP limited partners
resulting from the assumed sale as of December 31, 1998 of the Hotels of
PHLP, 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 PHLP 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 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 PHLP after the Initial Valuation Date to perform
deferred maintenance that were previously subtracted in determining the
estimated Adjusted Appraised Value of PHLP and (iii) to reflect any changes in
PHLP's other reserves, such as for litigation expenses and indemnification
costs and any revised estimates of transfer and recordation taxes and fees.
The General Partner does not believe that any adjustments to the Exchange
Value will be material; however, if any such changes are deemed to be
material, the General Partner will provide the PHLP Limited Partners an
opportunity to change their vote on the Merger.
APPRAISED VALUE. PHLP's 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
PHLP Supp-11
<PAGE>
properties such as PHLP's Hotels. Each appraisal (an "Appraisal") was reviewed
by a Member Appraisal Institute ("MAI") appraiser and certified by such MAI
appraiser as having been prepared in accordance with the requirements of the
Standards of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice of the Appraisal Foundation.
The 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 but one of PHLP's Hotels for purposes of the
Appraisals. Neither AAA nor the General Partner believes that the lack of site
visits to one of PHLP's Hotels affects the determination of market value
because, as part of the Appraisals, AAA reviewed financial information of the
Hotels as well as conducted extensive interviews with the managers of the
Hotels. See "Fairness Analysis and Opinion--Fairness Opinion--Summary of
Materials Considered and Investigation Undertaken."
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 PHLP's Hotels:
. 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 each Hotel. AAA
also prepared a projection of the net operating income prior to
incentive management fees and certain capital expenditures for each
Hotel for the twelve month period ending February 28, 1999 (the
"Projected Year"), using historical financial information for each
Hotel, budget information, a survey with the manager of each Hotel
addressing the physical condition of each 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 each Hotel. The resulting gross margin (ratio of total
revenues to NOI 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. 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
PHLP Supp-12
<PAGE>
of capitalization rates reflected in recent transactions, adjusted for
factors specific to the 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
effective capitalization rates for 1997 and Projected Year's Adjusted
NOI resulting from AAA's estimated Appraised Values of PHLP's Hotels.
RESULTING EFFECTIVE CAPITALIZATION RATES FOR APPRAISALS OF PHLP'S HOTELS
<TABLE>
<CAPTION>
PROJECTED YEAR
1997 (ENDING FEBRUARY 28, 1999)
---- --------------------------
<S> <C>
9.2-9.8% 9.7-10.6%
</TABLE>
APPRAISED VALUES OF PHLP'S HOTELS
<TABLE>
<CAPTION>
APPRAISED
HOTEL VALUE
----- --------------
(IN THOUSANDS)
<S> <C>
Albuquerque Marriott Hotel.................................. $ 21,600
Greensboro High Point Marriott Hotel........................ 27,800
Houston Marriott Medical Center Hotel....................... 26,300
Marriott Mountain Shadows Resort............................ 38,600
Miami Biscayne Bay Hotel.................................... 38,500
Raleigh Marriott Hotel...................................... 28,000
Seattle Sea-Tac Airport Marriott Hotel...................... 63,600
Tampa Westshore Marriott Hotel.............................. 21,400
--------
Total..................................................... $265,800
========
</TABLE>
. 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.
With respect to PHLP's Hotels, five properties were encumbered by ground
leases as of the date of the Appraisals. Accordingly, the Appraised Values of
such Hotels have been decreased to reflect the encumbrance of the ground
leases and the interests of the ground lessors in the operating cash flows of
such Hotels. The Appraised Value assumes 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 PHLP's Hotels
(but estimated deferred maintenance costs have been deducted in estimating the
Adjusted Appraised Value of each of PHLP's Hotels). The Appraised Value did
not take into account the costs that might be incurred in selling the Hotels
(but estimated costs for transfer and recordation taxes and fees have been
deducted in estimating the Adjusted Appraised Value of the Hotels).
The Appraisals are not guarantees of present or future values and no
assurance can be given as to the actual value of PHLP's Hotels. The Appraisals
should be read in conjunction with other information, such as, but not limited
to, the audited financial statements of PHLP.
The Appraised Value, and the assumptions underlying the projections on which
the Appraised Value 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 PHLP's Hotels will vary from the
results projected in the Appraisals and the variations may be material.
PHLP Supp-13
<PAGE>
ADJUSTED APPRAISED VALUE. The Adjusted Appraised Value of PHLP was
determined by totaling the Appraised Values of all of the Hotels of PHLP and
then making various adjustments to the aggregate Appraised Value, as described
below.
. Mortgage and Other Debt. The estimated principal balance and accrued
interest (including any participating interest that would accrue as a
result of the Merger) as of the Effective Date (assumed to be December
31, 1998) of all mortgage and other debt of PHLP has been subtracted
from the Appraised Value.
. 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 Agreements of PHLP 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 PHLP's
Hotels 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 PHLP in connection
with the Merger have been subtracted from the Appraised Value.
The following table sets forth the adjustments to the aggregate Appraised
Values made to derive the estimated Adjusted Appraised Value for PHLP as of
the Initial Valuation Date.
CALCULATION OF ESTIMATED ADJUSTED APPRAISED VALUE FOR PHLP
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value.............................................. $ 265,800
Mortgage debt................................................ (161,136)
Other debt................................................... (128,102)
Deferred management fees..................................... (34,151)
Deferred maintenance costs................................... (5,212)
Transfer taxes............................................... (814)
---------
Estimated Adjusted Appraised Value........................... $ 0
=========
General Partner's share(1)................................... $ 0
Limited partner share of Host subsidiaries(2)................ $ 0
Total limited partners' share(3)............................. $ 0
Per Partnership Unit......................................... $ 0(4)
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interest held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
(4) The estimated Adjusted Appraised Value for PHLP is zero because PHLP's
outstanding debt is greater than the Appraised Value of the Hotels and the
value of other assets, net of liabilities, owned by PHLP.
CONTINUATION VALUE. AAA estimated the Continuation Value of PHLP using the
following methodology:
. Estimated Future Cash Distributions. AAA prepared estimates of future
partnership cash flow for PHLP 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 (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 PHLP's limited partners after payment of all management
fees, debt service, owner funded capital expenditures based on the
Engineering Study and other partnership
PHLP Supp-14
<PAGE>
expenses and after application of the applicable partnership agreement
provisions. AAA assumed that PHLP's FF&E reserve was 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 first mortgage debt of PHLP would be
refinanced with an interest rate of 8.0% per annum and a 25-year
amortization schedule and the second mortgage debt would be refinanced
with an 8.5% interest rate per annum and a 25-year amortization
schedule, with estimated refinancing costs of 2% of the refinanced
amount being added to the principal balance of the loan, since cash flow
of PHLP was estimated to be insufficient to pay such costs.
. Determination of Residual Value. To estimate the residual value of the
PHLP limited partners' interest in PHLP at the end of the 12-year
period, AAA assumed that the PHLP Hotels 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% 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 PHLP partners. AAA then determined what portion of such
estimated net sales proceeds would be distributable to PHLP's limited
partners under the partnership and debt agreements.
. Discounting Distributions to Present Value. As a final step, AAA
discounted the estimated future cash distributions to PHLP's limited
partners from operations and estimated net sales proceeds 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.
While the 12-year period used by AAA is somewhat arbitrary and other firms
may have used a different time period, the 12-year period was selected by AAA
because it corresponds to the time period used in the Engineering Study to
estimate owner funded capital expenditures. AAA and the General Partner believe
that such 12-year period is within the accepted range of time periods used in
valuations similar to the Continuation Value.
The growth rate and exit capitalization rate used to determine the estimated
Continuation Value for PHLP are as set forth below:
GROWTH RATE, EXIT CAPITALIZATION RATE
AND ESTIMATED CONTINUATION VALUE FOR PHLP
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT AND PERCENTAGES)
<TABLE>
<CAPTION>
ESTIMATED GENERAL LIMITED ESTIMATED
CONTINUATION PARTNER'S PARTNER'S CONTINUATION VALUE
GROWTH RATE EXIT CAPITALIZATION RATE (2009) VALUE SHARE SHARE (PER PARTNERSHIP UNIT)
----------- ------------------------------- ------------ --------- --------- ----------------------
<S> <C> <C> <C> <C> <C>
3.6% 10.1% $12,096 $3,024 $9,072 $5,040
</TABLE>
LIQUIDATION VALUE. The Liquidation Value of PHLP was estimated by the General
Partner and represents the estimated value of PHLP if all of its assets were
sold as of December 31, 1998. Such value was based upon the Adjusted Appraised
Value of PHLP, 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; and (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 PHLP's Hotels was subtracted from the Appraised Value
for estimated liquidation costs, expenses and contingencies. The General
Partner then determined the portion of the estimated Liquidation Value that
would be distributable to PHLP's limited partners under the terms of the
partnership agreement and other contractual arrangements.
PHLP Supp-15
<PAGE>
The following table sets forth the adjustments made to the Adjusted
Appraised Value to estimate the Liquidation Value of PHLP as of the Initial
Valuation Date:
CALCULATION OF ESTIMATED LIQUIDATION VALUE OF PHLP
AS OF THE INITIAL VALUATION DATE
(IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT AMOUNT)
<TABLE>
<S> <C>
Appraised Value.............................................. $ 265,800
Mortgage debt................................................ (161,136)
Other debt................................................... (128,102)
Deferred management fees..................................... (34,151)
Deferred maintenance costs................................... (5,212)
Sales costs.................................................. (6,645)
---------
Estimated Liquidation Value.................................. $ 0
=========
General Partner's share(1)................................... $ 0
Limited partner share of Host subsidiaries(2)................ $ 0
Total limited partners' share(3)............................. $ 0
Per Partnership Unit......................................... $ 0(4)
</TABLE>
- --------
(1) Excludes amounts attributable to limited partner interest of the General
Partner.
(2) Includes limited partner interest held by the General Partner.
(3) Includes limited partner share of Host subsidiaries.
(4) The estimated Liquidation Value for PHLP is zero because PHLP's
outstanding debt is greater than the Appraised Value of the Hotels and the
value of other assets, net of liabilities, owned by PHLP.
ESTIMATED EXCHANGE VALUE. The following table sets forth the estimated
Exchange Value of PHLP (based upon the greatest of its estimated Adjusted
Appraised Value, estimated Continuation Value and estimated Liquidation
Value), the estimated minimum number of OP Units to be received (based upon a
maximum price of $ per OP Unit) and the estimated Note Election Amount for
PHLP, all on a per Partnership Unit basis as of the Initial Valuation Date.
The number of Common Shares received in exchange for OP Units will equal the
number of OP Units. The estimated Note Election Amount for PHLP (which will be
received by PHLP Limited Partners electing to receive Notes in exchange for OP
Units in connection with the Merger) is equal to 80% of the estimated Exchange
Value for PHLP. 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 PHLP 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 (but will not be less than $ or greater than $ per OP
Unit) and will not be finally determined until such time.
ESTIMATED EXCHANGE VALUE, NUMBER OF OP UNITS AND NOTE ELECTION AMOUNT OF PHLP
PER PARTNERSHIP UNIT(1)
<TABLE>
<CAPTION>
ESTIMATED
ESTIMATED ESTIMATED ESTIMATED ESTIMATED MINIMUM ESTIMATED
ADJUSTED APPRAISED CONTINUATION LIQUIDATION EXCHANGE NUMBER OF NOTE ELECTION
VALUE(2) VALUE VALUE(2) VALUE(3) OP UNITS(4) AMOUNT(5)
------------------ ------------ ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0 $5,040 $0 $5,040 336 $4,032
</TABLE>
- --------
(1) A Partnership Unit in PHLP represents an original investment of $10,000.
(2) The estimated Adjusted Appraised Value and the estimated Liquidation Value
are zero because PHLP's outstanding debt is greater than the Appraised
Value of the Hotels and the value of other assets, net of liabilities,
owned by PHLP.
(3) The estimated Exchange Value is equal to the greatest of estimated
Adjusted Appraised Value, estimated Continuation Value and estimated
Liquidation Value.
(4) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Merger and thus results in the minimum number of OP Units
that may be issued.
(5) The principal amount of Notes is equal to the greater of (i) the
Liquidation Value or (ii) 80% of the Exchange Value (the "Note Election
Amount").
PHLP Supp-16
<PAGE>
Price of OP Units to Pay Exchange Value to PHLP Limited Partners. Each PHLP
Limited Partner will receive OP Units with a deemed value equal to the
Exchange Value of such PHLP 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 will it be less than $ or
greater than $ per OP Unit). Thus, if the 20-day average trading price is
less than $ , the price per OP Unit in the Merger would be $ , and if such
average trading price is greater than $ , the price per OP Unit in the Merger
would be $ . The OP Units will be delivered to the PHLP Limited Partners
promptly after the twentieth trading day following the Effective Date of the
Merger (which would be promptly after January 29, 1999 if the Effective Date
of the Merger is December 30, 1998).
PHLP Limited Partners at the Effective Date of the Merger who retain OP
Units will receive cash distributions from PHLP for all of 1998 and, if the
Merger does not occur in 1998, any portion of 1999 prior to the Merger for
which period they do not receive a cash distribution from the Operating
Partnership. Cash distributions will be made by PHLP in accordance with its
partnership agreement on or before June 1, 1999 in respect of 1998 operations
and, if the Merger does not occur prior to January 1, 1999, within 90 days
after the Effective Date of the Merger in respect of any 1999 operations. PHLP
Limited Partners at the Effective Date of the Mergers who elect to receive
Common Shares in exchange for OP Units in connection with the Merger will
participate in the same distributions from PHLP as PHLP Limited Partners who
retain OP Units and will receive distributions from Host REIT with respect to
periods after the Effective Date of the Mergers, which distributions will
equal the amount distributed with respect to the OP Units. PHLP Limited
Partners at the Effective Date of the Merger who elect to receive Notes in
exchange for OP Units in connection with the Merger will participate in the
same distributions from PHLP 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 Merger because they will be entitiled
to receive interest on their Notes for such periods.
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.
DETERMINATION OF VALUE OF THE GENERAL PARTNER'S INTEREST IN PHLP AND
ALLOCATION OF OP UNITS TO THE GENERAL PARTNER
The value of the General Partner's interest will be determined in the same
manner as the Exchange Value of the PHLP Limited Partners' Partnership
Interests, by the same methodologies set forth above and giving effect to the
applicable distribution preferences in the PHLP partnership agreement. The
number of OP Units that will be received by the General Partner will be equal
to the value of its interest in PHLP divided by the same price per OP Unit
used to determine the number of OP Units to be received by the PHLP Limited
Partners.
The following table sets forth the estimated value of the interest of the
General Partner in PHLP based upon the estimated aggregate Exchange Value of
the PHLP Limited Partners' Partnership Interests as of the Initial Valuation
Date and the minimum number of OP Units estimated to be received by the
General Partner in respect thereof.
ESTIMATED VALUE OF THE GENERAL PARTNER'S INTEREST AND NUMBER OF OP UNITS
(IN THOUSANDS)
<TABLE>
<S> <C>
Aggregate Exchange Value............................................... $12,096
Limited partners' share of aggregate Exchange Value.................... 9,072
-------
Value of General Partner's interest(1)................................. $ 3,024
Value of General Partner's limited partner interest.................... 5
-------
Total Host interest.................................................... $ 3,029
=======
Minimum Number of OP Units:(2)......................................... 202
</TABLE>
- --------
(1) Excludes limited partner interest of the General Partner.
(2) Assumes the price of an OP Unit is $ , which is the maximum price for
purposes of the Mergers and thus results in the minimum number of OP Units
that may be issued.
PHLP Supp-17
<PAGE>
FAIRNESS ANALYSIS AND OPINION
FAIRNESS ANALYSIS
The General Partner believes that the Merger provides substantial benefits
and is fair to the Limited Partners of PHLP and recommends that all Limited
Partners of PHLP consent to the Merger. The General Partner bases this
recommendation primarily on (i) its view that the expected benefits of the
Merger for the PHLP Limited Partners outweigh the risks and potential
detriments of the Merger to the PHLP Limited Partners (see "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the Mergers" and
"Risk Factors"), (ii) its view that the value of the OP Units allocable to the
PHLP Limited Partners on the basis of the Exchange Value established for PHLP
represents fair consideration for the Partnership Interests held by the PHLP
Limited Partners and is fair to the PHLP Limited Partners from a financial
point of view and (iii) the Appraisals and Fairness Opinion of AAA. See "--
Fairness Opinion."
The Merger is not conditioned upon the consummation of any of the other
Mergers. The General Partner has considered this fact in evaluating the
fairness of the Merger. The General Partner believes that the fairness of the
Merger will not be materially affected by the presence or absence of any other
individual Partnership or by any particular combination of other Partnerships
and that the Merger will be fair to the PHLP Limited Partners, individually
and as a whole, if it is consummated with any combination of other
Participating Partnerships. The General Partner bases this belief primarily on
the fact that the consideration to be paid to the PHLP Limited Partners has
been established based upon PHLP's Exchange Value, without regard to any
possible combination of other Partnerships.
In reaching the conclusions implicit in the above recommendation, the
General Partner has taken into account the following considerations, placing
the greatest weight on the first two considerations:
. The General Partner has concluded that the Exchange Value for PHLP
represents fair consideration for the Partnership Interests of the PHLP
Limited Partners in the Merger in relation to PHLP because the Exchange
Value is equal to the greatest of the Adjusted Appraised Value,
Continuation Value and Liquidation Value, each of which is an acceptable
method for determining the fair market value of a Partnership's assets.
The General Partner also has concluded that the Exchange Value
established for the PHLP Limited Partners fairly reflects the value of
the assets held by PHLP. In addition, the General Partner's own analysis,
as well as the Fairness Opinion, support these conclusions.
. PHLP Limited Partners who retain OP Units will be able to defer
recognition of gain until such time as they choose to realize such gain
based on their personal circumstances.
. The General Partner has concluded that the potential benefits of the
Merger to the PHLP 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 Merger for
the PHLP Limited Partners, as described in "Risk Factors."
. The Fairness Opinion, in the view of the General Partner, supports the
fairness of the Merger, even though it includes qualifications,
limitations and assumptions relating to its scope and other factors that
PHLP Limited Partners should consider carefully and does not conclude
that the Exchange Value is the best price that could be obtained. 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 Merger.
. The General Partner believes that the economic terms of the leases of the
PHLP Hotels are fair and reasonable from the standpoint of the Operating
Partnership.
. Host REIT 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. The General Partner believes that this is a
factor supporting the fairness of the Merger to the PHLP Limited
Partners.
PHLP Supp-18
<PAGE>
. The General Partner believes that the value of the consideration to be
received by the PHLP Limited Partners in the Merger 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 PHLP is equal to its Continuation Value, which is
the greatest of the Adjusted Appraised Value, the Continuation Value and
the Liquidation Value and the historic prices paid for PHLP Partnership
Units. The General Partner does not believe that the sale of any of
PHLP's Hotels and liquidation of PHLP would obtain for PHLP Limited
Partners as much value as the value to be received by such PHLP Limited
Partners following the Merger. In addition, while the Continuation Values
of certain of the Partnerships, including PHLP, are higher than the
Adjusted Appraised Values of such Partnerships, the General Partner
believes that the Merger provides substantial benefits to PHLP Limited
Partners, including those benefits described under "Background and
Reasons for the Mergers and the REIT Conversion--Reasons for the
Mergers," especially enhanced liquidity and regular quarterly cash
distributions. The General Partner believes that the following benefits
are of the greatest value and importance to the PHLP Limited Partners:
. Liquidity. The Merger and the REIT Conversion will offer PHLP Limited
Partners liquidity with respect to their investments in PHLP because PHLP
Limited Partners can receive freely tradeable Host REIT Common Shares in
connection with the Merger or, for PHLP Limited Partners who retain OP
Units, at any time commencing one year following the Effective Date, by
exercising their Unit Redemption Right, 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 $3.6 billion after giving effect to the
earnings and profits distribution (based on a price of $15.00 per Host
REIT Common Share). The election to exchange OP Units for Common Shares
in connection with the Merger or 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. The General Partner expects that
the Operating Partnership will make regular quarterly cash distributions
to holders of OP Units and that Host REIT will make regular quarterly
cash distributions to holders of Common Shares. Host expects that these
distributions will be higher than the estimated cash distributions for
1998 for PHLP and, in any event, the ability to receive distributions
quarterly and in regular amounts would be enhanced.
. Risk Diversification. Upon consummation of the REIT Conversion, each PHLP
Limited Partner's investment will be converted from an investment in
PHLP, which owns eight hotels, into an investment in an enterprise that
initially will own or control approximately 125 Hotels and will have a
total market capitalization of approximately $3.6 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 PHLP 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 generally will have a lower leverage to value
ratio, approximately 53%, than PHLP currently, which has outstanding debt
balances in excess of the Exchange Values of its Hotels, resulting in
significant interest and debt service savings and greater financial
stability.
. Substantial Tax Deferral for PHLP Limited Partners Not Electing to
Exchange OP Units for Common Shares or Notes. The General Partner expects
that PHLP Limited Partners who do not elect to receive Common Shares or
Notes in exchange for OP Units in connection with the Merger generally
should be able to obtain the benefits of the Merger 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 PHLP or a sale or other disposition of its assets in a
taxable transaction (although PHLP Limited Partners may recognize a
relatively modest amount of ordinary income as the result of required
sales of personal property by PHLP to a Non-Controlled Subsidiary in
order to facilitate Host REIT's qualification as a REIT).
PHLP Supp-19
<PAGE>
The General Partner believes that the factors described above, which support
the fairness of the Merger to the PHLP Limited Partners, when weighed against
the factors that may be disadvantageous, taken as a whole, indicate that the
Merger is fair to the PHLP Limited Partners.
FAIRNESS OPINION
AAA, an independent financial advisory firm with substantial real estate and
partnership transaction experience, was engaged by the General Partner and the
other 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 PHLP and each other
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 PHLP Limited Partners and
the Limited Partners of each other Partnership and (ii) the methodologies used
to determine the value of an OP Unit and to allocate the equity in the
Operating Partnership to be received by the PHLP Limited Partners and the
Limited Partners of each other Partnership are fair and reasonable to the PHLP
Limited Partners and the Limited Partners of each other Partnership. The
Fairness Opinion is addressed to each Partnership and it may be relied upon by
each of the PHLP Limited Partners and the Limited Partners of each of the
other 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 the Consent Solicitation and
should be read in its entirety. The material assumptions and qualifications to
the Fairness Opinion are summarized below, although this summary does not
purport to be a complete description of the various inquiries and analyses
undertaken by AAA in rendering the Fairness Opinion. Arriving at a fairness
opinion is a complex analytical process not necessarily susceptible to partial
analysis or amenable to summary description. For a more complete description
of the assumptions and qualifications that limit the scope of the Fairness
Opinion, see "--Qualifications to Fairness Opinion" and "--Assumptions" below.
The Fairness Opinion is not limited to any particular combination of
Partnerships participating in the Mergers because there is no combination of
Partnerships required in order to complete the Mergers. No Merger is
conditioned upon the consummation of any other Merger. The Fairness Opinion
addresses the fairness of the Exchange Value for each Partnership to the
Limited Partners of each Partnership, which Exchange Value has been
established for each Partnership without regard to any possible combination of
Partnerships. In light of the foregoing, the Fairness Opinion will not be
revised to reflect the actual Partnerships which participate in the Mergers.
Although the General Partner advised AAA that certain assumptions were
appropriate in its view, the General Partner 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 Partner has 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 PHLP and the other
Partnerships might not have been more favorable to the Limited Partners in
certain of the Partnerships, (c) negotiate with the General Partner, the
General Partners of other Partnerships or Host, (d) participate in
establishing the terms of the Merger and the other Mergers, (e) provide an
opinion as to the terms and conditions of the Merger and the other 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 or (g) make any estimates of PHLP's and each other
Partnership's contingent liabilities.
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.
PHLP Supp-20
<PAGE>
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 Partner and the other General
Partners considered two other firms, CB Commercial and Hospitality Valuation
Services, for purposes of performing the appraisals and rendering the Fairness
Opinion and received proposals from each. The General Partners Selected AAA,
on the basis of the proposals, 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 limited 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.
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
PHLP Supp-21
<PAGE>
to AAA by 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 as of March 1, 1998. AAA did not conduct
any subsequent due diligence or valuation procedures.
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 methodologies 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 each of the Hotels,) are fair and reasonable, from a financial point of
view, to the PHLP Limited Partners and the Limited Partners of each other
Partnership and (ii) the methodologies used to determine the value of an OP
Unit and to allocate the equity interest in the Operating Partnership to be
received by the PHLP Limited Partners and the Limited Partners of each other
Partnership are fair and reasonable to the PHLP Limited Partners and the
Limited Partners of each other Partnership.
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.
CASH DISTRIBUTIONS
Historical Cash Distributions Paid by PHLP. PHLP has never paid any cash
distributions to its Limited Partners.
Compensation and Distributions to the General Partner. Under PHLP's
partnership agreement, the General Partner does not receive fees or
compensation in connection with managing the affairs of PHLP but the General
Partner and its affiliates are reimbursed for certain costs and expenses
incurred on behalf of PHLP. In addition, the General Partner is entitled to
distributions related to its interests in PHLP. The following information has
been prepared to compare the amount of reimbursements paid and cash
distributions made by PHLP to the General Partner and its affiliates to the
amounts that would have been paid if the reimbursement and distribution
structure which will be in effect after the REIT Conversion had been in effect
for the periods presented.
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). Marriott
International and its subsidiaries receives management fees and other
reimbursements from PHLP under the Management Agreements.
PHLP Supp-22
<PAGE>
The following table sets forth the reimbursements and distributions paid by
PHLP to the General Partner and its affiliates and payments made to Marriott
International and its affiliates 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 Partner and its affiliates and payments
made to Marriott International and its affiliates 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 $0.81 per year during such period, which is the
expected minimum distribution for 1999.
HISTORICAL AND PRO FORMA
REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNER AND
PAYMENTS MADE TO MARRIOTT INTERNATIONAL
(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>
Principal and interest
payments on loans...... $ 6,798 $ -- $ 9,845 $ -- $ 9,358 $11,820
Reimbursements(1)....... 132 -- 259 -- 218 88
Distributions(2)........ 0 82 0 164 0 0
Payments made to
Marriott Internation-
al..................... 7,750 7,750 11,617 11,617 11,184 11,388
------- ------ ------- ------- ------- -------
Total................. $14,680 $7,832 $21,721 $11,781 $20,760 $23,296
======= ====== ======= ======= ======= =======
</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 distribution payable to the General Partner on a pro forma
basis reflect distributions at a rate of $0.81 per annum per OP Unit
(which is the expected minimum distribution per OP Unit for 1999) with
respect to the estimated number of OP Units that the General Partner will
receive with respect to its general and limited partner interests in PHLP.
Such number does not reflect the aggregate number of OP Units Host REIT
will receive in connection with the REIT Conversion.
CERTAIN INFORMATION REGARDING THE HOTELS OWNED BY PHLP
<TABLE>
<CAPTION>
NUMBER OF DATE
NAME OF HOTEL LOCATION OF HOTEL ROOMS OPENED
- ------------- ----------------- --------- ------
<S> <C> <C> <C>
Albuquerque Marriott Hotel Albuquerque, NM 411 1982
Greensboro-High Point Marriott Hotel Greensboro, NC 299 1983
Houston Marriott Medical Center Hotel Houston, TX 386 1984
Marriott Mountain Shadows Resort Scottsdale, AZ 337 1959
Miami Biscayne Bay Hotel Miami, FL 605 1983
Raleigh Marriott Hotel Raleigh, NC 375 1982
Seattle Sea-Tac Airport Marriott Hotel Seattle, WA 459 1981
Tampa Westshore Marriott Hotel Tampa, FL 310 1981
-----
TOTAL 3,182
=====
</TABLE>
The table below sets forth certain performance information for PHLP's Hotels
for the indicated periods.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ------------------------
1998 1997 1997 1996 1995(1)
--------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Average daily rate.............. $ 117.81 $ 110.15 $105.40 $95.98 $94.86
Occupancy....................... 81.1% 82.2% 78.5% 79.4% 79%
REVPAR.......................... $ 95.54 $ 90.54 $ 82.74 $76.21 $74.94
% REVPAR change................. 5.5% -- 8.6% 1.7% --
</TABLE>
- --------
(1) 1995 information includes statistics on one Dallas hotel which was sold on
August 22, 1995. The % REVPAR change for 1995 is not shown as the Point
Clear and Tampa Hotels were foreclosed upon and the Tampa and Raleigh
Hotels were subsequently purchased in 1994 making 1994 and 1995
information incomparable.
PHLP Supp-23
<PAGE>
Albuquerque Marriott Hotel, Albuquerque, New Mexico
The Albuquerque Marriott Hotel is located on a leased parcel of land of
approximately six acres in the northeastern suburbs of Albuquerque in a
residential, office and commercial development called Uptown.
The Hotel, which opened in July 1982, consists of a 16-story guest room
tower. The facilities include 411 guest rooms, two restaurants, one lobby bar
and cocktail service in the lobby. There is approximately 13,800 square feet
of space for conventions and banquets. Parking is provided for approximately
500 cars. In addition, the Hotel offers an indoor/outdoor pool, hydrotherapy
pool, sauna, health club and gift shop.
Competition. Studies indicate that currently six hotels with approximately
1,800 rooms directly compete with the Albuquerque Marriott Hotel in the
Albuquerque market.
Ground Lease. The Hotel site is subject to a ground lease with an initial
term expiring in July 2032 and with three renewal options of 10 years each.
The ground lease provides for annual rent equal to the greater of (i) 3.5% of
annual gross room sales or (ii) $155,000 for the first 10 years and $165,000
thereafter during the initial term of the lease. For periods subsequent to the
initial term of the lease, annual rent will equal the greatest of (i) 3.5% of
annual gross room sales, (ii) $165,000 or (iii) 10% of the fair market value
of the land, determined in each case as of each renewal date of the lease.
Greensboro-High Point Marriott Hotel, Greensboro, North Carolina
The Greensboro-High Point Marriott Hotel is located on approximately 15
acres of leased land on the grounds of the Greensboro-High Point Regional
Airport which serves the cities of Greensboro, High Point and Winston-Salem.
The Hotel, which opened in June 1983, is a six-story tower containing 299
guest rooms including a concierge floor, two restaurants, a lounge and
approximately 9,000 square feet of space for banquets and conventions. Parking
for 500 cars is provided. In addition, the Hotel has two lighted tennis
courts, an indoor/outdoor pool with a 1,200-square foot deck for banquet
functions, a hydrotherapy pool, a gift shop and a health club.
Competition. Studies indicate that currently three hotels containing
approximately 1,500 rooms directly compete with the Greensboro-High Point
Marriott Hotel in the Greensboro market.
Ground Lease. The Hotel site is subject to a ground lease from the
Greensboro-High Point Airport Authority with an initial term expiring in June
2008 and with an option to extend for an additional 15 years. Additional
renewal options totaling 20 years are available if the Hotel is expanded to
500 rooms. The lease calls for an annual rent equal to the greater of (i)
2.25% of the annual gross room sales plus 2% of the annual gross alcoholic
beverage sales plus 1% of the annual gross food sales or (ii) $127,000.
During the first extended term, the percentage rental for the annual gross
room sales will be increased to 3% and, if on the first day of the extended
term the Hotel contains fewer than 400 rooms, the percentage rentals for
alcoholic beverage and food sales will increase to 2.5% and 1.25%,
respectively.
Houston Marriott Medical Center Hotel, Houston, Texas
The Houston Marriott Medical Center Hotel is located in the Texas Medical
Center in Houston, Texas, on a leased site of 23,670 square feet, and is
situated directly opposite the main building of the Methodist Hospital and
adjoins the Scurlock Towers which houses the Total Health Care Center of
Methodist Hospital and approximately 200 doctors' offices.
The Hotel, which opened in August 1984, includes 386 guest rooms, two
concierge floors, two restaurants and a lounge. There is approximately 8,500
square feet of space with facilities for conventions and banquets. Parking is
available for approximately 380 cars in an adjacent parking structure.
Additional facilities within the Hotel include an indoor pool, a hydrotherapy
pool, a gift shop and a health club.
PHLP Supp-24
<PAGE>
Competition. Studies indicate that currently six hotels containing
approximately 1,600 rooms directly compete with the Houston Marriott Medical
Center Hotel in the Houston market.
Ground Lease. The land on which the Hotel is located is subject to a ground
lease with an initial term expiring in August 2009 with five 10-year renewal
options. The lease provides for annual rental equal to the greater of (i)
$160,000 or (ii) 3% of the first $15 million of annual gross room sales plus
3.25% of annual gross room sales in excess of $15 million.
Marriott's Mountain Shadows Resort, Scottsdale, Arizona
The Mountain Shadows Resort Hotel is located on approximately 25 acres of
fee-owned land in Scottsdale, approximately ten miles north of the Phoenix Sky
Harbor International Airport. Host Marriott owns land adjacent to the site, on
which an 18-hole executive-style golf course is located.
Mountain Shadows opened in 1959 and was acquired by PHLP in 1982. A major
renovation program was completed in 1983. The Hotel contains 337 guest rooms
as well as three pools, two hydrotherapy pools, eight lighted tennis courts
and a fitness center. Hotel guests have full privileges at the Mountain
Shadows Golf Club which offers an 18-hole executive-style golf course. In
addition, guests of the Hotel have access to the Camelback Inn Country Club
owned by Marriott International (which is approximately two miles from the
Hotel and offers two 18-hole championship golf courses) and the Camelback Inn
spa located on the Camelback Inn resort grounds. Dining facilities at the
Hotel include a family restaurant, a specialty seafood restaurant and an
outdoor terrace. The Hotel's restaurants can accommodate seating for 430. In
addition, the Mountain Shadows Golf Club offers a restaurant/snack bar, bar
and patio area. The Hotel has more than 15,000 square feet of space for
conventions and banquets. Parking is available for approximately 740 cars.
Competition. Studies indicate that currently five hotels containing
approximately 1,500 rooms directly compete with Marriott's Mountain Shadows
Resort in the Scottsdale market.
Miami Biscayne Bay Hotel, Miami, Florida
The Miami Biscayne Bay Hotel is located on a leased parcel of land of
approximately 1.9 acres plus space and facilities in an adjacent building in a
residential and commercial project located on Biscayne Bay in downtown Miami.
The Hotel, which opened in December 1983, is a 31-story tower which has 605
guest rooms, one restaurant, an indoor lounge and cocktail service in the
lobby. Approximately 14,000 square feet of space with facilities for
conventions and banquets is available. Parking is provided for 288 cars. In
addition, the Hotel has an outdoor pool, a recreation deck, a game room, a
gift shop and a health club.
Competition. Studies indicate that currently five hotels containing
approximately 2,500 rooms directly compete with the Miami Biscayne Bay Hotel
in the Miami market.
Ground Lease. The Hotel site is subject to a ground lease with an initial
term expiring in December 2008, with renewal options for five successive 10-
year periods. The lease calls for annual rental of the greater of (i) $1.0
million or (ii) 4% of annual gross room sales plus 3% of annual gross food and
beverage sales.
Raleigh Marriott Hotel, Raleigh, North Carolina
The Raleigh Marriott Hotel is located on approximately ten acres of fee-
owned land at the entrance to Crabtree Valley Mall in northwest Raleigh. The
Raleigh-Durham Airport and the Research Triangle Park are located 10 and 17
miles west of the site, respectively. Downtown Raleigh is two miles east of
the site.
The Hotel, which opened in March 1982, includes 375 guest rooms, one
restaurant, a cocktail lounge and approximately 8,300 square feet of space for
conventions and banquets. Parking for approximately 571 cars is
PHLP Supp-25
<PAGE>
provided. In addition, the Hotel offers an indoor/outdoor pool, a concierge
lounge, sauna and hydrotherapy facilities, a health club and a gift shop.
Competition. Studies indicate that currently three hotels with approximately
900 rooms directly compete with the Raleigh Marriott Hotel in the Raleigh
market.
Seattle Marriott Hotel Sea-Tac Airport, Seattle, Washington
The Seattle Marriott Hotel is located on nine acres of fee-owned land near
the entrance to the Seattle-Tacoma International Airport. The Hotel is
approximately ten miles from downtown Seattle and approximately three miles
from Interstate 5, the major north-south route through Washington.
The Hotel, which opened in January 1981, consists of a nine-story tower and
three five-story wings surrounding a landscaped atrium. The facilities include
459 guest rooms, a restaurant, an atrium cocktail service bar, three ballrooms
totaling 18,500 square feet and meeting and conference rooms. In addition, the
Hotel has two hydrotherapy pools, a health club, a sauna, an indoor pool, a
gift shop, a game room and parking for 550 cars.
Competition. Studies indicate that currently four hotels containing
approximately 1,500 rooms directly compete with the Seattle Marriott Hotel
Sea-Tac Airport in the Seattle market.
Tampa Westshore Hotel, Tampa, Florida
The Tampa Westshore Hotel is located on a leased parcel of land of
approximately seven acres in a major office development just off I-75 on North
Westshore Boulevard. The Hotel is approximately two miles from the Tampa
International Airport and five miles from downtown Tampa.
The Hotel, which opened in July 1981, consists of a 13-story hotel tower, a
one-and-one-half story lobby and meeting space. The facilities include 310
guest rooms, a restaurant, a sports bar, a concierge lounge and approximately
8,400 square feet of space for conventions and banquets. Parking for more than
400 cars is provided. In addition, the Hotel has an indoor/outdoor pool, a
hydrotherapy pool, a health club, a game room and a gift shop.
Competition. Studies indicate that currently 11 hotels containing
approximately 3,200 rooms directly compete with the Tampa Westshore Hotel in
the Tampa market.
Ground Lease. The Hotel is subject to a ground lease with an initial term
expiring in July 2006 with five 10-year renewal options. The lease provides
for a percentage rent equal to the greater of (i) 3% of gross room sales plus
1% of gross food sales plus 1% of gross alcoholic beverage sales or (ii)
$96,000 per year.
LEGAL PROCEEDINGS
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 been served with
the complaint and intends to vigorously defend against the claims asserted in
the lawsuit.
AMENDMENTS TO PHLP'S PARTNERSHIP AGREEMENT
In order to allow the Hotels of PHLP to be leased to Crestline in connection
with the Merger and the REIT Conversion, PHLP's partnership agreement must be
amended. Currently, there is no provision in PHLP's
PHLP Supp-26
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partnership agreement to allow PHLP's Hotels to be leased. Therefore, Section
5.02B of PHLP's partnership agreement must be amended to amend and restate
paragraph 5.02B(ii) to read as follows:
(vi) sell, lease or otherwise dispose of (or consent to the sale, lease
or other disposition of), directly or indirectly, in one transaction or a
series of related transactions any or all of the Hotels.
Other Amendments. Amendments to certain terms and sections of PHLP's
partnership agreement would be made in order to make any other amendments to
PHLP's partnership agreement deemed necessary or advisable, in the sole
discretion of the General Partner, in connection with the consummation of the
Merger and the REIT Conversion. The form of amendment to the PHLP partnership
agreement is attached as an exhibit to the Registration Statement of which
this Supplement is a part.
VOTING PROCEDURES
PHLP Limited Partners will be asked to vote separately on the Merger and the
proposed amendments to the partnership agreement, but PHLP will not
participate in the Merger unless both proposals are approved. The consent of
PHLP Limited Partners holding more than 50% of the outstanding limited partner
interests is required for participation in the Merger and with respect to the
amendments to the partnership agreement. The General Partner holds 0.06% of
the outstanding limited partner interests. The General Partner intends to vote
its limited partner interests FOR the Merger and FOR the related amendments to
the partnership agreement.
At the time of voting, PHLP Limited Partners will be asked to indicate
whether they wish to retain OP Units or elect to exchange their OP Units for
Common Shares or a Note in connection with the Merger. The OP Units will be
delivered to the PHLP Limited Partners promptly after the twentieth trading
day following the Effective Date of the Merger (which would be promptly after
January 29, 1999 if the Effective Date of the Merger is December 30, 1998).
See "Determination of Exchange Value of PHLP and Allocation of OP Units."
A PHLP Limited Partner may mark the Consent Form to vote "FOR," "AGAINST" or
"ABSTAIN" with respect to participation in the Merger by PHLP and "FOR,"
"AGAINST" or "ABSTAIN" with respect to the amendments to the partnership
agreement. THE FAILURE OF A PHLP LIMITED PARTNER TO VOTE OR AN ABSTENTION WILL
HAVE THE SAME EFFECT AS IF SUCH LIMITED PARTNER HAD VOTED HIS PARTNERSHIP
INTERESTS "AGAINST" THE MERGER AND "AGAINST" THE AMENDMENTS TO THE PARTNERSHIP
AGREEMENT. LIMITED PARTNERS WHO RETURN A SIGNED CONSENT FORM BUT FAIL TO
INDICATE THEIR APPROVAL OR DISAPPROVAL AS TO ANY MATTER (INCLUDING THE MERGER
AND THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT) WILL BE DEEMED TO HAVE VOTED
TO APPROVE SUCH MATTER. The voting procedures applicable to PHLP Limited
Partners are set forth in the Consent Solicitation under the heading "Voting
Procedures--Required Vote and Other Conditions."
As of June 19, 1998, no person owned of record, or to the Partnership's
knowledge owns beneficially, more than 5% of the total number of PHLP
Partnership Units.
FEDERAL INCOME TAX CONSEQUENCES
In addition to the federal income tax consequences discussed in the sections
of the Consent Solicitation entitled "Federal Income Tax Consequences" and
"Risk Factors--Federal Income Tax Risks," PHLP Limited Partners should read
carefully the following discussion of federal income tax consequences
applicable specifically to the PHLP Limited Partners. The information included
in this discussion is based upon various
PHLP Supp-27
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factual assumptions and information which are believed by the Operating
Partnership and the General Partner to be reliable. However, some of these
assumptions inevitably will not materialize and unanticipated events and
circumstances will occur. Therefore, there likely will be differences between
the information provided herein, including the numerical data and estimates,
and actual results and the variations may be material and adverse.
Applicability 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 (in the form of Appendix C to the Consent
Solicitation) as to certain federal income tax consequences to the Operating
Partnership and the PHLP Limited Partners resulting from the Mergers and the
REIT Conversion. The opinion letter is based upon certain assumptions and
certain 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 Hotels contributed to the Operating Partnership by Host and the Blackstone
Entities prior to the Mergers and the REIT Conversion and of Host REIT, the
Operating Partnership and the Partnerships following the Mergers and the REIT
Conversion. In addition, prior to 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 to the Consent Solicitation) as to
the qualification and taxation of Host REIT as a REIT under the Code following
the REIT Conversion. The receipt of this opinion letter is a condition to the
REIT Conversion and each of the Mergers. See "Federal Income Tax
Considerations--Summary of Tax Opinions" in the Consent Solicitation.
Each opinion provided by Hogan & Hartson in the opinion letter that is in
the form of Appendix C to the Consent Solicitation is applicable to the PHLP
Limited Partners.
The opinions already rendered by Hogan & Hartson are based on the Code and
Treasury Regulations in effect on the date hereof, current administrative
interpretations and positions of the IRS and existing court decisions, and the
opinions to be rendered by Hogan & Hartson prior to the Effective Date will be
based on the same authorities as of the date such opinions are rendered. 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 one exception described below (see "--Tax
Consequences of the Merger--Deemed Cash Distribution and Resulting Taxable
Gain") and in the Consent Solicitation under "Federal Income Tax
Consequences--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.
Tax Consequences of the Merger
Overview. Hogan & Hartson has provided an opinion to the effect that, except
for any gain attributable to the sale of personal property by PHLP to a Non-
Controlled Subsidiary in connection with the REIT Conversion, the Merger will
not result in the recognition of taxable gain or loss at the time of the
Merger to a PHLP Limited Partner (i) who does not elect to receive Common
Shares (the "Common Share Election") or a Note (the "Note Election") in
exchange for his OP Units in connection with the Merger; (ii) 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 Merger; (iii) who does not receive a
cash distribution (or a deemed cash distribution resulting from relief from
liabilities, including as a result of any repayment of the Mitsui Bank Debt)
in connection with the Merger or the REIT Conversion in excess of his
aggregate adjusted basis in his PHLP Partnership Units at the time of the
Merger;
PHLP Supp-28
<PAGE>
(iv) who is not required to recognize gain by reason of the exercise by
another PHLP Limited Partner of his right to make the Common Share Election or
the Note Election (which, in counsel's opinion, described below, should not be
the result of such election); and (v) who does not have his "at risk" amount
fall below zero as a result of the Merger or the REIT Conversion. See "Federal
Income Tax Consequences--Summary of Tax Opinions" in the Consent Solicitation.
With respect to the foregoing exceptions to nonrecognition treatment, the
Operating Partnership and the General Partner believe as follows: (i) a PHLP
Limited Partner who acquired his PHLP Partnership Units in the original
offering of such Partnership Units and who has held such Partnership Units at
all times since would not be considered to receive, as a result of the Merger,
a distribution (or a deemed cash distribution resulting from relief from
liabilities) that exceeds his aggregate adjusted basis in his PHLP Partnership
Units at the time of the Merger, and would not have his "at risk" amount fall
below zero as a result of the Merger, and (ii) a portion of the personal
property associated with six of the eight Hotels owned by PHLP will need to be
sold to a Non-Controlled Subsidiary in connection with the REIT Conversion,
which may result in the recognition of a relatively modest amount of income by
the PHLP Limited Partners. See "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Overview" in the Consent Solicitation and "Tax
Allocations upon the Sale of Certain Personal Property Associated with the
PHLP Hotels" below.
With respect to the effects of a PHLP Limited Partner's election to receive
Common Shares or a Note in exchange for his OP Units in connection with the
Merger, Hogan & Hartson is of the opinion that, although the matter is not
free from doubt, a PHLP Limited Partner who does not make the Common Share
Election or the Note Election should not be required to recognize gain by
reason of another PHLP Limited Partner's exercise of either of such rights.
With respect to the exercise of a Unit Redemption Right, Hogan & Hartson is of
the opinion that it is more likely than not that a PHLP Limited Partner's
exercise of his Unit Redemption Right more than one year after the date of
consummation of the Merger but less than two years after such date will not
cause the Merger itself to be a taxable transaction for the PHLP Limited
Partner (or the other PHLP Limited Partners). See "Federal Income Tax
Consequences--Summary of Tax Opinions" in the Consent Solicitation. Opinions
of counsel, however, do not bind the IRS or the courts, and no assurances can
be provided that such opinions will not be challenged by the IRS or will be
sustained by a court if so challenged.
Deemed Cash Distribution and Resulting Taxable Gain. With respect to his
PHLP Partnership Units, a PHLP Limited Partner will receive no actual cash
distribution in connection with the Merger but would be deemed to receive a
cash distribution in connection with the Merger to the extent that his share
of Operating Partnership liabilities immediately after the Merger and the REIT
Conversion is less than his share of PHLP liabilities immediately prior to the
Merger. For example, any repayment of the Mitsui Bank Debt or debt encumbering
other Hotels may result in a deemed cash distribution to the PHLP Limited
Partners. See "Federal Income Tax Considerations--Tax Consequences of the
Mergers--Relief from Liabilities/Deemed Cash Distribution" in the Consent
Solicitation. Even if the Mitsui Bank Debt or debt encumbering other Hotels is
not repaid or refinanced in connection with the Mergers and the REIT
Conversion, a PHLP Limited Partner's share of indebtedness following the
Mergers and the REIT Conversion may decrease in comparison to the Limited
Partner's estimated aggregate share of PHLP indebtedness as of December 31,
1998 (calculated based on the assumption that the Mergers did not occur) by
reason of the manner in which the debt allocation rules work when multiple
assets with different levels of leverage are consolidated into a single
partnership. However, the prepayment of indebtedness owed by PHLP to the
General Partner or its affiliates in connection with the Merger will not
result in a deemed cash distribution to the PHLP Limited Partners.
A PHLP Limited Partner, however, would recognize taxable gain as a result of
any deemed cash distribution only to the extent that the deemed cash
distribution were to exceed his adjusted tax basis in his PHLP Partnership
Units immediately prior to the Merger. As noted above, the Operating
Partnership and the General Partner believe, based upon and subject to the
assumptions and other limitations described below, that a PHLP Limited Partner
who acquired his PHLP Partnership Units in the original offering of such
Partnership Units and has held the Partnership Units at all times since the
offering will have an adjusted tax basis in excess of the deemed cash
PHLP Supp-29
<PAGE>
distribution that might occur in connection with the Merger and the REIT
Conversion. Therefore, such a PHLP Limited Partner should not recognize gain
due to such deemed cash distribution resulting from the relief from
liabilities in connection with the Merger and the REIT Conversion.
The adjusted tax basis of a PHLP Limited Partner who did not acquire his
PHLP Partnership Units in the original offering of such Partnership Units or
who has not held his PHLP Partnership Units at all times since such offering
could vary materially from that of a PHLP Limited Partner who did so. If a
PHLP Limited Partner has an adjusted tax basis in his PHLP Partnership Units
(per PHLP Partnership Unit) that is substantially less than the adjusted tax
basis of a PHLP Limited Partner who acquired his PHLP Partnership Units in the
original offering of such Partnership Units and has held such Partnership
Units at all times since, he could recognize gain due to any deemed cash
distribution resulting from the relief from liabilities in connection with the
Merger and the REIT Conversion.
The Mitsui Bank Debt matures on December 22, 1999. There can be no assurance
that either PHLP or the Operating Partnership could refinance the Mitsui Bank
Debt at maturity with mortgage indebtedness secured only by the PHLP Hotels
that would qualify as nonrecourse liabilities allocable to the PHLP Limited
Partners for purposes of determining their adjusted tax basis in their
partnership interests (either in PHLP or in the Operating Partnership
following the Merger). The Operating Partnership and the General Partner
believe, however, that PHLP will face the same, if not greater, difficulties
with regard to obtaining such refinancing if PHLP does not participate in the
Merger and that the Operating Partnership, given the magnitude and diversity
of its assets and the extent of its relationships with lenders, may be in a
better position than PHLP to obtain satisfactory replacement financing.
Moreover, 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 debt as 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. In
view of these considerations and the potential adverse consequences to Limited
Partners in certain Partnerships, including the PHLP Limited Partners, 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 (including the
Mitsui Bank Debt), would be considered to be "secured" by those Hotels for
purposes of allocating the liabilities for tax basis purposes (and thus would
be allocable, at least in substantial part, to the former Limited Partners in
the Partnerships owning those Hotels, including the PHLP Limited Partners),
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.
Each PHLP Limited Partner will gradually begin to recognize income over the
term of his ownership of OP Units (beginning, perhaps, in his first year of
ownership of OP Units) attributable to deemed cash distributions resulting
from the relief from liabilities, as the aggregate principal amount of
nonrecourse indebtedness encumbering (or deemed to encumber) the Hotels
amortizes in accordance with its terms. The Operating Partnership will make
regular quarterly cash distributions to the PHLP Limited Partners that may or
may not be sufficient to allow the PHLP Limited Partners to pay the federal
and state income tax owed on the income allocated to such Limited Partners by
reason of the amortization of the debt secured by the PHLP Hotels.
Even if PHLP does not participate in the Merger, the General Partner has
estimated that the PHLP Limited Partners will be required to recognize in
taxable year 1998 income of approximately $5,000 per PHLP Partnership Unit, as
of December 31, 1998, resulting, in part, from the amortization of the Mitsui
Bank Debt and the General Partner expects that PHLP will not make cash
distributions to the Limited Partners sufficient to pay such additional taxes.
Section 465(e) Recapture. As discussed in the Consent Solicitation, see
"Federal Income Tax Consequences--Tax Consequences of the Mergers--Section
465(e) Recapture," the "at risk" rules of
PHLP Supp-30
<PAGE>
Section 465 of the Code generally apply to limit the use of partnership losses
by a partner. Under Section 465(e) of the Code, a partner may be required to
include in gross income, or "recapture," losses previously allowed to such
partner with respect to his investment in a partnership if the amount for
which the partner is "at risk" in relation to his investment in the
partnership is less than zero at the close of the taxable year. The "at risk"
rules 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 his interests before that date
(the "grandfather" rule). Thus, the "at risk" rules have not been applicable
to date to those PHLP Limited Partners who acquired their Partnership Units at
the time of the original offering in July of 1982 or at any time prior to
January 1, 1987, and who have held those Partnership Units since the date of
the acquisition. The PHLP Limited Partners, however, will become subject to
the "at risk" rules as a result of the Merger and their receipt of OP Units in
connection therewith (since the OP Units do not qualify for the "grandfather"
rule).
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, the Hotel Partnerships or the Hotels contributed to the Operating
Partnership by the Blackstone Entities at the time of or following the Merger
and the REIT Conversion could, singularly or in combination, cause a PHLP
Limited Partner's amount at risk in relation to his investment in PHLP (and,
after the Mergers, in the Operating Partnership) to be reduced below zero,
resulting in an income inclusion to the Limited Partner under Section 465(e)
of the Code. Currently, a sufficient portion of the current debt of PHLP
constitutes "qualified nonrecourse financing" so that the PHLP Limited
Partners have positive at risk amounts. The Operating Partnership and the
General Partner believe, based upon and subject to the assumptions and other
limitations described below, that a PHLP Limited Partner who acquired his PHLP
Partnership Units in the original offering of such Partnership Units and has
held the Partnership Units at all times since will have a positive at risk
amount immediately following the Merger and the REIT Conversion.
It is possible, however, that a former PHLP Limited Partner's at risk amount
could decline in the future, either because of the allocation of losses from
the Operating Partnership to that former PHLP Limited Partner or because of
cash distributions by the Operating Partnership to that former PHLP Limited
Partner in excess of the taxable income allocable to him with respect to his
OP Units. Moreover, there can be no assurance that debt incurred by the
Operating Partnership in the future to refinance the Mitsui Bank Debt or
outstanding mortgage debt of the other Hotel Partnerships or the Hotels
contributed by the Blackstone Entities will qualify as "qualified nonrecourse
financing." If, however, the Operating Partnership were to obtain the
requested ruling from the IRS and were to refinance existing mortgage
indebtedness of the Partnerships with the type of indebtedness described in
the ruling, such indebtedness should constitute "qualified nonrecourse
financing" for purposes of the "at risk" rules.
Impact of Assumption of PHLP Liabilities by the Operating Partnership. As
described in the Consent Solicitation, see "Federal Income Tax Consequences--
Tax Consequences of the Mergers--Disguised Sale Regulations," a PHLP Limited
Partner will recognize gain to the extent he is treated as having sold all or
part of his PHLP Partnership Interest in a "disguised sale." 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.
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" also will not be treated as part of
a disguised sale. 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
PHLP Supp-31
<PAGE>
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.
Hogan & Hartson believes, based on representations made by the Operating
Partnership and the General Partner relating to the facts and circumstances
surrounding each such liability, that all liabilities of PHLP fall into one of
the four categories of "qualified liabilities" described above and,
accordingly, that the mere assumption by the Operating Partnership of the
outstanding liabilities of PHLP will not give rise to a "disguised sale" by
any of the PHLP Limited Partners.
Tax Treatment of PHLP Limited Partners Who Hold OP Units Following the Merger
Initial Basis in Units. In general, a PHLP Limited Partner will have an
initial tax basis in his OP Units received in the Merger with respect to his
PHLP Partnership Units equal to the basis in his PHLP Partnership Units at the
time of the Merger, reduced to reflect any deemed cash distributions resulting
from a reduction in his share of PHLP liabilities and increased to reflect his
share of other liabilities of the Operating Partnership and any gain required
to be recognized in connection with the Merger and the REIT Conversion
(including income, if any, attributable to the sale of a portion of the
personal property associated with six of the PHLP Hotels, as described below
under "--Tax Allocations upon the Sale of Certain Personal Property Associated
with the PHLP Hotels"). For a discussion of the federal income tax
consequences for a PHLP Limited Partner from a reduction in basis that may
result from the Merger and the REIT Conversion, see "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Initial Tax Basis of OP Units" in the Consent Solicitation.
Tax Allocations by the Operating Partnership upon a Sale of PHLP
Hotels. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (referred to as the "Book-Tax
Difference"). The Operating Partnership and the General Partner estimate,
based upon and subject to the assumptions and other limitations described
below, that the Book-Tax Difference for all PHLP Limited Partners (but
excluding all of Host's Interests) with respect to the PHLP Hotels will be
$100,606,432 upon the consummation of the Merger.
If the Operating Partnership were to sell all of the PHLP Hotels, the former
partners of PHLP (including Host REIT with respect to Host's interest in PHLP)
would be specially allocated by the Operating Partnership an aggregate amount
of taxable gain equal to the aggregate Book-Tax Difference with respect to the
PHLP Hotels. The share of such gain allocable to a PHLP Limited Partner who
acquired his PHLP Partnership Units in the original offering of such
Partnership Units and held such Partnership Units at all times since would be
$55,892 per PHLP Partnership Unit. The share of such gain of a PHLP Limited
Partner who did not acquire his PHLP Partnership Units in the original
offering of such Partnership Units or who has not held his PHLP Partnership
Units at all times since such offering could vary materially from this amount.
If the Operating Partnership were to sell a PHLP Hotel with a Book-Tax
Difference, the remaining Book-Tax Difference at the time the Hotel is sold
would be required to be allocated exclusively to the former PHLP Limited
Partners and the General Partner, even though the proceeds of such sale would
be allocated proportionately among all the partners in the Operating
Partnership (and would likely be retained by the Operating Partnership, rather
than distributed to holders of OP Units and Common Shares of Host REIT). The
PHLP Limited Partners would not be entitled to any special distributions from
the Operating Partnership in connection with such a sale, and thus would not
necessarily receive cash distributions from the Operating Partnership
sufficient to pay such additional
PHLP Supp-32
<PAGE>
taxes. Although the Partnership Agreement does not impose any restrictions
upon the Operating Partnership preventing it from causing the sale of any or
all of the PHLP Hotels at any time following the Merger, the Operating
Partnership does not have current plans to pursue a sale of any of the PHLP
Hotels. See "Federal Income Tax Consequences--Tax Treatment of Limited
Partners Who Hold OP Units Following the Mergers--Sale of Individual Hotels"
in the Consent Solicitation.
Tax Allocations upon the Sale of Certain Personal Property Associated with
the PHLP Hotels. As discussed in the Consent Solicitation, see "Federal Income
Tax Consequences--Federal Income Taxation of Host REIT Following the REIT
Conversion--Income Tests Applicable to REITs" and "--Taxable Income
Attributable to Sales of Personal Property in Connection with the REIT
Conversion," 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
Partner have determined that the percentage of rent attributable to the
personal property to be leased in connection with the lease of six of the PHLP
Hotels (which excludes the Tampa and Raleigh Hotels) would not satisfy the 15%
Personal Property Test. The 15% Personal Property Test is a mechanical test
that is based not on the relative fair market value of the assets subject to
lease, or the relative fair rental value of those assets, but, rather, is
based on the average relative adjusted tax bases of the assets subject to the
lease. Accordingly, immediately prior to the Merger, the Operating Partnership
will require PHLP, if it chooses to participate in the Merger, to sell to a
Non-Controlled Subsidiary a portion of the personal property associated with
those six PHLP Hotels. This sale, which will be a taxable transaction, may
result in the recognition by PHLP (and the allocation to the PHLP Limited
Partners) of a relatively modest amount of taxable gain to the extent of the
difference, if any, 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.
The actual amount of any such gain 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 PHLP partnership agreement, any such taxable gain will be
characterized as ordinary recapture income and will be allocated by PHLP to
the former PHLP Limited Partners in the same proportions and to the same
extent that such Limited Partners were allocated any deductions directly or
indirectly giving rise to the treatment of such gains as recapture income
prior to the Merger. The PHLP Limited Partners would not be entitled to any
special distributions from PHLP in connection with such a sale of personal
property.
Tax Allocations with Respect to Contributed Hotels Generally. The tax
allocations of depreciation to the PHLP Limited Partners may change
significantly as a result of the Mergers and the REIT Conversion for two
reasons. First, as described above, pursuant to Section 704(c) of the Code,
depreciation and deductions attributable to the PHLP Hotels will be required
to be allocated for federal income tax purposes in a manner such that the PHLP
Limited Partners are charged with the Book-Tax Difference associated with the
PHLP Hotels at the time of the consummation of the Merger. Consequently, a
PHLP Limited Partner will be allocated less depreciation with respect to the
PHLP Hotels than would be the case if the Mergers had not occurred and the
PHLP Limited Partner had continued to hold his PHLP Partnership Units. (On the
other hand, a former PHLP Limited Partner will be allocated depreciation with
respect to other Hotels acquired by the Operating Partnership in connection
with the Mergers and the REIT Conversion, including the Hotels owned by the
other Hotel Partnerships and the Hotels being contributed to the Operating
Partnership by Host and the Blackstone Entities in connection with the Merger
and the REIT Conversion.) Second, the Mergers will cause the technical
termination under Section 708(b)(1)(B) of the Code of PHLP and certain of the
other Hotel Partnerships that participate in the Mergers and the REIT
Conversion. 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 real estate components of the PHLP Hotels and the
Hotels held by the other Hotel Partnerships that terminate will be depreciated
over 39 years, rather than over the remaining current lives of such Hotels
(which range from less than one year to 39 years). See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--Effect of Mergers on Depreciation" in the Consent Solicitation.
PHLP Supp-33
<PAGE>
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 Partner 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 (and,
consequently, the amount of taxable income) allocable to a PHLP Limited
Partner.
Impact on Passive Activity Losses of an Investment in a Publicly Traded
Partnership. The passive loss limitation rules 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 Operating Partnership for PHLP Limited Partners) to
the extent that such losses are not in excess of the taxpayer's income from
passive activities or investments. A PHLP Limited Partner would be able to
offset losses from other passive activities 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 Partner 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
limitation rules. In this event, any losses or deductions of the Operating
Partnership allocable to a PHLP Limited Partner after the Merger could not be
used to offset passive income from other passive activities. Similarly, losses
from other passive activities could not be applied to offset income of the
Operating Partnership allocated to a PHLP Limited Partner. A PHLP Limited
Partner, however, would be able to offset any passive losses from his other
investments against any gain recognized by the PHLP Limited Partner as a
result of the Merger.
State and Local Taxes. PHLP Limited Partners holding OP Units will 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 and the REIT Conversion, the Operating
Partnership expects that it will own properties in 28 states across the United
States and the District of Columbia. Currently, PHLP owns, directly and
indirectly, properties in only six states. See "Federal Income Tax
Consequences--Tax Treatment of Limited Partners Who Hold OP Units Following
the Mergers--State and Local Taxes" in the Consent Solicitation.
Assumptions Used in Determining Tax Consequences of the Merger
In preparing the discussion set forth above, the Operating Partnership and
the General Partner made several key assumptions, which are described below.
If any such assumption is not accurate with respect to a particular PHLP
Limited Partner, the tax consequences of the Merger to such PHLP Limited
Partner could be substantially different from those reflected above.
ACCORDINGLY, EACH PHLP LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS
OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH PHLP LIMITED PARTNER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING
IN THE MERGER.
First, with respect to a PHLP Limited Partner's basis in his PHLP
Partnership Units prior to the Merger, the Operating Partnership and the
General Partner assumed that a PHLP Limited Partner acquired his PHLP
Partnership Units in the original offering of such Partnership Units and has
held such Partnership Units at all times since the offering (the "Original
Limited Partner's Adjusted Basis"). In general, each PHLP Limited Partner had
an initial tax basis in his PHLP Partnership Units ("Initial Basis") equal to
his cash investment in PHLP (plus his proportionate share of PHLP's
nonrecourse liabilities at the time he acquired his PHLP Partnership Units). A
PHLP Limited Partner's Initial Basis generally has been increased by (a) such
Limited
PHLP Supp-34
<PAGE>
Partner's share of PHLP taxable income and (b) any increases in his share of
liabilities of PHLP. Generally, such Limited Partner's Initial Basis has been
decreased (but not below zero) by (i) his share of PHLP cash distributions,
(ii) any decreases in his share of liabilities of PHLP, (iii) his share of
losses of PHLP and (iv) his share of nondeductible expenditures of PHLP that
are not chargeable to capital.
The General Partner has set forth on Appendix E to the Consent Solicitation
for PHLP (i) the Original Limited Partner's Adjusted Basis as of December 31,
1997 for each such PHLP Limited Partner and (ii) an estimate of such PHLP
Limited Partner's 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 the Consent Solicitation). The General Partner also
has set forth on Appendix E to the Consent Solicitation for each PHLP Limited
Partner whose adjusted basis in his PHLP Partnership Interest is the same as
the Original Limited Partner's Adjusted Basis (a) the PHLP liabilities
allocable to such PHLP Limited Partner as of December 31, 1997 and (b) an
estimate of the PHLP 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 the Consent Solicitation).
The adjusted tax basis of a PHLP Limited Partner who did not acquire his
PHLP Partnership Units in the original offering of such Partnership Units
could vary materially from that of a PHLP Limited Partner who did so for
various reasons. If a PHLP Limited Partner has an adjusted tax basis in his
PHLP Partnership Units that is less than the Original Limited Partner's
Adjusted Tax Basis, the Merger might result in the receipt by the PHLP Limited
Partner of a deemed distribution of cash in excess of his adjusted tax basis
in his PHLP Partnership Units, which could result in the recognition of income
or gain.
Second, the Operating Partnership and the General Partner assumed that the
method expected to be used by the Operating Partnership to allocate
liabilities among the partners will be respected for federal income tax
purposes. The Operating Partnership will allocate liabilities associated with
the PHLP Hotels as described in "Federal Income Tax Consequences--Tax
Consequences of the Mergers--Relief from Liabilities/Deemed Cash Distribution"
in the Consent Solicitation. If the method used by the Operating Partnership
were not respected for federal income tax purposes and the nonrecourse
liabilities actually allocable to a PHLP Limited Partner are less than the
amount assumed by the Operating Partnership and the General Partner, the
Merger might result in the receipt by such PHLP Limited Partner of a deemed
distribution of cash that is greater than the deemed distribution of cash
expected to be received by such PHLP Limited Partner as described above in
"Tax Consequences of the Merger--Deemed Cash Distribution and Resulting
Taxable Gain." For a PHLP Limited Partner who did not acquire his PHLP
Partnership Units in the original offering of such Partnership Units or who
did not hold such Partnership Units at all times since, this deemed
distribution of cash could exceed his adjusted tax basis in his PHLP
Partnership Units, which could result in the recognition of income or gain.
Finally, the Operating Partnership and the General Partner assumed that the
Merger will be treated for federal income tax purposes as the transfer by the
PHLP Limited Partners of their interests in the Partnership 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 possibly Notes and/or Common Shares) and the
subsequent distribution of such OP Units (and possibly Notes and/or Common
Shares) to its partners. If the Merger is recharacterized in the manner
described in (ii) in the preceding sentence, the tax consequences of the
Merger to the PHLP Limited Partners likely would be materially affected.
EACH PHLP LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH PHLP LIMITED PARTNER'S PARTICULAR TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
THE TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER TO A PARTICULAR PHLP
LIMITED PARTNER COULD VARY SUBSTANTIALLY FROM THE CONSEQUENCES DESCRIBED
ABOVE.
PHLP Supp-35
<PAGE>
Tax Treatment of PHLP Limited Partners Who Exercise their Right to Make the
Common Share Election or the Note Election
A PHLP Limited Partner who exercises his right to make the Common Share
Election or the Note Election and receive Common Shares or a Note in
connection with the Merger will be treated as having made a taxable
disposition of his OP Units. Generally, the amount realized in connection with
such disposition made pursuant to the exercise of the Common Share Election
will equal the sum of the fair market value of the Common Shares received
(i.e., the Exchange Value, currently estimated as $5,040 per PHLP Partnership
Unit) plus the portion of PHLP's liabilities allocable to the PHLP Limited
Partner for federal income tax purposes immediately prior to the disposition
of the OP Units (estimated as $71,861 per PHLP Partnership Unit as of December
31, 1998). Generally, the amount realized in connection with such disposition
made pursuant to the Note Election will equal the sum of the "issue price" of
the Note (i.e., the face amount of the Note, currently estimated as $4,032 per
PHLP Partnership Unit) plus the portion of PHLP liabilities allocable to the
PHLP Limited Partner for federal income tax purposes immediately prior to the
disposition of the OP Units (estimated as $71,861 per PHLP Partnership Unit as
of December 31, 1998). To the extent the amount realized exceeds the PHLP
Limited Partner's adjusted basis in his PHLP Partnership Units, the PHLP
Limited Partner will recognize gain. The Operating Partnership and the General
Partner estimate (assuming the PHLP Limited Partner acquired his PHLP
Partnership Units at the time of the original offering and has held such
Partnership Units at all times since the offering) that the amount of gain
that would be recognized by a PHLP Limited Partner who made the Common Share
Election would be approximately $55,892 per PHLP Partnership Unit and that the
amount of gain that would be recognized by a PHLP Limited Partner, who made
the Note Election would be approximately $54,884 per PHLP Partnership Unit, as
of December 31, 1998. For a discussion of the federal income tax rates
applicable to the net capital gain from the sale of a capital asset, see
"Federal Income Tax Consequences--Tax Treatment of Limited Partners Who Hold
OP Units Following the Mergers--Disposition of OP Units by Limited Partners"
in the Consent Solicitation. In this regard, the General Partner estimates
that, as of December 31, 1998, if PHLP sold all of its Hotels in a fully
taxable transaction for a net amount, after payment of liabilities, equal to
the Exchange Value of PHLP (with respect to a Limited Partner who makes the
Common Share Election) or determined by reference to the Note Election Amount
of PHLP (with respect to a Limited Partner who makes the Note Election), the
"unrecognized Section 1250 gain" per PHLP Partnership Unit would be $52,287,
for a Limited Partner who makes the Common Share Election and $51,279 for a
Limited Partner who makes the Note Election and the gain subject to tax as
ordinary income under Code Section 1245 per PHLP Partnership Unit would be
$3,605 for a Limited Partner who makes either of the Elections. A PHLP Limited
Partner who makes the Common Share Election or the Note Election would be able
to treat any per Partnership Unit passive activity loss carryforward with
respect to the activities of PHLP, to the extent the sum of such losses
exceeds his passive activity income for 1998, as losses that are not from a
passive activity and, therefore, not subject to the passive activity loss
limitation rules.
A PHLP Limited Partner who elects to receive Common Shares will not be
eligible to defer any gain under the "installment sale" rules, while a PHLP
Limited Partner who elects to receive a Note may be eligible to defer only a
small portion of that gain under those rules. To the extent that the face
amount of the Note (and any other installment obligations received by the
taxpayer during the year) outstanding at the end of the taxable year in which
the Merger occurs exceeds $5,000,000, the "installment sale" rules will
require that the PHLP Limited Partner who defers gain pay to the IRS interest
on the resulting tax that has been deferred. The PHLP Limited Partner will not
be eligible to defer gain recognized upon the receipt of the Note to the
extent that his share of PHLP liabilities at the time of the Merger exceeds
his adjusted tax basis in his PHLP Partnership Units immediately prior to the
Merger (that is, to the extent that he has a "negative capital account" for
tax purposes). In addition, the PHLP Limited Partner will not be eligible to
defer gain to the extent that such gain would be taxed as ordinary income
under Sections 1245 and 1250 of the Code. Lastly, if a PHLP Limited Partner
disposes of his Note, any gain that had been deferred would be recognized in
the year of disposition.
THE SPECIFIC TAX ATTRIBUTES OF A PARTICULAR PHLP LIMITED PARTNER COULD HAVE
A MATERIAL IMPACT ON THE TAX CONSEQUENCES OF THE MERGER AND THE SUBSEQUENT
OWNERSHIP AND DISPOSITION OF COMMON SHARES OR NOTES. THEREFORE, IT IS
ESSENTIAL THAT PHLP LIMITED PARTNERS CONSIDERING ELECTING TO RECEIVE COMMON
SHARES OR
PHLP Supp-36
<PAGE>
NOTES CONSULT WITH THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF
THE FEDERAL INCOME TAX LAWS TO SUCH PHLP LIMITED PARTNERS' RESPECTIVE PERSONAL
TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL, OR FOREIGN TAXING JURISDICTION.
Tax Consequences if PHLP Does Not Participate in the Merger
If PHLP does not participate in the Merger, the PHLP Limited Partners would
not have any tax consequences resulting from the Merger. The consequences of
continued ownership of PHLP Partnership Units will be the same as would have
resulted if the Merger had not been proposed.
* * *
The above description is not exhaustive of all possible tax considerations
associated with the Merger and the REIT Conversion. This summary does not
discuss foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation or state and local taxation that may be relevant to
PHLP Limited Partners in light of their particular circumstances. EACH PHLP
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH PHLP LIMITED PARTNER'S PARTICULAR TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES OF PARTICIPATING IN THE MERGER.
PHLP Supp-37
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data derived from
the audited financial statements for the five most recent fiscal years in the
period ended December 31, 1997 and the unaudited condensed financial
statements for the First Two Quarters 1998 and First Two Quarters 1997. The
following data should be read in conjunction with the financial statements and
the notes thereto, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER PARTNERSHIP UNIT(1))
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 29,480 $ 28,048 $ 50,323 $ 45,853 $ 50,598 $ 43,777 $ 45,994
Operating profit........ 14,077 14,350 21,056 21,898 23,442 9,863 10,593
Income (loss) before
extraordinary item(2).. 2,429 3,188 (2,825) (1,841) 20,045 (22,741) (21,729)
Net income (loss)....... 2,429 3,188 (2,825) (1,841) 166,348 24,427 (4,581)
Distributions
General partner........ -- -- -- -- -- -- --
Limited partners....... -- -- -- -- -- -- --
Per Partnership Unit:
Net income (loss)...... 1,336 1,753 (1,554) (1,013) 88,187 8,601 (2,519)
Distributions.......... -- -- -- -- -- -- --
Cash provided by
operating activities... 17,962 18,043 20,886 19,384 14,812 3,480 5,764
Cash used in (provided
by) investing
activities............. (4,082) (4,195) (7,754) (10,249) 37,237 (36,472) --
Cash used in (provided
by) financing
activities............. (16,473) (18,102) (15,178) (10,046) (53,793) 37,156 (4,372)
Increase (decrease) in
cash and cash
equivalents............ (2,593) (4,254) (2,046) (911) (1,744) 4,164 1,392
Ratio of earnings to
fixed charges
(unaudited)(3)......... 1.20x 1.27x -- -- -- -- --
Deficiency of earnings
to fixed charges
(unaudited)(3)......... -- -- 2,825 1,841 4,541 22,741 21,729
Total assets at book
value.................. 185,666 188,608 178,224 179,867 176,521 196,061 203,251
Cash and cash
equivalents............ 589 974 3,182 5,228 6,139 7,883 3,719
Total debt(4)........... 292,998 299,940 298,442 304,564 308,519 359,186 401,829
Total liabilities....... 330,359 329,717 325,346 324,164 318,977 506,865 538,482
Partners' deficit:
Limited partners....... (109,876) (106,327) (112,280) (109,483) (107,660) (266,396) (281,878)
General partner........ (34,817) (34,782) (34,842) (34,814) (34,796) (44,408) (53,353)
Book Value per
Partnership Unit
(unaudited)(1)......... (61,042) (59,071) (62,378) (60,824) (59,811) (147,998) (156,599)
Exchange Value per
Partnership Unit
(unaudited)(1)......... 5,040 -- -- -- -- -- --
</TABLE>
- --------
(1) A Partnership Unit represents a $10,000 original investment in PHLP.
(2) In 1995, an extraordinary gain of $146,303,000 was recognized as a result
of the forgiveness of deferred base and incentive management fees in
connection with the bank loan restructuring. In 1994 and 1993, $47,168,000
and $17,148,000 respectively, of gains on early debt extinguishment
resulting from the foreclosure of the S&L Hotels were recognized as
extraordinary items.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before interest expense and other fixed charges by total fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense that is deemed to represent interest. The
deficiency of earnings to fixed charges is largely the result of
depreciation and amortization of $8,430,000, $5,473,000, $5,912,000,
$7,219,000, and $6,859,000 for the fiscal years 1997, 1996, 1995, 1994,
and 1993, respectively.
(4) Total debt includes amounts due to Host of $123,819,000, $121,952,000,
$125,475,000, $124,348,000, $122,176,000, $114,186,000 and $79,983,000 as
of June 19, 1998, June 20, 1997 and December 31, 1997, 1996 and 1995,
respectively.
PHLP Supp-38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
First Two Quarters 1998 Compared to First Two Quarters 1997
Hotel Revenues: Hotel revenues increased 5% to 29.5 million for the first
two quarters 1998, when compared to the same period in 1997. The increases in
revenues are primarily due to the increases in REVPAR at seven of the eight
Hotels for the first two quarters 1998. REVPAR, or revenue per available room,
represents the combination of the average daily room rate charged and the
average daily occupancy achieved and is a commonly used indicator of hotel
performance. For the first two quarters 1998, the combined average room rate
increased 7% to $118, while the combined average occupancy decreased one
percentage point to 81%, when compared to the same period in 1997.
Operating Costs and Expenses: Operating costs and expenses increased 12% to
$15.4 million for the first two quarters 1998, when compared to the same
period in 1997. The principal components of this category are:
Management Fees: Incentive management fees, base management fees, and
ground rent are calculated generally as a percentage of Hotel sales or
Hotel revenues. The increases in these expenses for the first two quarters
1998 were directly related to the increases in Hotel sales and Hotel
revenues for the first two quarters 1998.
Depreciation: Depreciation expense increased in the first two quarters of
1998 due to property and equipment additions as well as a change in the
estimated useful lives of certain assets.
Operating Profit: Operating profit decreased 2% to $14.1 million for the
first two quarters 1998, when compared to the same period in 1997. The
decrease in operating profit for the first two quarters 1998 was attributable
to the increase in operating costs and expenses which was partially offset by
the increase in revenues.
Interest Expense: Interest expense increased 4% to $11.9 million for the
first two quarters 1998, when compared to the same period in 1997. The
weighted average interest rate on the Bank Loan was 8.3% for the first two
quarters 1998, as compared to 7.4% for the comparable period in 1997.
Net Income: Net income decreased 24% to $2.4 million for the first two
quarters 1998, when compared to the same period in 1997 due to the increases
in operating costs and expenses and interest expense.
Individual hotel operating results are discussed below:
For the first two quarters 1998 revenues at the MOUNTAIN SHADOWS RESORT
decreased 2% to $5.3 million when compared to the same period of 1997 due to
the decline in food and beverage revenues. In the upcoming months the Hotel
plans to increase its marketing efforts by distributing a newsletter in the
fall and circulating mailers during the holiday season.
Revenues for the TAMPA WESTSHORE HOTEL increased 4% to $2.9 million for the
first two quarters 1998, due to a 9% increase in room sales which was offset
by a 3% decrease in food and beverage sales. REVPAR improved 8% to $106 due to
an increase of 12% in the average room rate to $128 which was offset by a four
percentage point decrease in average occupancy when compared to the first two
quarters 1997. The slight decrease in average occupancy is related to the
customer's sensitivity to increases in average room rates. The Hotel recently
completed the renovation of the Champions lounge and has installed new health
club equipment for the guests. The Hotel is also utilizing focus groups in
order to continue to increase guest satisfaction and employing aggressive
pricing strategies in order to gain group business.
For the first two quarters 1998, revenues at the MIAMI BISCAYNE BAY HOTEL
increased 9% to $6.1 million when compared to the same period in 1997. This
increase was due to a 6% increase in REVPAR to $100 coupled
PHLP Supp-39
<PAGE>
with a 15% increase in food and beverage revenues due to strong catering
sales. The Hotel added two new airline contracts and started to focus on the
Latin American markets to increase it occupancy for the remainder of 1998.
For the first two quarters 1998 revenues at the SEATTLE SEA-TAC HOTEL
increased 17% to $4.8 million when compared to the same period in 1997. REVPAR
increased 10% to $96 due to a four percentage point increase in average
occupancy to 80% and a 6% increase in the average room rate to $120.
Additionally, for the first two quarters 1998 food and beverage revenues
increased 22% to $1.4 million. During 1998, the Hotel implemented revenue-
maximizing strategies, such as requiring large groups to purchase one catered
meal per day, and recent renovations at the Yukon Landing Restaurant and
Snoqualmie Ballroom have helped increase restaurant and banquet business.
During 1998, the Hotel obtained business from several new groups and also
experienced greater success with weekend promotions resulting in increased
revenues.
The GREENSBORO HOTEL experienced a 9% increase in revenues for the first two
quarters 1998 to $2.4 million over the same period in 1997 due to increased
room revenues and food and beverage revenues. Room revenues at the Hotel
increased 6% to $3.4 million when compared to the same period in 1997 due to a
7% increase in REVPAR to $89. The increase in REVPAR was due to a 7% increase
in the average room rate to $111 with average occupancy remaining stable at
80%. Food and beverage revenues increased 38% to $518,000 over the same period
of 1997 due to the significant increases in the Hotel's catering business.
Revenues at the HOUSTON MEDICAL CENTER HOTEL increased 18% to $3.3 million
for the first two quarters 1998 when compared to the same period in 1997. The
Hotel increased its sales 7% while reducing its direct operating expenses by
2%. The increase in sales was due to a 10% increase in REVPAR to $88 which was
attributable to a 14% increase in the average room rate to $109 offset by a
two percentage point decline in average occupancy to 81%. Direct operating
expenses decreased as the Hotel used stricter cost containment measures in its
food and beverage department. In order to address the decline in average
occupancy for the first two quarters 1998, the Hotel is planning several new
promotions. These promotions include using amusement park affiliations to
garner weekend and Labor Day business and using local media to obtain weekend
restaurant business. The Hotel is undergoing a rooms renovation that will
replace the bedspreads, drapery, upholstery, carpet and furniture in all the
guest rooms.
The RALEIGH CRABTREE VALLEY HOTEL reported a 4% increase in revenues for the
first two quarters 1998 to $2.7 million due to a 5% increase in REVPAR to $84.
The average room rate increased 6% to $102 while average occupancy decreased
one percentage point to 82% when compared to same period of last year. The
Hotel increased its corporate room rate by $10 in 1998, which primarily led to
the increase in the average room rate. In order to better serve its guests,
the Hotel opened a business center in May 1998. To improve the Hotel's average
occupancy, the Hotel is continuing its partnership with the North Carolina
State University as the preferred hotel of Wolfpack sporting events.
Revenues for the first two quarters of 1998 at the ALBUQUERQUE HOTEL
decreased 20% to $2 million due to a 7% decrease in REVPAR to $68 and a 36%
decline in food and beverage revenues when compared to the same period in
1997. The decrease in REVPAR was due to a 5% decrease in the average room rate
to $91 and a one percentage point decrease in occupancy to 75%. The Hotel is
trying to increase business on weekends through the "Can't Beat Friday"
discounted rate promotion. In order to increase food and beverage sales, a
director of catering was hired, and a restaurant and bar renovation is planned
for early 1999.
PHLP Supp-40
<PAGE>
The following chart summarizes REVPAR, or revenues per available room, and
the percentage change in REVPAR from the prior year for each Hotel owned by
the Partnership as of the end of the Second Quarter 1998. The percentage
change in REVPAR for the Raleigh and Tampa Hotels from 1994 to 1995 is not
shown because these Hotels were not owned by the Partnership for the entire
year in 1994.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS 1998 1997 1996 1995
----------------------- --------------- --------------- ---------------
REVPAR % CHANGE REVPAR % CHANGE REVPAR % CHANGE REVPAR % CHANGE
------------ ------------ ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mountain Shadows........ $139 2% $105 6% $99 5% $94 7%
Seattle................. 96 10 91 11 82 4 79 11
Tampa Westshore......... 106 8 87 9 80 10 73 N/A
Greensboro.............. 89 7 80 7 75 (1) 76 7
Miami Biscayne Bay...... 100 6 80 13 71 1 70 9
Raleigh Crabtree
Valley................. 84 5 76 6 72 9 66 N/A
Houston Medical Center.. 88 10 75 12 67 5 64 2
Albuquerque............. 68 (7) 70 1 69 3 67 0
</TABLE>
1997 COMPARED TO 1996
Mountain Shadows
The Mountain Shadows Resort's revenues increased 10% to $6.8 million in 1997
when compared to 1996 due primarily to a 6% increase in REVPAR to $105. The
increase in REVPAR was due to an 11% increase in the average room rate to $138
offset by a four percentage point decrease in average occupancy to 76%. The
increase in the average room rate was attributable to the increases in the
Hotel's corporate rate by $15 to $151 and in the group rates by $9 to $135.
The decrease in average occupancy was related to unexpected group
cancellations during the second quarter of 1997. In 1997, the Hotel combined
its sales center with two other Marriott properties in the Scottsdale region
which improved its sales and marketing efficiency. Additionally during 1997,
the Hotel completed a renovation of its Cactus Flower Restaurant and its
Shells Seafood Restaurant. In early 1998, the Hotel replaced the carpet in the
ballroom.
Seattle
The Seattle Marriott Hotel reported an increase in revenues of 14% to $9.7
million for 1997 when compared to the prior year due to an 11% increase in
REVPAR to $91. The increase in REVPAR was due to a $12 increase in the average
room rate to $117. The Hotel's average occupancy remained stable at 78%. The
increase in average room rate is the result of the Hotel's ability to increase
room rates with little to no price resistance due to the strong transient
demand in the Seattle area. The Hotel's food and beverage revenues increased
$365,000 or 17% to $2.5 million when compared to 1996. This increase is
attributable to the increase in catering sales. The Hotel completed
renovations of its Snoqualmie Ballroom and Yukon Restaurant in February 1998.
In addition, the Hotel will be adding coffee makers, reading chairs, and
ergonomic workstations to its guest rooms in 1998. The current outlook for the
Seattle area remains strong due to continued growth of large companies such as
Boeing and Microsoft in the region.
Tampa Westshore
The Tampa Marriott Westshore Hotel experienced a 2% increase in revenues to
$4.6 million in 1997 as compared to 1996. REVPAR increased 9% to $87 in 1997
due to an $8 increase in the average room rate to $108 coupled with a two
percentage point increase in average occupancy to 81%. Rooms revenues
increased 7%, or $500,000, in 1997 when compared to 1996. This increase was
partially offset by an increase in repairs and maintenance expense related to
the air conditioning system. In 1998, the Hotel plans to replace the cooling
tower related to the air conditioning system. In early 1997, the Hotel
completed the third phase of the rooms renovation project that replaced the
furniture in approximately 108 guest rooms. All the guest rooms now feature
new furniture. During the summer of 1998, the Hotel plans to replace the guest
room carpet, draperies, and bedspreads. These improvements will enable the
Hotel to compete more effectively in the Tampa market in the future.
PHLP Supp-41
<PAGE>
Greensboro
In 1997, the Greensboro Hotel's revenues increased 4% to $4.7 million when
compared to 1996. REVPAR increased 7% to $80 due to increases in the average
room rate of $3 to $101 and in average occupancy of three percentage points to
79%. The increase in occupancy was primarily due to the addition of 2,000 new
contract roomnights. During 1997, the Hotel filled an open Director of
Marketing position that has helped increase revenues at the Hotel, especially
revenue from group and contract sales. In early 1997 the Hotel renovated the
restaurant, and in 1998 the Hotel will replace fixtures and tiles in all its
guest bathrooms. The Partnership expects the Greensboro market to continue to
improve in 1998 due to the increased popularity of the North Carolina
furniture market.
Miami Biscayne Bay
Miami Biscayne Bay Hotel revenues for 1997 increased an impressive 18% to
$9.1 million when compared to 1996 due primarily to increased rooms revenues.
REVPAR for 1997 increased 13% to $80 when compared to 1996 due to a $10
increase in average room rate to $97 and a one percentage point increase in
average occupancy to 83%. In 1997, the Hotel reduced its lower-rated airline
contract roomnights by approximately 19,000 roomnights and replaced a majority
of these roomnights with higher-rated corporate roomnights. During 1997, the
Hotel sold 64% corporate-rated rooms and 36% group and contract-rated rooms as
compared to 1996 when the Hotel sold 55% corporate-rated rooms and 45% group
and contract-rated rooms. During 1997, the Hotel replaced the furniture in its
guest rooms. During the summer of 1998, the Hotel plans to renovate the lobby,
restaurant and lounges.
Raleigh
In 1997, revenues increased 4% to $5.2 million for the Raleigh Hotel as
compared to 1996. REVPAR increased 6% to $76 due to a 7% increase in the
average room rate to $94. Average occupancy declined slightly to 81%. The
increase in average room rate was due to a $10 increase in the corporate rate
in 1997 to $119 as well as increases in some of the Hotel's special corporate
rates. During 1997, the Hotel began projects to expand its restaurant and to
convert its lounge to additional meeting space. These projects will be
completed in early 1998. Additionally, the Hotel plans to replace its ballroom
carpeting and create a Hotel business center in 1998. The Hotel currently is
marketing to local universities to attract weekend business during the fall
sports season.
Houston Medical Center
Revenues for the Houston Medical Center Hotel increased an impressive 20% to
$5.4 million in 1997 when compared to 1996. REVPAR increased 12% to $75 due to
a 12% increase in average room rate to $97 and a one percentage point increase
in average occupancy to 78%. The Hotel increased its corporate room rate by
$20 to $149 in 1997. Rooms revenues increased 13% due to the increase in the
average room rate. In 1998, the Hotel plans to complete a rooms renovation
that will replace the bedspreads, drapery, upholstery, carpet, and furniture
in all its guest rooms. This renovation will enable the Hotel to have a more
competitive product, and the General Partner anticipates that it will allow
the Hotel to increase its average room rate further in the future.
Albuquerque
Although REVPAR increased $1 to $70, revenues for the Albuquerque Hotel
decreased slightly in 1997 to $4.8 million when compared to the prior year.
The increase in REVPAR was due to the 13% increase in average room rate to $97
offset significantly by the eight percentage point decrease in average
occupancy to 72%. The decrease in revenues was due to the increase in salaries
and wages expenses related to the addition of a director of group sales and
the increase in sales promotion costs. These costs were necessary to address
the declining average occupancy. During 1998, the Hotel plans to replace a
major portion of the roof on the building and renovate the Allies American
Grille restaurant.
PHLP Supp-42
<PAGE>
1997 COMPARED TO 1996 COMBINED RESULTS OF OPERATIONS
Hotel Revenues: Hotel revenues increased 10% to $50.3 million in 1997
primarily due to an increase in REVPAR at each of the Partnership's Hotels in
1997 when compared to 1996.
Hotel Sales: Hotel sales increased 5% to $150.5 million in 1997 due to
increased rooms sales in 1997. The combined average room rate increased 9% to
$105 while combined average occupancy remained stable at 79%.
Direct Hotel Expenses: Direct hotel expenses increased 3% to $100.2 million
in 1997. The increase in direct hotel expenses is due to higher variable costs
related to the increase in hotel sales. However, direct hotel expenses as a
percentage of hotel sales decreased to 67% in 1997 from 68% in 1996.
Depreciation: Depreciation increased in 1997 due to property and equipment
additions, and the change in the estimated useful lives of certain assets.
Management Fees: Incentive and base management fees increased 12% to $8.4
million and 5% to $4.5 million, respectively, in 1997 due to the corresponding
increase in hotel sales.
Net Loss: Net loss increased 53% to $2.8 million in 1997. The increase in
net loss primarily is attributable to increased depreciation expense on the
Partnership's property and equipment and an increase in management fees in
1997 as compared to 1996.
1996 COMPARED TO 1995
Mountain Shadows
REVPAR for 1996 increased 5% to $99. This increase was due to a 3% increase
in the average room rate to $124 combined with a two percentage point increase
in occupancy to 80%. Hotel revenues for 1996 increased 4% to $6.2 million. The
increase in average room rate and hotel revenues is due to the Hotel's
successful efforts in shifting business from lower rated group business to
higher transient rates. The Hotel's marketing promotions include a newsletter
to 3,000 past customers as well as newspaper advertising in key cities such as
Los Angeles, Chicago and New York.
Seattle
Hotel revenues increased 7% to $8.5 million in 1996 when compared to the
prior year due to an increase in REVPAR of 4% to $82. The increase in REVPAR
was due to a $6 increase in average room rate to $105 partially offset by a
one percentage point decrease in occupancy to 78%. The increase in the average
room rate is the result of the strong transient demand in the growing Seattle
economy. The local economy is tied to the global aerospace industry as well as
the availability of raw timber products. Current projections for each of these
industries are strong and indicate steady growth and reliability.
Tampa Westshore
The Tampa Westshore Hotel experienced a 10% increase in REVPAR to $80 for
1996 as compared to 1995. This increase was due to a 6% increase in the
average room rate to $100 coupled with a two percentage point increase in
average occupancy to 79%. The increase in average room rate is attributable to
strong market demand and the successful efforts of Hotel management in
restricting discounted corporate rates. An increase in transient business
contributed to the increase in average occupancy. In early 1997, the Hotel
completed the third phase of a rooms renovation project which replaced the
furniture in approximately 108 guest rooms. All 311 guest rooms now have new
furniture which will enable the Hotel to compete more effectively in the Tampa
market.
PHLP Supp-43
<PAGE>
Greensboro
For 1996, REVPAR decreased slightly to $75 when compared to 1995. The
average room rate increased 6% to $98; however, this increase was offset by a
six percentage point decline in average occupancy to 76% as a result of new
competition in the Greensboro area. Hotel revenues decreased 5% to $4.5
million primarily due to the decline in occupancy. In 1996, the Hotel facade
was painted, and in early 1997 a renovation of the restaurant was completed.
Miami Biscayne Bay
REVPAR for 1996 increased slightly to $71 when compared to 1995 due to a
four and one-half percentage point increase in average occupancy to 82%
partially offset by a 3% decrease in the average room rate to $87. The
increase in average occupancy was due to the addition of a new contract with
United Airlines for 13,000 room nights in 1996. Hotel revenues decreased 7% to
$7.7 million primarily due a decrease in catering profits as a result of
business associated with the 1995 Superbowl not recurring in 1996. During
1996, the Hotel installed new carpet in the ballrooms and in selected
corridors. During 1997, the remaining corridors will receive new carpet, and
285 rooms will undergo a redo which will include new carpet and mattresses.
Raleigh
In 1996, REVPAR increased 9% to $72, due to a 9% increase in average room
rate to $88 while the average occupancy remained stable at 82%. The increase
in average room rate was due to a $10 increase in the corporate rate in 1996.
Hotel revenues increased 16% to $5 million primarily due to the increase in
average room rates. During 1996, the Hotel completed a rooms renovation which
replaced the furniture in 375 guest rooms.
Houston Medical Center
REVPAR for 1996 increased 5% to $67 when compared to 1995 due to the 2%
increase in average room rate to $87 and a two percentage point increase in
average occupancy to 77%. Hotel revenues increased 10% to $4.5 million in
1996. These increases were due to strong demand in the medical markets,
increased business due to city wide conventions and success in shifting lower
rated business to higher corporate rates.
Albuquerque
Hotel revenues for 1996 increased slightly to $5.0 million when compared to
the prior year primarily due a 3% increase in REVPAR to $69. The increase in
REVPAR is primarily due to a one and one-half percentage point increase in
average occupancy to 80% as a result of increased transient demand in the
Albuquerque market. The average room rate remained stable at $86. The Hotel is
focusing its marketing efforts on increasing weekend group business. During
1997, the Hotel will complete a renovation of its meeting rooms.
1996 COMPARED TO 1995 COMBINED RESULTS OF OPERATIONS
Hotel Revenues: Hotel revenues decreased 9% to $45.9 million in 1996
primarily due to the sale of the Dallas Hotel in 1995. For the eight hotels
which were owned by the Partnership continuously throughout 1996 and 1995
(Albuquerque, Greensboro, Houston, Miami Biscayne Bay, Mountain Shadows,
Raleigh, Seattle, and Tampa (the "Combined Hotels")), Combined Hotel revenues
increased 4% in 1996 due to an increase in Combined Hotel sales.
Hotel Sales: Hotel sales decreased 6% to $143.3 million in 1996 due to the
sale of the Dallas Hotel in 1995. Combined Hotel sales increased 5% in 1996
through a 3% increase in the Combined Hotel average room rate to $96 and a
slight increase in the Combined Hotel average occupancy to 79%.
Direct Hotel Expenses: Direct hotel expenses decreased 5% to $97.5 million
in 1996 due to the sale of the Dallas Hotel. Combined direct hotel expenses
increased 5% in 1996. The increase in Combined direct hotel
PHLP Supp-44
<PAGE>
expenses is due to an increase in variable costs related to the increase in
Combined Hotel sales. Furthermore, direct hotel expenses as a percentage of
Hotel sales increased to 68% in 1996 from 67% in 1995.
Management Fees: Incentive and base management fees decreased 14% to $7.5
million and 6% to $4.3 million, respectively, in 1996 due to a corresponding
decrease in hotel sales.
Property Taxes: Property taxes decreased 25% to $3.1 million in 1996 due to
the sale of the Dallas Hotel in 1995.
Interest Expense: Interest expense decreased 17% to $24.6 million in 1996
due to lower principal balances in 1996 and a lower average interest rate on
the Bank Loan in 1996.
Net Income: Net income decreased 101% to a net loss of $1.8 million in 1996.
The decrease is due to the recognition of the gain on the sale of the Dallas
Hotel of $24.6 million and the gain on forgiveness of deferred fees of $146.3
million in 1995.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions, Host Marriott Corporation
("Host Marriott") and its affiliates or Marriott International, Inc.
("Marriott International") and its affiliates. The general partner believes
that the Partnership will have sufficient capital resources and liquidity to
continue to conduct its business in the ordinary course.
Principal Sources and Uses of Cash
The Partnership reported a decrease in cash and cash equivalents of $2.6
million during the first two quarters 1998. This decrease was due to the use
of cash for investing and financing activities partially offset by cash
provided by operating activities. The Partnership reported a decrease in cash
and cash equivalents of $2.0 million for 1997. This decrease was due to the
use of cash for investing and financing activities partially offset by cash
provided by operating activities.
The Partnership's principal source of cash is cash from operations. Total
cash provided by operations remained steady at $18.0 million, for the twenty-
four weeks ended June 19, 1998, when compared to the first two quarters 1997.
Total cash provided by operations increased $1.5 million, to $20.9 million,
for 1997 due to improved Hotel operating results. Total cash provided by
operations was $19.4 million and $14.8 million for 1996 and 1995,
respectively.
The Partnership's principal uses of cash are to (i) pay for capital
expenditures and to fund the property improvement funds, (ii) make deposits to
restricted cash accounts, (iii) pay debt service on the Partnership's mortgage
debt, and (iv) pay amounts owed to Host Marriott and Marriott International.
Cash used in investing activities was $4.1 million for the first two
quarters 1998, and $4.2 million for the first two quarters 1997. Cash used in
investing activities for the first two quarters 1998, included capital
expenditures of $3.4 million primarily related to furniture, fixtures, and
equipment renewals and replacements at the Hotels. Cash used in investing
activities decreased to $7.8 million in 1997 from $10.2 million in 1996. Cash
used in investing activities included cash paid for FF&E of $7.3 million in
1997 compared to $9.9 million in 1996. Cash used in investing activities was
$10.2 million in 1996, and cash provided by investing activities was $37.2
million in 1995 due to proceeds received from the gain on the sale of the
Dallas Hotel.
Cash used in financing activities was $16.5 million and $18.1 million for
the first two quarters 1998 and 1997, respectively. Cash used in financing
activities for the first two quarters 1998, included repayments to Host
Marriott and affiliates of $4.6 million and repayments on the Partnership's
mortgage debt of $3.8 million. Cash used in financing activities increased to
$15.1 million in 1997 from $10.0 million in 1996. Cash used in financing
activities for 1997 included repayments on the Partnership's mortgage debt of
$7.2 million, repayments to Host
PHLP Supp-45
<PAGE>
Marriott and affiliates of $6.1 million, and net deposits to restricted cash
accounts of $1.8 million. Cash used in financing activities was $10.0 million
and $53.8 million in 1996 and 1995, respectively. In 1995, the Partnership
repaid $59 million on its mortgage on the Bank Hotels primarily from proceeds
from the sale of the Dallas Hotel and from a $10 million advance from Host
Marriott under the Bank Guaranty.
No cash was distributed to the partners during the First Two Quarters 1998,
or the First Two Quarters 1997. No cash was distributed to the Partners for
the years ended December 31, 1997, 1996 and 1995. Since all cash flow from the
Partnership's hotels is utilized to pay Partnership obligations, no cash is
expected to be available for distribution to the partners for the foreseeable
future.
Capital Expenditures
It is anticipated that shortfalls in the property improvement fund for the
six hotels financed with the Bank Loan, as defined below, will occur in 1999.
The General Partner is currently working to resolve the expected shortfalls.
Debt
The Partnership's financing needs are funded through loan agreements with
(i) The Mitsui Trust and Banking Company (the "Bank Lender"), (ii) Host
Marriott and its affiliates, and (iii) Marriott International and its
affiliates.
Total Partnership interest expense increased 4% to $11.9 million for the
first two quarters 1998, when compared to the same period in 1997 primarily
due to increased interest expense on the mortgage loan (the "Bank Loan"). The
weighted average interest rate on the Bank Loan was 8.3% for the first two
quarters 1998, as compared to 7.4% for the comparable period in 1997.
On June 22, 1998, the Partnership made the required Bank Loan principal
payment of $3.0 million. Thus, as of June 22, 1998, the Bank Loan principal
balance is $165.9 million.
The Bank Loan was scheduled to mature on December 22, 1998; however, an
additional one-year extension was available. As required under the Bank Loan,
the Partnership provided notice of its intent to extend the loan along with
adequate debt service coverage tests to extend the Bank Loan maturity to
December 22, 1999.
Pursuant to the terms of the restated Bank Loan, operating profit, as
defined, and the subordinated portion of the base management fee in excess of
debt service for the six hotels financed with the Bank Loan must be held in a
collateral account with the lender. After the end of each fiscal year, excess
cash remaining in the collateral account is applied to repay Bank Loan
principal, advances under the $26 million debt service guaranty (the "Bank
Guaranty") provided by Host Marriott and, depending upon the unadvanced
balance of the Bank Guaranty, deferred base management fees to Marriott
International. As a result, on February 23, 1998, the Partnership repaid $3.8
million in principal on the Bank Loan, $2.2 million to Host Marriott on the
Bank Guaranty, and $1.5 million to Marriott International for deferred base
management fees using amounts in the collateral account. As of June 19, 1998,
the balance of the Bank Loan was $168.9 million, $21.6 million was available
under the Bank Guaranty, and deferred base management fees payable to Marriott
International were $2.4 million.
In connection with the restructuring of the Bank Loan, Host Marriott agreed
to provide an additional guaranty (the "Interest Guaranty") for $12 million to
cover any shortfalls in the payment of interest after application of all cash
flow available for debt service. Advances with respect to interest will be
made first under the Interest Guaranty and then under the Bank Guaranty or an
equivalent "backup" guaranty provided by Marriott International. No amounts
have been advanced under the Interest Guaranty. Additionally, in early 1998,
in accordance with the terms of the Interest Guaranty, the amount available
was reduced from $8 million to $4 million.
PHLP Supp-46
<PAGE>
Host Marriott advanced funds (the "Host FF&E Loans") to the Partnership from
1991 through 1994 for the purchase of FF&E. The loans are secured by payments
from Marriott International under leases from the Partnership for FF&E
replacements. On February 9, 1998, Marriott International repaid $1.5 million
of principal to the Partnership on these leases, and the Partnership
subsequently repaid $1.4 million of principal to Host Marriott on the Host
FF&E Loans. Therefore, as of June 19, 1998, the balance of the Host FF&E Loans
was $1.5 million.
INFLATION
For the three fiscal years ended December 31, 1997, the rate of inflation
has been relatively low and, accordingly, has not had a significant impact on
the Partnership's revenues and net losses before extraordinary items. However,
the Hotel's room rates and occupancy levels are sensitive to inflation, and
the amount of the Partnership's interest expense under 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, Host Marriott Corporation, the General Partner, has
invested in implementing new accounting systems which are Year 2000 compliant.
Accordingly, the General Partner believes that future costs associated with
Year 2000 issues will be minimal and not material to the Partnership's
financial statements.
However, the Partnership does rely upon accounting software used by the
Managers of its properties to obtain financial information. The General
Partner believes that the managers have begun to implement changes to the
property specific software to ensure the software will function properly in
the Year 2000 and does not expect to incur significant costs related to these
modifications.
PHLP Supp-47
<PAGE>
FINANCIAL STATEMENTS
PHLP Supp-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF POTOMAC HOTEL LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Potomac Hotel Limited
Partnership, a Delaware limited partnership, (the "Partnership") as of
December 31, 1997 and 1996, and the related statements of operations, changes
in partners' deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements referred to below are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Potomac Hotel Limited
Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.,
March 4, 1998
PHLP Supp-49
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net.............................. $ 154,253 $ 155,412
Due from Marriott International, Inc. and affiliates..... 10,173 10,870
Restricted cash.......................................... 6,351 4,507
Property improvement funds............................... 3,792 3,141
Deferred financing costs, net............................ 473 709
Cash and cash equivalents................................ 3,182 5,228
--------- ---------
$ 178,224 $ 179,867
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt.......................................... $ 172,667 $ 179,837
Due to Host Marriott Corporation and affiliates........ 125,549 124,370
Incentive and base management fees due to Marriott
International, Inc.................................... 25,868 17,172
Due to Marriott International, Inc. and affiliates..... 398 1,956
Accrued interest and other liabilities................. 864 829
--------- ---------
Total Liabilities.................................. 325,346 324,164
--------- ---------
PARTNERS' DEFICIT
General Partner
Capital contribution................................. 172,093 172,093
Cumulative net losses................................ (20,408) (20,380)
Cumulative withdrawals............................... (186,527) (186,527)
--------- ---------
(34,842) (34,814)
--------- ---------
Limited Partners
Capital contributions, net of offering costs......... 15,600 15,600
Cumulative net losses................................ (127,880) (125,083)
--------- ---------
(112,280) (109,483)
--------- ---------
Total Partners' Deficit............................ (147,122) (144,297)
--------- ---------
$ 178,224 $ 179,867
========= =========
</TABLE>
See Notes to Financial Statements.
PHLP Supp-50
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)................................ $ 50,323 $ 45,853 $ 50,598
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation.................................. 8,430 5,473 5,912
Incentive management fee...................... 8,408 7,477 8,651
Base management fee........................... 4,515 4,300 4,597
Property taxes................................ 3,071 3,081 4,082
Ground rent, insurance and other.............. 4,843 3,624 3,914
-------- -------- --------
29,267 23,955 27,156
-------- -------- --------
OPERATING PROFIT................................ 21,056 21,898 23,442
Interest expense.............................. (24,596) (24,582) (29,431)
Other revenue................................. 715 843 1,448
Gain on sale of Dallas Hotel.................. -- -- 24,586
-------- -------- --------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM..... (2,825) (1,841) 20,045
EXTRAORDINARY ITEM
Gain on forgiveness of deferred fees.......... -- -- 146,303
-------- -------- --------
NET (LOSS) INCOME............................... $ (2,825) $ (1,841) $166,348
======== ======== ========
ALLOCATION OF NET (LOSS) INCOME
General Partner............................... $ (28) $ (18) $ 7,612
Limited Partners.............................. (2,797) (1,823) 158,736
-------- -------- --------
$ (2,825) $ (1,841) $166,348
======== ======== ========
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM PER
LIMITED PARTNER UNIT (1,800 UNITS)............. $ (1,554) $ (1,013) $ 7,720
======== ======== ========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT
(1,800 UNITS).................................. $ (1,554) $ (1,013) $ 88,187
======== ======== ========
</TABLE>
See Notes to Financial Statements.
PHLP Supp-51
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1994..................... $(44,408) $(266,396) $(310,804)
Net income................................... 7,612 158,736 166,348
Capital contribution from forgiveness of
debt........................................ 2,000 -- 2,000
-------- --------- ---------
Balance, December 31, 1995..................... (34,796) (107,660) (142,456)
Net loss..................................... (18) (1,823) (1,841)
-------- --------- ---------
Balance, December 31, 1996..................... (34,814) (109,483) (144,297)
Net loss..................................... (28) (2,797) (2,825)
-------- --------- ---------
Balance, December 31, 1997..................... $(34,842) $(112,280) $(147,122)
======== ========= =========
</TABLE>
See Notes to Financial Statements.
PHLP Supp-52
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................. $(2,825) $(1,841) $166,348
Extraordinary item................................ -- -- 146,303
------- ------- --------
Net (loss) income before extraordinary item....... (2,825) (1,841) 20,045
Noncash items:
Deferred incentive and base management fees...... 8,696 7,737 9,435
Depreciation..................................... 8,430 5,473 5,912
Interest on amounts due to Host Marriott
Corporation and affiliates...................... 7,084 6,892 6,235
Amortization of financing costs as interest...... 236 237 310
Loss on disposition of property and equipment.... -- 136 103
Interest on amounts due to an affiliate of
Marriott International, Inc..................... -- 29 --
Gain on sale of the Dallas Hotel................. -- -- (24,586)
Changes in operating accounts:
Due from/to Marriott International, Inc. and
affiliates...................................... (985) 541 (2,719)
Accrued interest and other liabilities........... 250 180 77
------- ------- --------
Cash provided by operating activities........... 20,886 19,384 14,812
------- ------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net.......... (7,271) (9,924) (4,976)
Change in property improvement funds.............. (651) (63) (2,590)
Working capital received from (funded to) Marriott
International, Inc. and affiliates, net.......... 168 (262) 400
Net proceeds from sale of the Dallas Hotel........ -- -- 44,403
------- ------- --------
Cash (used in) provided by investing activities.. (7,754) (10,249) 37,237
------- ------- --------
FINANCING ACTIVITIES
Principal repayments on mortgage debt............. (7,170) (6,163) (59,000)
(Repayments to) advances from Host Marriott
Corporation and affiliates, net.................. (6,120) (4,670) 3,319
Change in restricted cash......................... (1,844) (1,559) (2,948)
(Repayments to) advances from affiliates of
Marriott International, Inc...................... (44) (37) 350
Collection of amounts due from Marriott
International, Inc............................... -- 2,383 5,755
Payment of financing costs........................ -- -- (1,112)
Increase in amounts due from Marriott
International, Inc............................... -- -- (157)
------- ------- --------
Cash used in financing activities................ (15,178) (10,046) (53,793)
------- ------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.............. (2,046) (911) (1,744)
CASH AND CASH EQUIVALENTS at beginning of year..... 5,228 6,139 7,883
------- ------- --------
CASH AND CASH EQUIVALENTS at end of year........... $ 3,182 $ 5,228 $ 6,139
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......... $17,046 $17,528 $ 22,555
======= ======= ========
NONCASH FINANCING ACTIVITIES:
Forgiveness of obligations due to General Partner
accounted for as a capital contribution........... $ -- $ -- $ 2,000
======= ======= ========
</TABLE>
See Notes to Financial Statements.
PHLP Supp-53
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Potomac Hotel Limited Partnership (the "Partnership") was formed in Delaware
on December 17, 1981, to acquire, develop, own, and operate up to 11 Hotels
(the "Hotels"). On July 16, 1982, 1,800 limited partnership interests
("Units") were sold pursuant to a public offering at $10,000 per unit. The
Partnership commenced operations on July 17, 1982. The Hotels are operated as
part of the Marriott full-service hotel system and are managed by Marriott
International, Inc. ("Marriott International") or Marriott Hotel Services,
Inc. ("MHSI"), which is a subsidiary of Marriott International, (collectively
the "Managers"). The sole general partner of the Partnership is Host Marriott
Corporation ("Host Marriott" or the "General Partner").
The General Partner contributed five existing hotels (including one
undergoing substantial renovation), three hotels under construction, and sites
for three hotels planned to be developed to the Partnership in exchange for
$186,527,000 and a 1% General Partner interest. These funds were borrowed by
the Partnership under a loan agreement (see Note 6). The Partnership completed
the development and construction of its final hotel during 1984. On January
31, 1986, the Partnership sold its 307-room Denver West Hotel to Host Marriott
in accordance with provisions of the loan agreement and the partnership
agreement. As discussed in Note 6, foreclosures on the Raleigh, Tampa, and
Point Clear Hotels occurred in 1993 and 1994. In 1994, the Partnership
repurchased the Raleigh and Tampa Hotels using proceeds from two loans
advanced by a subsidiary of Host Marriott. On August 22, 1995, the Partnership
sold its Dallas Hotel to a wholly-owned subsidiary of Host Marriott and used
the proceeds to repay a portion of its mortgage debt in connection with the
restructuring of the Bank Loan, as described in Note 6. As of December 31,
1997, the Partnership owned and operated eight hotels located in the following
cities: Albuquerque, New Mexico; Greensboro, North Carolina; Houston, Texas;
Miami, Florida; Raleigh, North Carolina; Scottsdale, Arizona; Seattle,
Washington; and Tampa, Florida.
Partnership Allocations and Distributions
The partnership agreement provides for the distribution of cash and the
allocation, for tax purposes, of operating income, gains and losses, and
deductions and credits among the partners. Except for all cash proceeds
attributable to the replacement of furniture, fixtures and equipment ("FF&E")
as well as depreciation and interest on indebtedness (all of which are
specially allocated to the General Partner by the partnership agreement),
profits and losses are allocated between the partners as follows:
<TABLE>
<CAPTION>
PROFITS LOSSES
------- ------
<S> <C> <C>
General Partner............................................ 25% 1%
Limited Partners........................................... 75% 99%
</TABLE>
Any future distributions of cash will be made in the same percentages that
profits and losses are allocated.
Gains (for financial statement purposes) from the sale or other disposition
of Partnership property are allocated (i) first, to the partners with negative
capital accounts in proportion to their capital investment balances and (ii)
thereafter 25% to the General Partner and 75% to the limited partners.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting,
and its fiscal year coincides with the calendar year.
PHLP Supp-54
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreements discussed
in Note 8, the Partnership is required to provide the Managers with working
capital and supplies to meet the operating needs of the Hotels. The Managers
convert cash advanced by the Partnership into other forms of working capital
consisting primarily of operating cash, inventories, and trade receivables and
payables which are maintained and controlled by the Managers. Upon the
termination of the agreements, it is expected that the working capital and
supplies will be converted into cash and returned to the Partnership or
transferred to a subsequent owner or operator for consideration. As a result
of these conditions, the individual components of working capital and supplies
controlled by the Managers are not reflected in the accompanying balance
sheet.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Managers. House profit
reflects hotel operating results which flow to the Partnership as property
owner and represents gross hotel sales less property-level expenses, excluding
depreciation, base and incentive management fees, property taxes, ground rent,
insurance, and certain other costs, which are disclosed separately in the
statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $100.2 million, $97.5 million and $102.6 million for the year
ended December 31, 1997, 1996 and 1995, respectively and will have no impact
on operating profit or net income.
Property and Equipment
Property and equipment is recorded at the cost incurred directly by the
Partnership or at the cost incurred by the General Partner in the case of
those assets contributed by the General Partner. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
as follows:
<TABLE>
<S> <C>
Buildings and improvements..................................... 40 years
Leasehold improvements......................................... 40 years
Furniture and equipment........................................ 4-10 years
</TABLE>
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is
adjusted to fair market value.
PHLP Supp-55
<PAGE>
Deferred Financing Costs
Deferred financing costs consist of legal and accounting fees and other
costs incurred in connection with obtaining Partnership financing. Financing
costs are amortized using the straight-line method, which approximates the
effective interest rate method, over the life of the mortgage debt. As of
December 31, 1997 and 1996, deferred financing costs totaled $1,256,000.
Accumulated amortization of deferred financing costs as of December 31, 1997
and 1996, was $783,000 and $547,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for federal and state income taxes has not been made in the
accompanying financial statements because the Partnership does not pay income
taxes but, rather, allocates profits and losses to the individual partners.
Significant differences exist between the net income or loss for financial
reporting purposes and the net income or loss as reported in the Partnership's
tax return. These differences are due primarily to the use for tax purposes of
differing useful lives and accelerated depreciation methods for assets,
differing bases in contributed capital, and differing timings of the
recognition of management fee expenses. As a result of these differences, the
excess of the net liabilities reported on a tax basis over the net liabilities
reported in the accompanying financial statements was $36 million as of
December 31, 1997, and $46 million as of December 31, 1996.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior years financial statements
to conform to the current year presentation.
NOTE 3. REVENUES
Hotel revenues consist of the following hotel operating results for the
three years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
HOTEL SALES
Rooms.......................................... $ 95,761 $ 89,916 $ 94,654
Food and beverage.............................. 43,385 42,111 46,605
Other.......................................... 11,348 11,315 11,977
-------- -------- --------
150,494 143,342 153,236
-------- -------- --------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................ 23,556 22,619 23,443
Food and beverage............................ 33,231 32,863 35,569
Other hotel operating expenses................. 43,384 42,007 43,626
-------- -------- --------
100,171 97,489 102,638
-------- -------- --------
HOTEL REVENUES................................... $ 50,323 $ 45,853 $ 50,598
======== ======== ========
</TABLE>
PHLP Supp-56
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land..................................................... $ 10,444 $ 10,444
Building and improvements................................ 194,661 191,449
Furniture and equipment.................................. 26,758 22,699
-------- --------
231,863 224,592
Less accumulated depreciation............................ (77,610) (69,180)
-------- --------
$154,253 $155,412
======== ========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
DEBT AND OTHER LIABILITIES
Mortgage debt............. $ 172,667 $ 173,474 $ 179,837 $ 177,695
Due to Host Marriott
Corporation and
affiliates............... 122,356 40,803 118,280 41,313
Due to Marriott
International, Inc. and
affiliates............... 26,168 3,208 17,515 2,086
</TABLE>
The estimated fair value of mortgage debt is based on the expected future
debt service payments, discounted at estimated market rates adjusted for the
presence of debt service guaranties. "Due to Host Marriott Corporation and
affiliates" and "Due to Marriott International, Inc. and affiliates" are
valued based on the expected future payments from operating cash flow
discounted at risk adjusted rates.
NOTE 6. DEBT
Host Marriott Guaranty
The Partnership originally entered into a loan agreement dated January 14,
1982, (the "Original Loan") which funded up to $348 million to finance the
acquisition and development of the Hotels. In connection with the Original
Loan, the General Partner agreed to advance up to $42.6 million to cover debt
service shortfalls (the "Host Marriott Guaranty"). The General Partner
advanced a total of $33.4 million under the Host Marriott Guaranty. The
Partnership repaid $22.3 million and $5 million from the proceeds of the S&L
Loan and the Bank Loan, respectively, as defined below. Therefore, as of
December 31, 1997, $6.1 million plus accrued interest was outstanding related
to the Host Marriott Guaranty.
Savings and Loan Association Loan
On February 28, 1985, the Partnership borrowed $103 million (the "S&L Loan")
from a savings and loan association (the "S&L Lender") to refinance the loans
on three of its hotels located in Raleigh, North Carolina; Tampa, Florida; and
Point Clear, Alabama (the "S&L Hotels") and to repay a portion of the Host
Marriott Guaranty ($22.3 million). The S&L Loan, with an original maturity of
March 1, 2000, bore interest at 2.75% over the monthly average rate on six-
month Treasury Bills (subject to a 9% floor and a 16% ceiling). For the years
1989 through 1992, the S&L Lender, the Manager, and the General Partner agreed
to several modifications including (i) reductions in the interest rate, (ii)
reductions in the base management fees paid to the Manager, (iii) increases in
the debt service guaranty provided by Host Marriott (the "S&L Guaranty"), and
(iv) Host Marriott's subordination of cash flow generated from the Host
Marriott owned 66-room addition to the Raleigh Hotel.
PHLP Supp-57
<PAGE>
Bank Loan
On December 22, 1987, the Partnership borrowed $245 million (the "Bank
Loan") from The Mitsui Trust and Banking Company (the "Bank Lender") to repay
the outstanding indebtedness on seven of its Hotels (the "Bank Hotels"), a
portion of the Host Marriott Guaranty ($5.0 million), and related transaction
costs. The Bank Loan bore interest at an effective fixed rate of 10.37% and
required monthly interest payments with the entire principal balance due at
maturity.
The Bank Loan was secured by first priority liens on the Bank Hotels and all
related assets, including working capital and supplies advanced to the Manager
for each Bank Hotel. The Bank Loan established a priority for distributions of
cash from operations, prohibited the Partnership from creating any other liens
on the Bank Hotels, and restricted the Partnership from incurring certain
other indebtedness. The Bank Loan was non-recourse to the Partnership and its
partners, but was supported by a $26 million Host Marriott guaranty (the "Bank
Guaranty") and an equivalent Marriott International "backup" guaranty (to be
funded only if Host Marriott did not fund its guaranty).
The Bank Loan matured on December 22, 1994, with a principal balance of $245
million, and was not repaid at that time because the Partnership had
insufficient funds to do so. On December 22, 1994, the Partnership entered
into a forbearance agreement with the Bank Lender under which the Bank Lender
agreed not to exercise its rights and remedies for nonpayment of the Bank Loan
on the maturity date until February 24, 1995. The forbearance agreement was
subsequently extended until August 22, 1995, to allow the Partnership time to
solicit the consent of its limited partners regarding the sale of the Dallas
Hotel to a subsidiary of the General Partner in connection with the
restructuring of the Bank Loan. In exchange for the Bank Lender's agreement to
forbear, the Partnership made monthly interest payments at the one-month
London Interbank Offered Rate ("LIBOR") rate plus two percentage points for
the period December 22, 1994, through June 21, 1995, and at the one-month
LIBOR rate plus two-and-one-quarter percentage points for the period June 22,
1995, through August 21, 1995.
Restructured Bank Loan
On August 22, 1995, the General Partner and the Bank Lender successfully
completed the restructuring and extension of the Bank Loan. The principal
terms of the restructured Bank Loan are as follows: (i) the General Partner
advanced $10 million under the Bank Guaranty, which was used to pay down
principal on the Bank Loan (advances under the Bank Guaranty bear interest at
an annual rate equal to the prime rate, as announced by Bankers Trust
Company); (ii) the Partnership used $44 million of proceeds from the sale of
the Dallas Hotel to repay principal on the Bank Loan; (iii) the maturity of
the Bank Loan was extended to December 22, 1997, with two additional one-year
extensions available if certain debt service coverage tests are met; (iv)
semi-annual payments of interest at the six-month LIBOR rate plus 1.5
percentage points and annual payments of principal of $5 million during the
first three years of the restructured loan and $6 million during any extension
periods; (v) the General Partner's liability under the Bank Guaranty remained
at $26 million (subject to a credit for the advance of $10 million described
in (i) above); (vi) Marriott International continued its "backup" guaranty (
the "Marriott International Backup Guaranty"), under which Marriott
International agreed to advance any amounts not advanced by Host Marriott
under the Bank Guaranty; (vii) Host Marriott (but not Marriott International)
agreed to an additional guaranty (the "Interest Guaranty") for $12 million to
cover any shortfalls in the payment of interest after application of all cash
flow available for debt service (advances in respect to interest will be made
first under the Interest Guaranty then under the Bank Guaranty or the Marriott
International Backup Guaranty); (viii) the Interest Guaranty is to be reduced
each year by $4 million less any Interest Guaranty advances as of the date
such reduction is to occur and the Interest Guaranty will be increased by $4
million for each extension period, if applicable (the remaining liability
under the Bank Guaranty and the Marriott International Backup Guaranty in any
event must at least be equal to the scheduled amortization payments due during
the extension periods); (ix) all Partnership cash relating to the Bank Hotels
(including the Bank Hotels property improvement fund and the subordinated base
management fees) collateralize the Bank Loan; (x) the Bank Lender was paid a
fee of $573,000 for the successful restructuring of the Bank Loan; and (xi)
the Bank
PHLP Supp-58
<PAGE>
Lender required Marriott International to terminate the management agreement
related to the Bank Hotels (the "Marriott International Management Agreement")
and to forgive the deferred balances of base and incentive management fees
outstanding as of December 31, 1994. The Partnership recorded an extraordinary
gain of $146.3 million in 1995 to recognize the gain which resulted from the
forgiveness of the deferred fees. In addition, the Bank Lender required a
portion of the base management fee equal to 1% of gross Bank Hotel sales and a
portion of the property improvement fund contribution equal to 1% of gross
Bank Hotel sales to be subordinated to the payment of debt service.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June
19, 1997, the Partnership provided notice to the lender of its intent to
extend the loan along with a debt service coverage ratio calculation with a
required ratio greater than 1.2 and successfully extended the Bank Loan
maturity to December 22, 1998. An additional one-year extension is available
under the Bank Loan, and in order to extend the loan to December 22, 1999, the
Partnership must provide notice of its intent to extend the loan along with
adequate debt service coverage tests to the lender by June 22, 1998. Based on
current debt service coverage tests, the Partnership expects to be able to
exercise the additional one-year extension of the loan upon its maturity on
December 22, 1998.
Pursuant to the terms of the restated Bank Loan, operating profit, as
defined, and the subordinated portion of the base management fee from the Bank
Hotels in excess of debt service must be held in a collateral account with the
Bank Lender. After the end of each fiscal year, excess cash remaining in the
collateral account is applied as follows: (i) 50% to repay Bank Loan principal
and (ii) 50% to pay principal and interest on advances under the Bank
Guaranty, until the unadvanced portion of the Bank Guaranty is replenished to
a balance of $20.0 million. Thereafter, excess cash in the collateral account
is applied as follows: (i) 50% to repay Bank Loan principal, (ii) 25% to pay
principal and interest on advances under the Bank Guaranty, and (iii) 25% to
repay deferred base management fees to Marriott International.
As of December 31, 1997 and 1996, the principal balance of the Bank Loan was
$172.7 million and $179.8 million, respectively. As of December 31, 1997 and
1996, $8.5 million and $10.0 million including accrued interest, respectively,
was outstanding pursuant to the Bank Guaranty. On February 23, 1998, in
accordance with the cash flow priorities described in the preceding paragraph,
the Partnership repaid $3.8 million in principal on the Bank Loan, $2.2
million to Host Marriott on the Bank Guaranty, and $1.5 million to Marriott
International for deferred base management fees using amounts in the
collateral account. Therefore, as of February 23, 1998, the balance on the
Bank Loan was $168.9 million, $21.6 million was available under the Bank
Guaranty, and deferred base management fees payable to Marriott International
were $2.1 million. The weighted average interest rate on the Bank Loan was
7.46% for 1997, 7.26% for 1996, and 7.89% for 1995. At December 31, 1997, the
interest rate on the Bank Loan was 8.25%. The weighted average interest rate
on the Bank Guaranty was 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995.
At December 31, 1997, the interest rate on the Bank Guaranty was 8.50%.
No amounts were advanced under the Interest Guaranty during 1997.
Additionally on December 22, 1997, in accordance with the terms of the
Interest Guaranty, the amount available was increased from $4 million to $8
million, and in early 1998, the amount available was reduced to $4 million.
Raleigh and Tampa Loans
The Partnership repurchased the Raleigh Hotel and the Tampa Hotel on May 20,
1994, and July 11, 1994, respectively, with funding provided by non-recourse
loans to the Partnership from a wholly-owned subsidiary of Host Marriott.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover
the $18.7 million purchase price and closing costs. Under the terms of the
loan, $14.0 million of principal ("Raleigh Note A") bears interest at a fixed
rate of 10% and requires quarterly payments of interest and principal, based
on a 25-year amortization schedule, with a balloon payment due at maturity on
May 20, 2001. The remaining principal of $5.4 million
PHLP Supp-59
<PAGE>
("Raleigh Note B") bears interest at a fixed rate of 11.5% and matures on May
20, 2006. Cash flow from the Raleigh Hotel is used to pay debt service in the
following order of priority: (i) interest on Raleigh Note A, (ii) principal on
Raleigh Note A, and (iii) interest on Raleigh Note B. The remaining cash flow
is used to pay principal on Raleigh Note B. If cash flow is insufficient to
pay interest on Raleigh Note B, the unpaid interest rolls into the Raleigh
Note B principal balance annually. As of December 31, 1997 and 1996, the
Raleigh Note A principal balance was $13.5 million, and the Raleigh Note B
principal balance was $3.8 million and $4.8 million, respectively.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan,
$10.0 million of principal ("Tampa Note A") bears interest at a fixed rate of
10% and requires quarterly payments of interest and principal, based on a 25-
year amortization schedule, with a balloon payment due at maturity on July 11,
2001. The remaining principal of $6.3 million ("Tampa Note B") bears interest
at a fixed rate of 11.5% and matures on July 11, 2006. Cash flow from the
Tampa Hotel is used to pay debt service in the following order of priority:
(i) interest on Tampa Note A, (ii) principal on Tampa Note A, and (iii)
interest on Tampa Note B. The remaining cash flow is used to pay principal on
Tampa Note B. If cash flow is insufficient to pay interest on Tampa Note B,
the unpaid interest rolls into the Tampa Note B principal balance annually. As
of December 31, 1997 and 1996, the Tampa Note A principal balance was $9.7
million, and the Tampa Note B principal balance was $5.4 million and $6.1
million, respectively.
Both of the Raleigh and Tampa loans are secured by a first priority lien on
the building; land (the Partnership's leasehold interest in the case of the
Tampa Hotel); furniture, fixtures and equipment; and working capital and
supplies advanced to the Manager.
As of December 31, 1997, required principal payments related to the Raleigh
and Tampa Loans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998.............................................................. $ 325
1999.............................................................. 357
2000.............................................................. 393
2001.............................................................. 22,125
2002.............................................................. --
Thereafter........................................................ 9,200
-------
$32,400
=======
</TABLE>
Furniture, Fixtures and Equipment Loans
Prior to December 22, 1994, the Bank Loan and Marriott International
Management Agreement, as defined in Note 8, required the Partnership to
deposit funds in an escrow account (based on a percentage, ranging from 1% to
5%, of Bank Hotel sales) to be used to replace FF&E at the Bank Hotels.
Additionally, the Bank Loan required the General Partner to fund up to $30
million of these reserves, if necessary (the "FF&E Guaranty"). The Marriott
International Management Agreement contained a similar reserve requirement for
the S&L Hotels.
Host Marriott advanced funds (the "Host FF&E Loans") for the purchase of
FF&E for the Bank Hotels from 1991 through 1994 pursuant to the FF&E Guaranty
and also provided loans for the purchase of FF&E at the S&L Hotels for 1991
and 1992. The Host FF&E Loans bear interest at the prime rate and are to be
repaid in annual installments over six years. As of December 31, 1997 and
1996, $2.9 million and $5.2 million was outstanding under the Host FF&E Loans.
The weighted average interest rate was 8.44% for 1997, 8.27% for 1996 and
8.85% for 1995. At December 31, 1997, the interest rate was 8.50%.
PHLP Supp-60
<PAGE>
As of December 31, 1997, required principal payments related to the Host
FF&E Loans are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998............................................................... $2,600
1999............................................................... 300
------
$2,900
======
</TABLE>
Subsequent to year-end, the Partnership repaid $1.4 million of principal to
Host Marriott on the Host FF&E Loans, thereby reducing the balance on the Host
FF&E Loans to $1.5 million.
These loans are non-recourse to the Partnership and its partners and are
secured by payments from Marriott International under the FF&E Leases, as
defined in Note 8. Interest expense on these loans is offset by lease payments
received under the Marriott International FF&E Leases. As of December 31, 1997
and 1996, Marriott International owed $2.9 million plus accrued interest to
the Partnership pursuant to these agreements with the final installment due on
December 31, 1999. Subsequent to year-end, Marriott International repaid $1.5
million of principal to the Partnership on the Marriott International FF&E
Leases.
Since 1995 the Bank Hotels' FF&E funding requirements have been met through
contributions to a property improvement fund for the combined Bank Hotels.
Since its acquisition date in 1994, the FF&E funding requirements for the
Tampa Hotel have been met through the establishment of a property improvement
fund for the Hotel. However, the Raleigh Hotel required additional funds, as
described below. See Note 8 for further details on the property improvement
funds.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and MHSI each provided an unsecured loan to the
Partnership in the amount of $350,000 ("Raleigh $350,000 FF&E Loans") to fund
costs of a softgoods rooms renovation at the Raleigh Hotel in excess of
amounts available in the Hotel's property improvement fund. Each Raleigh
$350,000 FF&E Loan was fully advanced to the Partnership by January 24, 1995.
The Raleigh $350,000 FF&E Loans bear interest at the prime rate. Payments on
the loans are made each accounting period from a portion of the property
improvement fund contribution equal to 1% of gross Hotel sales and are applied
first to interest and then to principal. The Raleigh $350,000 FF&E Loans are
due and payable on the earlier of the termination of the Raleigh management
agreement or December 31, 2005. Interest accrued in 1995 was added to the
principal balance of each of the loans. As of December 31, 1997 and 1996,
$298,000 and $342,000, respectively, was due on each of the Raleigh $350,000
FF&E Loans. The weighted average interest rate was 8.44% for 1997, 8.27% for
1996, and 8.85% for 1995. At December 31, 1997, the interest rate on the
Raleigh $350,000 FF&E Loans was 8.50%.
In 1996, Host Marriott provided another unsecured loan to the Partnership in
the amount of $700,000 ("Raleigh $700,000 FF&E Loan") to fund costs of a
casegoods rooms renovation at the Raleigh Hotel in excess of the amounts
available in the Hotel's property improvement fund. The Raleigh $700,000 FF&E
Loan was fully advanced to the Partnership by December 9, 1996. The Raleigh
$700,000 FF&E Loan bears interest at the prime rate plus 0.5%. Payments on the
loan are made each accounting period from a portion of the property
improvement fund contribution equal to 1% of gross Hotel sales and are applied
first to interest and then to principal. The Raleigh $700,000 FF&E Loan is due
and payable on the earlier of the termination of the Raleigh management
agreement or December 31, 2003. As of December 31, 1997 and 1996, $571,000 and
$658,000, respectively, was due on the Raleigh $700,000 FF&E Loan. The
weighted average interest rate was 8.94% for 1997 and 8.75% for 1996. At
December 31, 1997, the interest rate was 9.00%.
Other Loans
As of December 31, 1997, the Partnership also owed Host Marriott $88.8
million including accrued interest, as follows: (i) $64.4 million related to
the original Host Marriott Guaranty and the S&L Guaranty; (ii) $8.5
PHLP Supp-61
<PAGE>
million related to the Bank Guaranty; (iii) $5.4 million related to working
capital advances; (iv) $8.9 million for capital improvements at the Point
Clear, Alabama Hotel; and (v) $1.6 million from Host Marriott's subordination
of cash flow from the 66-room Raleigh addition. All of the above-mentioned
advances bear interest at the prime rate as announced by Bankers Trust Company
with a weighted average interest rate of 8.44% for 1997, 8.27% for 1996, and
8.85% for 1995. At December 31, 1997, the interest rate was 8.50%.
All Partnership indebtedness, including the Bank Loan, guaranty advances,
other General Partner loans, and deferred base and incentive management fees,
which is outstanding upon dissolution of the Partnership must be repaid before
any cash distributions can be made to the partners.
NOTE 7. LEASES
The Partnership's five ground leases have lease terms expiring in 2006
(Tampa), 2008 (Greensboro and Miami), 2009 (Houston), and 2032 (Albuquerque)
and contain one or more renewal options that allow the Partnership to extend
the leases from 15 to 50 additional years. The leases generally provide for
minimum base rentals as well as additional ground rentals which are calculated
as a percentage of sales in excess of minimum base rentals. Total ground
rental expense for the three years ended December 31 consisted of (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Minimum rentals..................................... $1,548 $1,548 $1,548
Additional rentals based on sales................... 719 706 664
------ ------ ------
$2,267 $2,254 $2,212
====== ====== ======
</TABLE>
Minimum rentals for the five Hotels operating under noncancelable leases for
real estate for future years (exclusive of percentage rentals) are as follows
(in thousands):
<TABLE>
<CAPTION>
MINIMUM
YEAR RENTAL
---- -------
<S> <C>
1998............................................................. $ 1,548
1999............................................................. 1,548
2000............................................................. 1,548
2001............................................................. 1,548
2002............................................................. 1,548
Thereafter....................................................... 13,216
-------
Total minimum lease payments..................................... $20,956
=======
</TABLE>
NOTE 8. MANAGEMENT AGREEMENTS
Marriott International Management Agreement
On July 16, 1982, the Partnership entered into a management agreement with
Marriott International (the "Marriott International Management Agreement") to
manage and operate the Hotels for a term of 25 years from the opening of each
Hotel with renewal terms, at the option of Marriott International, of up to an
additional 50 years. The Marriott International Management Agreement provided
for payment of base management fees equal to a percentage of sales ranging
from 7% to 8% depending on the length of time the Hotel had been open as well
as incentive management fees equal to a percentage of hotel operating profit,
as defined, ranging from 20% to 90% depending on the level of returns from
operating profit paid to the Partnership. In connection with obtaining the
Bank Loan, the Marriott International Management Agreement was amended on
December 22, 1987, with respect to the Bank Hotels to provide for the payment
of base management fees only after payment of debt service on the Bank Loan.
If funds available after debt service were insufficient to pay all base
management fees related to the Bank Hotels, the fees were deferred without
interest and payable in future years. The Partnership and the S&L Lender also
modified the Marriott International Management Agreement with respect to the
S&L Hotels, providing for reductions in the base management fees for 1989
through 1993. As of December 31, 1994,
PHLP Supp-62
<PAGE>
the balance of deferred base management fees was $47.5 million. Payment of the
incentive management fees was dependent upon the availability of cash flow
after debt service, and incentive management fees were payable only after
repayment of certain debt service guaranty advances and certain priority
returns to the Partnership expressed as a percentage of limited partner
invested equity. Through December 31, 1994, no incentive management fees had
been paid since inception. As of December 31, 1994, deferred incentive
management fees were $98.8 million. In connection with the Bank Loan
restructuring in 1995, the Marriott International Management Agreement was
terminated and the deferred balances of base and incentive management fees
outstanding as of December 31, 1994, were forgiven. The Partnership recorded
an extraordinary gain of $146.3 million in 1995 to recognize the gain which
resulted from the forgiveness of the deferred fees.
Until the termination of the Marriott International Management Agreement,
Marriott International entered into leases (the "FF&E Leases") from the
Partnership for all FF&E replacements for terms of up to six years. Lease
payments represent an amount approximately equal to the principal
amortization, interest, and fees associated with indebtedness incurred by the
Partnership to finance the replacements and any sales and use taxes, personal
property taxes, insurance premiums, and additional costs incurred by the
Partnership in connection with the acquisition and use of such replacements.
As of December 31, 1997 and 1996, Marriott International was obligated to pay
$2.9 million and $5.2 million, respectively, to the Partnership under these
agreements.
Bank Hotels Management Agreement
Effective December 31, 1994, in connection with the Bank Loan restructuring,
the Partnership entered into a new management agreement (the "Bank Hotels
Management Agreement") with Marriott International. This agreement provides
for an initial term of 25 years from the opening date, as specified in the
agreement, of each Bank Hotel with renewal terms at the option of Marriott
International of up to an additional 50 years. The Bank Hotels Management
Agreement provides Marriott International with a base management fee of 3% of
gross Bank Hotel sales. In accordance with the restructured Bank Loan, a
portion of the base management fee equal to 1% of gross Bank Hotel sales (the
"Subordinated Base Management Fee") is subordinate to the payment of debt
service on the Bank Loan and repayment of certain advances under the Bank
Guaranty. As a result, the Subordinated Base Management Fee is set aside in a
collateral account to be made available for the payment of (i) debt service on
the Bank Loan, (ii) debt service on the Bank Guaranty, and (iii) depending
upon the balance of the Bank Guaranty, deferred base management fees. Any
unpaid base management fees are deferred without interest and are payable in
future years. As of December 31, 1997 and 1996, deferred base management fees
were $3.6 million and $2.4 million, respectively. On February 23, 1998, the
Partnership repaid $1.5 million to Marriott International for deferred base
management fees. Therefore, as of February 23, 1998, deferred base management
fees were $2.1 million.
The Manager will continue to earn incentive management fees equal to 20% of
hotel operating profit, as defined, and additional incentive management fees,
after certain returns to the Partnership, ranging from 10% to 70% of hotel
operating profit depending upon the level of returns achieved by the
Partnership. Payment of incentive management fees will continue to be fully
subordinated to the payment of debt service and to the replenishment of all
guaranties. As of December 31, 1997 and 1996, deferred incentive management
fees were $22.2 million and $14.8 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to
maintain a property improvement fund (the "Bank Hotels Property Improvement
Fund") to ensure that the physical condition and product quality of the Bank
Hotels are maintained. Contributions to the Bank Hotels Property Improvement
Fund are equal to 5% of gross Bank Hotel sales.
On February 24, 1995, the Partnership, the Bank Lender, and Marriott
International entered into a cash collateral agreement with terms effective
January 1, 1995, whereby all Partnership cash relating to the Bank Hotels
(including the Bank Hotels Property Improvement Fund and the Subordinated Base
Management Fees) was pledged as collateral for the Bank Loan. Pursuant to the
cash collateral agreement, a portion of the Bank Hotels Property Improvement
Fund contribution equal to 4% of gross Bank Hotel sales is to be deposited
into an
PHLP Supp-63
<PAGE>
escrow account for the FF&E needs of the Bank Hotels. This escrow balance as
of December 31, 1997 and 1996, was $2.8 million and $2.4 million,
respectively. The remaining portion of the Bank Hotels Property Improvement
Fund contribution equal to 1% of gross Bank Hotel sales is to be deposited
into a restricted cash account which is subordinated to the payment of current
debt service on the Bank Loan. Any balance remaining in the restricted cash
account at the end of each year, after payment of debt service, will be
released from any restrictions. As of December 31, 1997 and 1996, the balance
in the restricted cash account was $1.1 million. The balance in the fund was
not required for 1997 or 1996 debt service and was transferred to the Bank
Hotels Property Improvement Fund in early 1998 and 1997, respectively.
Raleigh and Tampa Management Agreements
Upon the Partnership's reacquisition of the Raleigh and Tampa Hotels, the
Partnership entered into new management agreements (the "MHSI Agreements")
with MHSI for each of the Hotels. These agreements provide for payments to
MHSI as follows: (i) a base management fee equal to 3% of gross Hotel sales
and (ii) an incentive management fee equal to 20% of operating profit, as
defined. The MHSI Agreements provide for an initial term expiring on December
31, 2009. MHSI may renew each agreement at its option, for up to two
successive eight-year terms. The Partnership may terminate the Raleigh or
Tampa management agreement after June 18, 1999, and July 16, 1999,
respectively, if specified minimum operating results for each Hotel are not
achieved. However, MHSI can prevent termination by waiving its base management
fee with respect to each Hotel for a two-year period.
The MHSI Agreements provide for a priority return to the Partnership equal
to 10.75% of the owner's investment, plus ground rent in the case of the Tampa
Hotel. As of December 31, 1997, the Raleigh and Tampa owner's investment was
$19.6 million and $16.8 million, respectively. The MHSI Agreement for Raleigh
provides for a portion of the base management fee payable to MHSI equal to 1%
of gross Hotel sales to be subordinated to the first 10% of the 10.75%
priority return for five years from the effective date of the Raleigh
agreement. Any unpaid base management fees will accrue and are payable from
any excess operating profit; however, any deferred base management fees
remaining on June 18, 1999, will be waived. As of December 31, 1997 and 1996,
no base management fees were deferred under the Raleigh management agreement.
Incentive management fees are payable from 40% of available cash flow, as
defined. Any unpaid incentive management fees for the Raleigh and Tampa Hotels
are waived annually. In 1997, incentive management fees paid for the Raleigh
and Tampa Hotels were $567,000 and $350,000, respectively. In 1996, incentive
management fees paid for the Raleigh and Tampa Hotels were $574,000 and
$315,000, respectively.
Each MHSI Agreement provides for the establishment of a property improvement
fund ("Property Improvement Fund") for each Hotel. Contributions to the
Property Improvement Fund equal 5% of gross Hotel sales from each Hotel.
However, effective August 1996, MHSI and the Partnership agreed to increase
the contribution from 5% to 7% for the Raleigh Hotel until an additional
$300,000 was deposited to cover the cost of certain renovations. This increase
was in effect until the fourth quarter of 1997. In addition, a portion of the
contribution for the Raleigh Hotel equal to 2% of gross Hotel sales is used to
pay interest and principal on the Raleigh $350,000 FF&E Loans and the Raleigh
$700,000 FF&E Loan. As of December 31, 1997, the balances of the Raleigh and
Tampa Property Improvement Funds were $727,000 and $232,000, respectively. As
of December 31, 1996, the balances of the Raleigh and Tampa Property
Improvement Funds were $678,000 and $67,000, respectively.
General
Pursuant to the terms of the management agreements, the Managers are
required to furnish the Hotels with certain services ("Chain Services") which
generally are provided on a central or regional basis to all hotels in the
Marriott 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
performed more efficiently on a centralized basis. Costs and expenses incurred
in providing such services
PHLP Supp-64
<PAGE>
are allocated among all domestic hotels managed, owned, or leased by Marriott
International or its subsidiaries. In addition, the Hotels also participate in
Marriott International's Marriott Rewards Program ("MRP"). This program was
formerly called the Honored Guest Awards Program. The cost of this program is
charged to all hotels in the Marriott hotel system based on the MRP sales at
each hotel. The total amount of Chain Services and MRP costs charged to the
Partnership was $7.3 million in 1997, $7.1 million in 1996, and $7.6 million
in 1995.
Pursuant to the terms of the management agreements, the Partnership is
required to provide the Managers with working capital and supplies to meet the
operating needs of the Hotels. In 1995, in conjunction with the sale of the
Dallas Hotel, $946,000 was reimbursed by the Dallas Hotel to the Partnership.
These funds were used to pay interest and principal on working capital
advances from Host Marriott. Additionally during 1995, Marriott International
returned $400,000 in working capital to the Partnership. During 1996, the
Partnership advanced $262,000 to Marriott International for working capital.
During 1997, $168,000 in working capital was returned to the Partnership.
Therefore, as of December 31, 1997 and 1996, $5.1 million and $5.3 million,
respectively, has been advanced to the Managers for working capital and
supplies for the Hotels.
NOTE 9. RELATED PARTY TRANSACTIONS
A 66-guest room addition to the Raleigh Hotel was completed and opened on
July 18, 1987. The $3.4 million addition was operated as part of the Raleigh
Hotel but was owned by Host Marriott. Host Marriott subordinated its receipt
of cash flow generated from the Host Marriott-owned Raleigh addition (the
"Addition Deferral") to the payment of debt service on the S&L Loan for the
years 1991 through 1993. The Addition Deferral bears interest at the prime
rate. The weighted average interest rate was 8.44% for 1997, 8.27% for 1996,
and 8.85% for 1995. The balance of the Addition Deferral including accrued
interest at December 31, 1997 and 1996, was $1.6 and $1.5 million,
respectively. Except for the balance of $1.6 million, the Partnership's rights
and obligations under the Addition Deferral arrangement terminated with the
Raleigh Hotel foreclosure. Additionally, the 66-room addition was purchased by
the Partnership when the Raleigh Hotel was repurchased during 1994.
On June 28, 1995, the Partnership assigned its right of first refusal to
purchase the Point Clear Hotel to a subsidiary of Host Marriott, which
subsequently purchased the Hotel. In exchange, Host Marriott agreed to forgive
$2 million of accrued interest on certain advances to the Partnership, which
has been accounted for as a capital contribution by the General Partner.
On August 22, 1995, the Partnership sold the Dallas Hotel to a subsidiary of
Host Marriott. The proceeds from the sale of the Dallas Hotel were used to
repay $44 million of the Bank Loan.
PHLP Supp-65
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Hotel revenues............................................ $ 29,480 $ 28,048
-------- --------
OPERATING COSTS AND EXPENSES
Incentive management fees................................. 5,548 5,195
Depreciation.............................................. 3,891 2,526
Base management fees...................................... 2,370 2,257
Property taxes............................................ 1,625 1,602
Ground rent, insurance and other.......................... 1,969 2,118
-------- --------
15,403 13,698
-------- --------
OPERATING PROFIT............................................ 14,077 14,350
Interest expense.......................................... (11,905) (11,490)
Other revenues............................................ 257 328
-------- --------
NET INCOME.................................................. $ 2,429 $ 3,188
======== ========
ALLOCATION OF NET INCOME
General Partner........................................... $ 25 $ 32
Limited Partners.......................................... 2,404 3,156
-------- --------
$ 2,429 $ 3,188
======== ========
NET INCOME PER LIMITED PARTNER UNIT (1,800 Units)........... $ 1,336 $ 1,753
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
PHLP Supp-66
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 19, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $ 153,748 $ 154,253
Due from Marriott International, Inc. and affiliates.. 10,602 10,173
Other assets.......................................... 4,834 4,265
Restricted cash....................................... 15,893 6,351
Cash and cash equivalents............................. 589 3,182
--------- ---------
$ 185,666 $ 178,224
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................... $ 168,909 $ 172,667
Due to Host Marriott Corporation and affiliates..... 123,819 125,549
Incentive and base management fees due to Marriott
International, Inc. ............................... 29,793 25,868
Due to Marriott International, Inc. and affiliates.. 368 398
Accrued interest and other liabilities.............. 7,470 864
--------- ---------
Total Liabilities................................. 330,359 325,346
--------- ---------
PARTNERS' DEFICIT
General Partner..................................... (34,817) (34,842)
Limited Partners.................................... (109,876) (112,280)
--------- ---------
Total Partners' Deficit........................... (144,693) (147,122)
--------- ---------
$ 185,666 $ 178,224
========= =========
</TABLE>
See Notes to Condensed Financial Statements.
PHLP Supp-67
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 2,429 $ 3,188
Noncash items............................................ 11,251 9,457
Changes in operating accounts............................ 4,282 5,398
-------- --------
Cash provided by operating activities.................. 17,962 18,043
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment...................... (3,404) (3,358)
Change in property improvement funds..................... (678) (1,005)
Working capital received from Marriott International,
Inc. and affiliates, net................................ -- 168
-------- --------
Cash used in investing activities...................... (4,082) (4,195)
-------- --------
FINANCING ACTIVITIES
Change in restricted cash................................ (9,542) (10,490)
Repayments to Host Marriott Corporation and affiliates,
net..................................................... (4,649) (5,419)
Principal repayments on mortgage debt.................... (3,758) (2,171)
Repayments to affiliates of Marriott International,
Inc..................................................... (28) (22)
Collection of amounts due from Marriott International,
Inc..................................................... 1,504 --
-------- --------
Cash used in financing activities...................... (16,473) (18,102)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (2,593) (4,254)
CASH AND CASH EQUIVALENTS at beginning of period........... 3,182 5,228
-------- --------
CASH AND CASH EQUIVALENTS at end of period................. $ 589 $ 974
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................ $ 2,162 $ 2,080
======== ========
</TABLE>
See Notes to Condensed Financial Statements.
PHLP Supp-68
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by
Potomac Hotel Limited Partnership (the "Partnership") without audit. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have
been condensed or omitted from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information presented
not misleading. However, the condensed financial statements should be read in
conjunction with the Partnership's financial statements and notes thereto
included in the Partnership's Form 10-K for the fiscal year ended December 31,
1997.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of June 19, 1998; the results of operations and cash flows
for the first two quarters 1998 and 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, the Partnership's net income is allocated
99% to the limited partners and 1% to Host Marriott Corporation ("Host
Marriott" or "General Partner"). Significant differences exist between the net
income for financial reporting purposes and the net income for Federal income
tax reporting purposes. These differences are due primarily to the use for tax
purposes of differing useful lives and accelerated depreciation methods,
differing tax bases in contributed capital, and differing timings in the
recognition of management fee expense.
2. Certain reclassifications were made to the prior quarter financial
statements to conform to the current quarter presentation.
3. Hotel revenues represent house profit of the Partnership's hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the hotels to the manager. House
profit reflects hotel operating results which flow to the Partnership as
property owner and represents gross hotel sales less property-level expenses,
excluding depreciation, base and incentive management fees, property taxes,
ground rent, insurance, and certain other costs, which are disclosed
separately in the condensed statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that it
should be applied to its hotels. Accordingly, hotel sales and property level
expenses will be reflected on the statement of operations. This change in
accounting principle will be adopted in the financial statements during the
fourth quarter of 1998 as of and for the year ended December 31, 1998 with
retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $49.5 million and $47.2 million for the first two quarters 1998
and 1997, respectively and will have no impact on operating profit or net
income.
PHLP Supp-69
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Hotel revenues consist of the following hotel operating results (in
thousands):
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS
-----------------
1998 1997
-------- --------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $ 51,015 $ 48,339
Food and beverage.......................................... 22,137 21,190
Other...................................................... 5,841 5,704
-------- --------
78,993 75,233
-------- --------
HOTEL EXPENSES
Departmental Direct Costs
Rooms.................................................... 11,780 11,098
Food and beverage........................................ 16,292 15,840
Other hotel operating expenses............................. 21,441 20,247
-------- --------
49,513 47,185
-------- --------
HOTEL REVENUES............................................... $ 29,480 $ 28,048
======== ========
</TABLE>
4. Host Marriott, the General Partner of the Partnership, announced on April
17, 1998, that its Board of Directors has authorized the company to reorganize
its business operations to qualify as a real estate investment trust ("REIT")
to become effective as of January 1, 1999. As part of the REIT conversion,
Host Marriott expects to form a new operating partnership (the "Operating
Partnership") and limited partners in certain Host Marriott full-service hotel
partnerships and joint ventures, including the Partnership, are expected to be
given an opportunity to receive, on a tax-deferred basis, Operating
Partnership units in the Operating Partnership in exchange for their current
limited partnership interests. The Operating Partnership units would be
redeemable by the limited partner for freely traded Host Marriott shares (or
the cash equivalent thereof) at any time after one year from the closing of
the merger. In connection with the REIT conversion, the Operating Partnership
filed a Registration Statement on Form S-4 with the Securities and Exchange
Commission on June 2, 1998. Limited partners will be able to vote on this
Partnership's participation in the merger later this year through a consent
solicitation.
PHLP Supp-70
<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 Second 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.
3.12 --Declaration of Trust of Host Marriott Trust, dated September 8,
1998
3.13** --Form of Amended and Restated Declaration of Trust of Host Marriott
Trust
3.14 --Bylaws of Host Marriott Trust, dated September 8, 1998
3.15 --Form of Amendments to Amended and Restated Agreements of Limited
Partnership of the Partnerships
4.1 --Form of Indenture between Host Marriott, L.P. and Marine Midland
Bank, as Indenture Trustee, and Form of 6.56% Callable Note due
December 15, 2005
4.2** --Form of Rights Agreement between Host Marriott Trust and [The Bank
of New York] as Rights Agent
4.3(i) --Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Host Marriott Corporation Registration Statement No.
33-62444)
4.3(ii) --First Amendment to Rights Agreement between Marriott Corporation
and Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 33-51707)
4.4 --Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-00768)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
4.5 --Indenture by and among HMH Properties, Inc., as Issuer, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc.,
Marriott Financial Services, Inc., Marriott SBM Two Corporation, HMH
Pentagon Corporation and Host Airport Hotels, Inc., as Subsidiary
Guarantors, and Marine Midland Bank, as Trustee (incorporated by
reference to Host Marriott Corporation Registration Statement
33-95058
4.6 --Indenture by and among HMH Properties, Inc., as Issuer, and the
Subsidiary Guarantors named therein, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated August 6, 1998)
4.7** --Form of Common Share Certificate of Host Marriott Trust
5.1** --Opinion of Hogan & Hartson L.L.P. regarding legality of the OP
Units being registered
5.2** --Opinion of Hogan & Hartson L.L.P. regarding legality of the Notes
being registered
5.3** --Opinion of Hogan & Hartson L.L.P. regarding legality of the Common
Shares being registered
8.1** --Opinion of Hogan & Hartson L.L.P. regarding certain tax matters
10.1 --Amended and Restated Credit Agreement dated as of June 19, 1997 and
Amended and Restated as of August 5, 1998 among Host Marriott
Corporation, Host Marriott Hospitality, Inc., HMH Properties, Inc.,
Host Marriott, L.P., HMC Capital Resources Corp., Various Banks,
Wells Fargo Bank, National Association, The Bank of Nova Scotia and
Credit Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust
Company as Arranger and Administrative Agent (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated September 11, 1998)
10.2 --Marriott Corporation Executive Deferred Compensation Plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i) of
the Host Marriott Corporation Annual Report on Form 10-K for the
fiscal year ended December 28, 1991)
10.3 --Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from Host
Marriott Corporation Current Report on Form 8-K dated October 23,
1993)
10.4 --Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Host Marriott Corporation Current Report on Form
8-K dated October 23, 1993)
10.5 --Amendment No. 1 to the Distribution Agreement dated September 15,
1993 by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International (incorporated by reference
from Host Marriott Corporation Current Report on Form 8-K dated
January 16, 1996)
10.6 --Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Host Marriott Corporation Current
Report on Form 8-K dated January 16, 1996)
10.7 --Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Host Marriott Corporation Current Report on Form
8-K dated October 23, 1993)
10.8 --Assignment and License Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Host Marriott Corporation Current
Report on Form 8-K dated October 23, 1993)
10.9 --Amendment No. 1 to the Assignment and License Agreement dated as of
October 8, 1993 by and between Marriott International, Inc. and Host
Marriott Corporation (incorporated by reference from Host Marriott
Corporation Current Report on Form 8-K dated January 16, 1996)
10.10 --Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Host Marriott Corporation Current
Report on Form 8-K dated October 23, 1993)
10.11 --Noncompetition Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Host Marriott Corporation Current Report on Form
8-K dated October 23, 1993)
10.12 --Amendment No. 1 to the Noncompetition Agreement dated October 8,
1993 by and between Host Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Host Marriott
Corporation Current Report on Form 8-K dated January 16, 1996)
10.13** --Form of Noncompetition Agreement between Host Marriott Trust, Host
Marriott, L.P. and Crestline Capital Corporation
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
10.14 --Host Marriott Lodging Management Agreement--Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No.
33-51707)
10.15 --Employee Benefits and Other Employment Matters Allocation Agreement
dated as of December 29, 1995 by and between Host Marriott
Corporation and Host Marriott Services Corporation (incorporated by
reference from Host Marriott Corporation Current Report on Form 8-K
dated January 16, 1996)
10.16 --Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Host Marriott Corporation Current
Report on Form 8-K dated January 16, 1996)
10.17 --Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference to Host Marriott
Corporation Registration Statement No. 33-62444)
10.18 --Contribution Agreement dated as of April 16, 1998 among Host
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein, together with Exhibit B
10.19 --Amendment No. 1 to Contribution Agreement dated May 8, 1998
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein
10.20 --Amendment No. 2 to Contribution Agreement dated May 18, 1998 among
Host Marriott Corporation, Host Marriott, L.P. and the contributors
named therein
12.1* --Computation of Ratios of Earnings to Fixed Charges and HMH
Properties, Inc.
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 --Consents of American Appraisal Associates, Inc.
23.4** --Consents of Trustee nominees of Host Marriott Trust
25.1** --Statement of Eligibility and Qualification of , as Indenture
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
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
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
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** --Form of Fairness Opinion of American Appraisal Associates, Inc.
99.26** --Questions and Answers
99.27 --Consent Form
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
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 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.
II-5
<PAGE>
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-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANTS HAVE
DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF
MARYLAND, ON SEPTEMBER 11, 1998.
Host Marriott, L.P.
By: HMC Real Estate L.L.C.,
---------------------------------
AS GENERAL PARTNER OF HOST
MARRIOTT, L.P.
By: /s/ Robert E. Parsons, Jr.
-------------------------------
NAME: ROBERT E. PARSONS, JR.
TITLE: PRESIDENT
Host Marriott Trust
By: /s/ Robert E. Parsons, Jr.
--------------------------
NAME: ROBERT E. PARSONS, JR.
TITLE: PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert E. Parsons, Jr.
- ------------------------------------- President and September 11,
ROBERT E. PARSONS, JR. Manager of HMC Real 1998
Estate L.L.C.
(Chief Executive
Officer and Chief
Financial Officer);
President and
Initial Trustee of
Host Marriott Trust
(Chief Executive
Officer and Chief
Financial Officer)
/s/ Donald D. Olinger
- ------------------------------------- Vice President of September 11,
DONALD D. OLINGER HMC Real Estate 1998
L.L.C. and Host
Marriott Trust
(Chief Accounting
Officer)
/s/ Christopher G. Townsend
- ------------------------------------- Vice President and September 11,
CHRISTOPHER G. TOWNSEND Manager of HMC Real 1998
Estate L.L.C.; Vice
President and
Initial Trustee of
Host Marriott Trust
</TABLE>
II-7
<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 Corporation, Host Marriott Hotels
and HMC Senior Communities, Inc. included in this registration statement and
have issued our reports thereon dated February 27, 1998, 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-7 are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic 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
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COST JANUARY 2, 1998 DATE OF
----------------- SUBSEQUENT ------------------------ COMPLETION
BUILDING & COSTS BUILDINGS & ACCUMULATED OF DATE DEPRECIATION
DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIFE
DESCRIPTION ------ ---- ------------ ----------- ---- ------------ ------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service ho-
tels:
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)
Senior living
communities..... 195 103 436 35 103 471 574 (8) various 1997 40
Other
properties, each
less than 5% of
total........... -- 14 14 3 14 17 31 (17) various N/A various
------ ---- ------ ---- ---- ------ ------ -----
Total........... $1,979 $511 $4,278 $528 $521 $4,796 $5,317 $(506)
====== ==== ====== ==== ==== ====== ====== =====
</TABLE>
S-2
<PAGE>
SCHEDULE III
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
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..................................................... 1,459
Capital expenditures............................................. 117
Transfers from construction-in-progress.......................... 30
Deductions:
Dispositions and other........................................... (145)
------
Balance at January 2, 1998........................................... $5,317
======
</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........................................ 126
Dispositions and other............................................... (31)
----
Balance at January 2, 1998............................................. $506
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $4,508 million at January 2, 1998.
(D) The total cost of properties excludes construction-in-progress
properties.
S-3
<PAGE>
SCHEDULE III
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-4
<PAGE>
SCHEDULE III
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-5
<PAGE>
SCHEDULE III
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-6
<PAGE>
SCHEDULE III
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-7
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
HOST MARRIOTT TRUST
HOST MARRIOTT, L.P.
MERGER SUB
PARTNERSHIP
DATE:
<PAGE>
TABLE OF CONTENTS
Page
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1. PLAN OF MERGER........................................................ 2
1.1. The Merger....................................................... 2
1.2. Certificate of Merger; Effective Time............................ 2
1.3. Effects of Merger................................................ 3
1.4. Closing.......................................................... 3
1.5. Exchange and Conversion of Partnership Interests................. 3
1.6. Right to Exchange OP Units for Common Shares or Notes............ 4
1.7. No Fractional OP Units........................................... 5
1.8. No Appraisal Rights.............................................. 5
1.9. Approval of Limited Partners of the Partnership.................. 5
2. REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP..................... 5
2.1. Organization, Good Standing and Qualification.................... 6
2.2. Power, Authority and Enforceability.............................. 6
2.3. Capitalization................................................... 6
2.4. Noncontravention................................................. 7
2.5. Litigation....................................................... 7
2.6. SEC Documents; Financial Statements.............................. 7
2.7. No Material Adverse Changes...................................... 8
2.8. Title to Properties; Encumbrances................................ 9
2.9. Compliance with Laws and Material Agreements..................... 9
2.10. Environmental Compliance........................................ 9
2.11. Voting Requirements............................................. 10
2.12. Fairness Opinion................................................ 10
3. REPRESENTATIONS AND WARRANTIES OF HOST REIT, THE OPERATING
PARTNERSHIP AND MERGER SUB............................................ 10
3.1. Organization, Good Standing and Qualification.................... 10
3.2. Power, Authority and Enforceability.............................. 11
3.3. Capitalization; Notes............................................ 11
3.4. Noncontravention................................................. 12
3.5. Litigation....................................................... 13
3.6. SEC Documents; Financial Statements.............................. 13
3.7. No Material Adverse Changes...................................... 14
3.8. Compliance with Laws and Material Agreements..................... 14
3.9. NYSE Listing of Common Shares.................................... 14
-i-
<PAGE>
Page
----
4. COVENANTS............................................................. 14
4.1. Conduct of Business by the Partnership........................... 14
4.2. Reasonable Efforts; Further Assurances; Cooperation;
Notifications; Tax Treatment and Reporting..................... 15
5. CONDITIONS TO CLOSING................................................. 16
5.1. Conditions to Each Party's Obligations........................... 16
5.2. Conditions to Obligations of the Partnership..................... 18
5.3. Conditions to Obligations of Host REIT, the Operating
Partnership and Merger Sub..................................... 18
6. TERMINATION, EXPENSES, AMENDMENT AND WAIVER........................... 19
6.1. Termination...................................................... 19
6.2. Expenses......................................................... 19
6.3. Amendment........................................................ 19
6.4. Extension; Waiver................................................ 19
7. MISCELLANEOUS......................................................... 20
7.1. Notices.......................................................... 20
7.2. Assignment and Binding Effect.................................... 20
7.3. Governing Law.................................................... 21
7.4. Severability..................................................... 21
7.5. Further Assurances............................................... 21
7.6. Exculpation...................................................... 21
7.7. Counterparts..................................................... 21
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into
as of _______________ __, 1998 by and among Host Marriott Trust, a Maryland real
estate investment trust ("Host REIT"), Host Marriott, L.P., a Delaware limited
partnership (the "Operating Partnership"), [MERGER SUB], a Delaware limited
partnership and an indirect wholly-owned subsidiary of the Operating Partnership
and Host REIT ("Merger Sub"), and [PUBLIC LP], a [Delaware/Rhode Island] limited
partnership (the "Partnership").
WHEREAS, Host Marriott Corporation, a Delaware corporation ("Host"),
has adopted a plan to restructure its business operations so that it will
qualify as a real estate investment trust ("REIT") for federal income tax
purposes; and
WHEREAS, the Partnership is the owner of the full-service hotel[s]
described on SCHEDULE A attached hereto (the "Hotel[s]"); and
----------
WHEREAS, as part of the restructuring and other transactions that Host
determines in its discretion are necessary or desirable to permit or facilitate
the qualification of Host REIT as a REIT for federal income tax purposes (the
"REIT Conversion"), Host REIT will become the sole general partner of the
Operating Partnership; and
WHEREAS, as part of the REIT Conversion, the Operating Partnership
through Merger Sub is proposing to acquire by merger (the "Mergers") eight
public limited partnerships, including the Partnership; and
WHEREAS, HMC Real Estate LLC, a Delaware limited liability company and
the initial general partner of the Operating Partnership ("OPGP"), and
_______________, a Delaware corporation and the sole general partner of the
Partnership ("PGP"), have deemed it advisable for their respective limited
partnerships and the partners thereof that, upon the terms and subject to the
conditions contained herein, the Operating Partnership acquire the Partnership
through a merger (the "Merger") of Merger Sub with and into the Partnership with
the partnership interests in the Partnership ("Partnership Interests"),
including without limitation, the units of limited partnership interests therein
(the "Partnership Units"), being exchanged for and converted into units of
limited partnership interest in the Operating Partnership ("OP Units"); and
WHEREAS, for federal income tax purposes, it is intended that the
Merger, regardless of form, be treated as a contribution by the current holders
of Partnership Interests of such Partnership Interests to the Operating
Partnership in exchange for OP Units, as provided for herein, under Section 721
of the Internal Revenue
<PAGE>
Code of 1986, as amended (the "Code"), and a distribution of such partnership
interests by the Partnership to its partners under Section 731 of the Code; and
WHEREAS, upon the terms and subject to the conditions contained
herein, the holders of OP Units received in the Merger will have the right to
elect to exchange such OP Units for common shares of beneficial interest, par
value $.01 per share, of Host REIT ("Common Shares") or unsecured 6.56% Callable
Notes due December 15, 2005 issued by the Operating Partnership ("Notes"); and
WHEREAS, the Partnership has received a fairness opinion relating to
the Merger.
NOW, THEREFORE, for and in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth and other good and
valuable consideration, the parties, each intending to be legally bound hereby,
agree as follows:
1. PLAN OF MERGER
1.1. THE MERGER
Upon the terms and subject to the conditions hereof, and in accordance
with the provisions of Section 17-211 of the Delaware Revised Uniform Limited
Partnership Act (the "DRULPA"), Merger Sub shall be merged with and into the
Partnership at the Effective Time (as defined below), with the holders of
Partnership Interests receiving OP Units, as set forth in Sections 1.3 and 1.5
below, and with the partners in [MERGER SUB] becoming the sole partners in the
Surviving Partnership (as defined in the next sentence). The Partnership shall
be the surviving entity of the Merger (the "Surviving Partnership"), and the
separate existence of Merger Sub will cease. The Surviving Partnership shall
continue its existence as a limited partnership under the laws of the State of
Delaware, and its name shall continue to be "______________________ Limited
Partnership."
1.2. CERTIFICATE OF MERGER; EFFECTIVE TIME
Upon the terms and subject to the conditions hereof, at or prior to
the Closing (as defined herein), the parties shall execute a Certificate of
Merger (the "Certificate of Merger") substantially in the form attached hereto
as EXHIBIT A and the Partnership shall file the Certificate of Merger with the
---------
Office of the Secretary of State of the State of Delaware in accordance with the
provisions of Section 17-211(c) of the DRULPA. The Merger shall become
effective on the time and date specified in the Certificate of Merger filed with
the Secretary of State of the State of Delaware, or absent any such indication,
upon acceptance of filing (the "Effective Time"). The date on which the
Effective Time occurs is referred to herein as the "Effective Date."
2
<PAGE>
1.3. EFFECTS OF MERGER
The Merger shall have the effects set forth in the DRULPA. The sole
general partner of the Surviving Partnership shall be ________________, which
shall be the general partner of Merger Sub until it withdraws or is removed in
accordance with the partnership agreement of the Surviving Partnership, and the
sole limited partner of the Surviving Partnership shall be ___________________,
the limited partner of Merger Sub. The Amended and Restated Agreement of Limited
Partnership, as amended by the Amendment to Amended and Restated Agreement of
Limited Partnership substantially in the form attached hereto as EXHIBIT B ,
shall be adopted as the partnership agreement of the Surviving Partnership and
shall continue in full force and effect after the Merger until further amended
in accordance with the terms and conditions thereof and applicable Delaware
law.
1.4. CLOSING
The closing of the Merger (the "Closing") will take place at 9:00
a.m., Eastern Time, on the date to be specified by the parties, which (subject
to satisfaction or waiver of the conditions set forth herein) shall be on the
first business day following the distribution by Host REIT to its shareholders
of shares of common stock of Crestline Capital Corporation received by Host REIT
in the merger of Host Marriott Corporation with and into Host REIT or such other
date to which the parties may agree (the "Closing Date"), at the offices of
Hogan & Hartson L.L.P., 555 13th Street, Washington, D.C. or such other place to
which the parties may agree.
1.5. EXCHANGE AND CONVERSION OF PARTNERSHIP INTERESTS
At the Effective Time, the outstanding Partnership Interests in the
Partnership shall be exchanged for and converted into units of limited
partnership interests in the Operating Partnership without the need for any
further action of the partners of the Partnership, and thereupon any
certificates representing any interests in the Partnership shall be deemed
canceled. Each holder of record of a Partnership Unit (including the general
partner and other subsidiaries of Host REIT or the Operating Partnership) at the
Effective Time shall be entitled to receive in the Merger in exchange for such
Partnership Unit a number of OP Units equal to the quotient determined by
dividing (a) the Exchange Value (as defined below) of such Partnership Unit by
(b) the OP Unit Price (as defined below). The general partner of the Partnership
shall be entitled to receive in the Merger in exchange for its general
Partnership Interest a number of OP Units equal to the quotient determined by
dividing (a) the Exchange Value (as defined below) of such Partnership Interest
(determined as described in the Consent Solicitation, as defined below) by (b)
the OP Unit Price (as defined below). Promptly following the twentieth (20th)
trading day after the Effective Date, the Operating Partnership shall notify
each such holder and the former general partner in writing of the number of OP
Units that such person received in the Merger. For
3
<PAGE>
purposes of this Agreement, (a) "Exchange Value" shall have the meaning set
forth in the final Registration Statement/Consent Solicitation on Form S-4 filed
by the Operating Partnership, Host REIT and the Partnership (collectively with
the appendices, exhibits and supplements thereto, the "Consent Solicitation")
and shall be determined as of the Final Valuation Date (as defined in the
Consent Solicitation), and (b) "OP Unit Price" shall mean the average closing
price on the New York Stock Exchange (the "NYSE") of a Host REIT Common Share
for the first twenty (20) trading days after the Effective Date; provided,
however, if such 20-day average trading price is less than $_____, then the "OP
Unit Price" shall be equal to $____; and if such 20-day average trading price is
greater than $____, then the "OP Unit Price" shall be equal to $____.
1.6. RIGHTS TO EXCHANGE OP UNITS FOR COMMON SHARES OR NOTES
(a) Host REIT shall provide each holder of a Partnership Interest
receiving OP Units in the Merger (other than any subsidiary of Host REIT or the
Operating Partnership) the right to exchange all, but not less than
all, of the OP Units received in the Merger for Common Shares (the "Common
Shares Election"). If such holder makes the Common Shares Election by properly
completing and delivering to Host REIT the Consent Form (as defined in the
Consent Solicitation) and does not revoke such election by written notice to
Host REIT, at any time prior to the end of the Solicitation Period (as defined
in the Consent Solicitation), then, immediately following the twentieth (20th)
trading day after the Effective Date, such OP Units shall be tendered (or deemed
tendered) to Host REIT in exchange for an equal number of Common Shares.
Promptly following the twentieth (20th) trading day after the Effective Date,
Host REIT shall deliver or cause to be delivered to such holder or his designee
the certificates representing the Common Shares issued to such holder pursuant
to the Common Shares Election. The Operating Partnership shall have no
obligations under the Common Share Election.
(b) The Operating Partnership shall provide each holder of a
Partnership Interest receiving OP Units in the Merger (other than any subsidiary
of Host REIT or the Operating Partnership) the right to exchange all, but not
less than all, of the OP Units received in the Merger for a Note (the "Note
Election"). If a holder makes the Note Election by properly completing and
delivering to the Operating Partnership the Consent Form (as defined in the
Consent Solicitation) and does not revoke such election by written notice to the
Operating Partnership, at any time prior to the end of the Solicitation Period
(as defined in the Consent Solicitation), then, immediately following the
Effective Date, such OP Units shall be tendered (or deemed tendered) to the
Operating Partnership in exchange for Notes. The principal amount of each Note
shall be equal to the Note Election Amount (as defined in and determined as
described in the Consent Solicitation) of such holder's Partnership Units as of
the Final Valuation Date and the other terms of the Notes shall be as described
in the Consent Solicitation. The Notes shall be issued pursuant to an indenture
qualified
4
<PAGE>
under the Trust Indenture Act of 1939, as amended, and substantially in the form
of the indenture included as an exhibit to the Consent Solicitation. Promptly
following the Effective Date, the Operating Partnership shall deliver or cause
to be delivered to such holder or his designee the Note issued to such holder
pursuant to the Note Election. Host REIT shall have no obligations under the
Note Election.
(c) Any holder of a Partnership Interest receiving OP Units in the
Merger who fails to timely and properly exercise the Common Share Election or
the Note Election pursuant to this SECTION 1.6 shall be deemed to have elected
to retain the OP Units received in the Merger, and shall not be entitled to
tender such OP Units to Host REIT for Common Shares or to the Operating
Partnership for Notes pursuant to this SECTION 1.6.
1.7. NO FRACTIONAL OP UNITS
The Operating Partnership will not issue any fractional OP Units upon
conversion of Partnership Interests pursuant to SECTION 1.5. Fractions of an OP
Unit otherwise issuable that are greater than or equal to 0.5 of an OP Unit will
be rounded up to the next largest whole number of OP Units. Fractions of an OP
Unit otherwise issuable that are less than 0.5 of an OP Unit will be rounded
down to the next smallest whole number of OP Units.
1.8. NO APPRAISAL RIGHTS
The holders of Partnership Interests are not entitled under applicable
law to appraisal rights as a result of the Merger.
1.9. APPROVAL OF LIMITED PARTNERS OF THE PARTNERSHIP
The Partnership and PGP promptly shall seek the requisite approval of
the limited partners of the Partnership to the Merger and the related proposed
amendments to the Partnership's partnership agreement substantially as
contemplated by the Consent Solicitation as and to the extent required by the
Partnership's partnership agreement and of any other matters reasonably
requested by Host REIT or the Operating Partnership to effectuate the
transactions contemplated by this Agreement (collectively, the "Limited Partner
Approvals").
2. REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
The Partnership represents and warrants to Host REIT, the Operating
Partnership and Merger Sub as of the date of this Agreement:
5
<PAGE>
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION
The Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the DRULPA with partnership power and
authority to own, lease and operate its properties, conduct the business in
which it is engaged and perform its obligations under this Agreement. The
Partnership is duly qualified to transact business and is in good standing under
the laws of each jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification except where the failure to so
qualify or be in good standing would not reasonably be expected to have a
material adverse effect on the business, financial condition or results of
operations of the Partnership and its subsidiaries (if any) taken as a whole (a
"Partnership Material Adverse Effect"). The Partnership has furnished or made
available to Host REIT, the Operating Partnership and Merger Sub true and
complete copies of its Certificate of Limited Partnership and its partnership
agreement, as amended or supplemented to the date of this Agreement.
2.2. POWER, AUTHORITY AND ENFORCEABILITY
The Partnership has the requisite partnership power and authority to
enter into this Agreement and, subject to the requisite Limited Partner
Approvals, to consummate the Merger and other transactions contemplated by this
Agreement and each other agreement in connection therewith to which the
Partnership is a party. The execution and delivery of this Agreement by the
Partnership and the consummation by the Partnership of the transactions
contemplated by this Agreement and each other agreement in connection therewith
to which the Partnership is a party have been duly authorized by all necessary
action on the part of the Partnership, except for and subject to the Limited
Partner Approvals. This Agreement has been duly executed and delivered by the
Partnership and constitutes the legal, valid and binding agreement of the
Partnership enforceable against the Partnership in accordance with its terms,
except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) equitable principles of
general applicability relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
2.3. CAPITALIZATION
The only interests in the Partnership outstanding are the Partnership
Interests reflected in the Consent Solicitation, including, without limitation,
the Partnership Units. All of such Partnership Interests have been duly
authorized and validly issued, are fully paid and are not subject to any
preemptive or similar rights. The Partnership is not a party to or bound by any
agreement, put or commitment pursuant to which it is obligated to purchase,
redeem or otherwise
6
<PAGE>
acquire any Partnership Interests or any options or securities convertible into
Partnership Interests.
2.4. NONCONTRAVENTION
Except as disclosed in the Partnership SEC Documents (as defined
below), the execution, delivery and performance of this Agreement by the
Partnership and the consummation by the Partnership of the Merger will not
violate the partnership agreement of the Partnership as proposed to be amended
and in effect as of the Effective Time substantially as described in the Consent
Solicitation, or conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or grant to
others any rights of termination, amendment, acceleration or cancellation of,
any other material agreement, indenture or instrument to which the Partnership
or any of its subsidiaries (if any) is a party or by which any of its property
or assets of the Partnership is bound or affected, or result in a violation of
any statute, law, ordinance, regulation, rule, judgment, decree or order
(collectively "Laws") of any federal, state or local government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency having jurisdiction (a "Governmental Entity") applicable to
the Partnership or any of its subsidiaries (if any) or by which any of its
property or assets is bound or affected, which conflict, default, grant or
violation would reasonably be expected to have a Partnership Material Adverse
Effect or which will be avoided by the Partnership obtaining the consent of a
third party (including, without limitation, the Limited Partner Approvals) at or
prior to the Effective Time.
2.5. LITIGATION
Except as disclosed in the Partnership SEC Documents (as defined
below), there is no suit, action or proceeding pending or, to the knowledge of
the Partnership, threatened against the Partnership or any of its subsidiaries
(if any) or of which any of its properties or assets is the subject which is not
covered by insurance and which, individually or in the aggregate, if determined
adversely to such party, would impair the ability of the Partnership to perform
its obligations under this Agreement or to consummate the Merger on
substantially the terms contemplated by this Agreement.
2.6. SEC DOCUMENTS; FINANCIAL STATEMENTS
The Partnership has filed all required reports, forms, statements and
other documents with the Securities and Exchange Commission (the "SEC") since
January 1, 1993 through the date hereof, including, without limitation, the
Consent Solicitation (the "Partnership SEC Documents"). The Partnership SEC
Documents, as of their respective filing dates, complied in all material
respects with the
7
<PAGE>
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in each case, the rules and regulations promulgated
thereunder applicable to such Partnership SEC Documents. None of the
Partnership SEC Documents at the time of filing contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later Partnership SEC
Documents filed and publicly available prior to the date hereof and with respect
to which any such statement or omission would not reasonably be expected to have
a Partnership Material Adverse Effect. The consolidated financial statements of
the Partnership and its consolidated subsidiaries, if any, included in the
Partnership SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles ("GAAP") (except, in the case of unaudited
statements, as permitted by the applicable rules and regulations of the SEC)
applied on consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP and the applicable rules and regulations of the
SEC, the consolidated financial position of the Partnership and its consolidated
subsidiaries, if any, in each case taken as a whole, as of the dates thereof and
the consolidated results of operations and cash flow for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
2.7. NO MATERIAL ADVERSE CHANGES
Since the date of the Partnership's most recent financial statements
included in the Consent Solicitation, there has not been (i) any material
adverse change in the business, financial condition or results of operations of
the Partnership and its subsidiaries (if any) taken as a whole (a "Partnership
Material Adverse Change"), nor has there been any occurrence or circumstance
affecting the Partnership or any of its subsidiaries (if any) that with the
passage of time would reasonably be expected to result in a Partnership Material
Adverse Change, or (ii) any damage, destruction or loss, whether or not covered
by insurance that has had or would reasonably be expected to have a Partnership
Material Adverse Effect, or (iii) any change in accounting methods, principles
or practices by the Partnership materially affecting its assets, liabilities or
business, except insofar as may have been disclosed in Partnership SEC Documents
or required by a change in GAAP.
8
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2.8. TITLE TO PROPERTIES; ENCUMBRANCES
The Partnership and its subsidiaries (if any) have good and
marketable fee simple title or leasehold title, as applicable, to all real
property (the "Partnership Properties") identified in the Consent Solicitation
as being owned or leased by the Partnership, in each case free and clear of all
imperfections in title, easements, liens, mortgages, security interests, and
other encumbrances ("Encumbrances") except for mortgages and security interests
securing indebtedness reflected in the Consent Solicitation or Encumbrances
which do not materially detract from the current use of the Partnership
Properties or would not have a Partnership Material Adverse Effect.
2.9. COMPLIANCE WITH LAWS AND MATERIAL AGREEMENTS
Except as disclosed in any Partnership SEC Reports and except for
violations, noncompliances, defaults which would not reasonably be expected to
have a Partnership Material Adverse Effect, neither the Partnership nor any of
its subsidiaries (if any) (i) has violated or failed to comply with any
applicable Law of any Governmental Entity or (ii) is in default, and no event
has occurred which, with notice or lapse of time or both, would constitute such
a default, under any material indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which it is a party or by which it is bound
or to which any of its properties or assets is subject.
2.10. ENVIRONMENTAL COMPLIANCE
Except as disclosed in the Partnership SEC Documents, to the
Partnership's knowledge, (i) neither the Partnership nor any other Person (as
defined below) has caused or permitted the unlawful presence of any Hazardous
Materials (as defined below) on any of the Partnership Properties or any
unlawful spills, releases, discharges or disposal of Hazardous Materials to have
occurred or be presently occurring on or from the Partnership Properties as a
result of any construction on or operation and use of such Partnership
Properties and (ii) none of the Partnership Properties, the Partnership or any
of its subsidiaries (if any) have failed to comply in all material respects with
all Environmental Laws (as defined below), which presence, occurrence or failure
would have a Partnership Material Adverse Effect.
For the purposes of this Agreement, "Hazardous Materials" means any
of the following on, under from or affecting the Partnership Properties (as
defined herein) or any soil, water, vegetation, buildings, personal property,
persons or animals located thereon or any neighboring areas: asbestos-containing
materials, polychlorinated biphenyls, flammable materials, explosives,
radioactive materials, petroleum products and any materials, wastes, substances,
or chemicals that are deemed hazardous, toxic, a pollutant or a contaminant
under the Comprehensive
9
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Environmental Response, Compensation and Liability Act of 1980, as amended
(42 U.S.C. Section 9601, et seq.) the Hazardous Materials Transportation Act, as
-- ---
amended (49 U.S.C. Section 1801, et seq.), the Resource Conservation and
-- ---
Recovery Act of 1976, as amended (42 U.S.C. Section 6901, et seq.), in the
-- ---
regulations adopted or publications promulgated pursuant thereto, or in any
other applicable Laws of any Governmental Entity in effect on the date hereof
relating to protection of public health, safety or the environment (each such
law, ordinance, rule or regulation, an "Environmental Law"). For purposes of
this Agreement, "Person" means any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization or other
form of business or legal entity.
2.11. VOTING REQUIREMENTS
The affirmative consent of the limited partners as described in the
Consent Solicitation constitutes the Limited Partner Approvals and is the only
partnership consent necessary to approve this Agreement and Merger that has not
been obtained on or prior to the Effective Time.
2.12. FAIRNESS OPINION
The Partnership has received the opinion of American Appraisal
Associates substantially in the form of APPENDIX B to the Consent Solicitation.
3. REPRESENTATIONS AND WARRANTIES OF HOST REIT, THE OPERATING PARTNERSHIP AND
MERGER SUB
Host REIT, the Operating Partnership and Merger Sub represent and
warrant to the Partnership as of the date of this Agreement:
3.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION
Host REIT has been duly formed and is validly existing as a real
estate investment trust in good standing under Title 8 of the Maryland General
Corporation Law (the "MGCL") with trust power and authority to own, lease and
operate its properties, conduct the business in which it is engaged and perform
its obligations under this Agreement. Each of the Operating Partnership and
Merger Sub has been duly formed and is validly existing as a limited partnership
in good standing under the DRULPA with partnership power and authority to own,
lease and operate its properties, conduct the business in which it is engaged
and perform its obligations under this Agreement. Each of Host REIT, the
Operating Partnership and Merger Sub is duly qualified to transact business and
is in good standing under the laws of each jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, except where the failure to so qualify or be in good standing
would not reasonably be expected to have a
10
<PAGE>
material adverse effect on the business, financial condition or results of
operations of Host REIT, the Operating Partnership and their respective
subsidiaries taken as a whole (a "Host Material Adverse Effect"). Host REIT has
furnished or made available to the Partnership true and complete copies of its
Declaration of Trust and Bylaws, as amended or supplemented to the date of this
Agreement. As of the Effective Time, Host REIT's Declaration of Trust and
Bylaws and the Operating Partnership's partnership agreement shall be
substantially in the forms of the Amended and Restated Declaration of Trust, the
Bylaws and the Amended and Restated Agreement of Limited Partnership included as
exhibits to the Consent Solicitation. Each of the Operating Partnership and
Merger Sub has furnished or made available to the Partnership true and complete
copies of its Certificate of Limited Partnership and its partnership agreement,
as amended or supplemented to the date of this Agreement.
3.2. POWER, AUTHORITY AND ENFORCEABILITY
Each of Host REIT, the Operating Partnership and Merger Sub has the
requisite trust or partnership power and authority to enter into this Agreement
and, subject to obtaining certain approvals of their Board of Trustees,
shareholders or partners relating to the REIT Conversion (other than the Merger)
(the "REIT Conversion Approvals"), to consummate the Merger and other
transactions contemplated by this Agreement and each other agreement in
connection therewith to which Host REIT, the Operating Partnership or Merger
Sub, as the case may be, is a party. The execution and delivery of this
Agreement by each of Host REIT, the Operating Partnership and Merger Sub and the
consummation by each of Host REIT, the Operating Partnership and Merger Sub of
the transactions contemplated by this Agreement and each other agreement in
connection therewith to which Host REIT, the Operating Partnership or Merger
Sub, as the case may be, is a party have been duly authorized by all necessary
action on the part of Host REIT, the Operating Partnership and Merger Sub, as
the case may be, except for and subject to the REIT Conversion Approvals. This
Agreement has been duly executed and delivered by each of Host REIT, the
Operating Partnership and Merger Sub and constitutes the legal, valid and
binding agreement of each of Host REIT, the Operating Partnership and Merger Sub
enforceable against each of Host REIT, the Operating Partnership and Merger Sub
in accordance with its terms, except as may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, and (ii)
equitable principles of general applicability relating to the availability of
specific performance, injunctive relief, or other equitable remedies.
3.3. CAPITALIZATION; NOTES
(a) As of the date of this Agreement, the authorized capitalization
of Host REIT and the Operating Partnership are described in the Consent
Solicitation.
11
<PAGE>
(b) All outstanding Common Shares of Host REIT have been duly
authorized, validly issued, fully paid and are nonassessable and not subject to
any preemptive or similar rights, and the Common Shares that may be issued
pursuant to SECTION 1.6 hereof have been duly authorized for issuance, and upon
issuance will be duly and validly issued, fully paid and nonassessable.
(c) All outstanding OP Units have been duly authorized and validly
issued, are fully paid and are not subject to any preemptive or similar rights,
and the OP Units to be issued by the Operating Partnership in the Merger
pursuant to this Agreement have been duly authorized for issuance, and upon
issuance will be duly and validly issued and fully paid.
(d) Any Notes that may be issued by the Operating Partnership
pursuant to SECTION 1.6 hereof have been duly authorized for issuance, and upon
issuance, when duly authenticated and delivered by the Trustee in the manner
provided for in the Indenture, will constitute valid and binding obligations of
the Operating Partnership, entitled to the benefits of the Indenture and will be
enforceable against the Operating Partnership in accordance with their terms,
except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, and (ii) equitable principles of
general applicability relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
3.4. NONCONTRAVENTION
Except as disclosed in the Host SEC Documents (as defined below), the
execution, delivery and performance of this Agreement by each of Host REIT, the
Operating Partnership and Merger Sub and the consummation by each of Host REIT,
the Operating Partnership and Merger Sub of the Merger will not violate the
Declaration of Trust or Bylaws of Host REIT or the partnership agreement of the
Operating Partnership or Merger Sub as in effect on the date hereof or as
proposed to be amended and in effect as of the Effective Time substantially as
described in the Consent Solicitation, or conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or grant to others any rights of termination, amendment, acceleration or
cancellation of, any other material agreement, indenture or instrument to which
any of Host REIT, the Operating Partnership, Merger Sub or any of their
respective subsidiaries is a party or by which any of its property or assets is
bound or affected, or result in a violation of any Law of any Governmental
Entity applicable to any of Host REIT, the Operating Partnership or Merger Sub
or any of their respective subsidiaries or by which any of its property or
assets is bound or affected, which conflict, default, grant or violation would
reasonably be expected to have a Host Material Adverse Effect or which will be
avoided by Host REIT, the Operating Partnership, Merger Sub or Host obtaining
the consent of a third party (including, without limitation, the REIT Conversion
Approvals) at or prior to the Effective Time.
12
<PAGE>
3.5. LITIGATION
Except as disclosed in the Host SEC Documents (as defined below),
there is no suit, action or proceeding pending or, to the knowledge of any of
Host REIT, the Operating Partnership or Merger Sub, threatened against any of
Host REIT, the Operating Partnership, Merger Sub or any of their respective
subsidiaries or of which any of its properties or assets is the subject which is
not covered by insurance and which, individually or in the aggregate, if
determined adversely to such party, would impair the ability of any of Host
REIT, the Operating Partnership or Merger Sub to perform its obligations under
this Agreement or to consummate the Merger on substantially the terms
contemplated by this Agreement.
3.6. SEC DOCUMENTS; FINANCIAL STATEMENTS
Each of Host REIT, the Operating Partnership and Host has filed all
required reports, forms, statements and other documents with the SEC since
January 1, 1993 through the date hereof, including, without limitation, the
Consent Solicitation (the "Host SEC Documents"). The Host SEC Documents, as of
their respective filing dates, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act and, in each
case, the rules and regulations promulgated thereunder applicable to such Host
SEC Documents. None of the Host SEC Documents at the time of filing contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except to the extent such statements have been modified or
superseded by later Host SEC Documents filed and publicly available prior to the
date hereof and with respect to which any such statement or omission would not
reasonably be expected to have a Host Material Adverse Effect. The consolidated
financial statements of Host REIT, the Operating Partnership and Host and their
consolidated subsidiaries included in the Host SEC Documents complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by the applicable rules and regulations of the SEC) applied on
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly presented, in accordance with the applicable
requirements of GAAP and the applicable rules and regulations of the SEC, the
consolidated financial position of Host REIT, the Operating Partnership, Host
and their consolidated subsidiaries, in each case taken as a whole, as of the
dates thereof and the consolidated results of operations and cash flow for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
13
<PAGE>
3.7. NO MATERIAL ADVERSE CHANGES
Since the date of the most recent financial statements of Host REIT
and the Operating Partnership included in the Consent Solicitation, there has
not been any material adverse change in the business, financial condition or
results of operations of Host REIT, the Operating Partnership and their
subsidiaries taken as a whole (a "Host Material Adverse Change"), nor has there
been any occurrence or circumstance affecting Host REIT, the Operating
Partnership or any of their subsidiaries that with the passage of time would
reasonably be expected to result in a Host Material Adverse Change.
3.8. COMPLIANCE WITH LAWS AND MATERIAL AGREEMENTS
Except as disclosed in any Host SEC Reports and except for
violations, noncompliances and defaults which would not reasonably be expected
to have a Host Material Adverse Effect, none of Host REIT, the Operating
Partnership, Merger Sub or any of their subsidiaries (i) has violated or failed
to comply with any applicable Law of any Governmental Entity or (ii) is in
default, and no event has occurred which, with notice or lapse of time or both,
would constitute such a default under any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a party or
by which it is bound or to which any of its properties or assets is subject.
3.9. NYSE LISTING OF COMMON SHARES
The Common Shares issuable under SECTION 1.6 hereof and the Common
Shares reserved for issuance upon redemption of OP Units issued in the Merger
have been approved for listing on the NYSE, subject to official notice of
issuance.
4. COVENANTS
4.1. CONDUCT OF BUSINESS BY THE PARTNERSHIP
From the date of this Agreement to the Effective Time, except as
required in connection with the Merger and the other transactions contemplated
by this Agreement or unless the Partnership obtains prior written consent from
Host REIT or the Operating Partnership in each instance, the Partnership will:
(a) Carry on its business as currently conducted and only in the
usual and ordinary course, and make no amendment (except as contemplated in the
Consent Solicitation) to its partnership agreement;
14
<PAGE>
(b) Use its reasonable efforts to preserve its business organization
intact, to continue to operate the Partnership Properties in a good and
businesslike fashion consistent with past practices and to maintain the
Partnership Properties in good working order and condition in a manner
consistent with past practice;
(c) Not incur any material liability or make any material commitment
or enter into any other material transaction except in the ordinary and usual
course of business or pursuant to contracts existing on the date hereof;
(d) Not issue any Partnership Interests or options or rights to
purchase Partnership Interests and not purchase any of its Partnership Units;
(e) Not organize any subsidiary and not acquire or enter into an
agreement to acquire, by merger, consolidation or purchase of stock, interests
or assets, any business or entity;
(f) Not enter into, modify, amend or terminate any material agreement
with respect to any of the Partnership Properties, other than in the ordinary
course of business or pursuant to contracts existing on the date hereof, which
would encumber or be binding upon the Partnership Properties from and after the
Effective Time.
4.2. REASONABLE EFFORTS; FURTHER ASSURANCES; COOPERATION; NOTIFICATION;
TAX TREATMENT AND REPORTING
Each of the parties shall use its commercially reasonable efforts to
take, or cause to be taken or do, or cause to be done, all things necessary,
proper or advisable under applicable law to obtain all required regulatory
approvals and shall cooperate fully with each other and their respective
officers, trustees, directors, general partners, employees, agents, counsel,
accountants and other designees in connection with any steps required to be
taken as a part of its obligations under this Agreement. Each party shall do
such things as may be reasonably requested by the other parties in order to more
effectively consummate the Merger and the other transactions contemplated by
this Agreement, including, without limitation:
(a) The Partnership, Host REIT and the Operating Partnership shall
promptly make their respective required material filings and submissions with
Governmental Entities and shall take, or cause to be taken, all actions and do,
or cause to be done, all things necessary, proper or advisable under applicable
material Laws to (i) comply in all material respects with the provisions of the
Hart-Scott Rodino Antitrust Improvement Act of 1976, as amended ("HSR Act"), if
applicable, and (ii) obtain any other required material consent or approval of
any third party or any Governmental Entity necessary to perform their respective
obligations under this Agreement.
15
<PAGE>
(b) The Partnership, Host REIT and the Operating Partnership shall
cooperate and keep each other informed regarding (i) any required HSR Act
filings, if required, and (ii) all filings with the SEC.
(c) If any claim, action, suit, investigation or other proceeding by
any Governmental Entity or other person is commenced which questions the
validity or legality of the Merger or any of the other transactions contemplated
by this Agreement or seeks damages in connection therewith, the parties shall
cooperate and use all reasonable efforts to defend against such claim, action,
suit, investigation or other proceeding and, if an injunction or other order is
issued in any such action, suit or other proceeding, to use commercially
reasonable efforts to have such injunction or other order lifted, and to
cooperate reasonably regarding any other impediment to the consummation of the
Merger or any of the other transactions contemplated by this Agreement.
(d) Each party shall give prompt written notice to the others of (i)
the occurrence, or failure to occur, of any event which occurrence or failure
would reasonably be expected to cause any representation or warranty of the
Partnership, Host REIT, the Operating Partnership or Merger Sub, as the case may
be, contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date of this Agreement to the Effective Time or
that will or is reasonably expected to result in the failure to satisfy any of
the conditions specified in ARTICLE 5 and (ii) any failure of the Partnership,
Host REIT, the Operating Partnership or Merger Sub, as the case may be, to
comply in any material respect with any covenant or other agreement to be
compiled with under this Agreement.
(e) Each party shall treat the Merger for federal income tax purposes
(including, without limitation, each party's tax reporting requirements) as a
contribution by the current holders of Partnership Interests of such Partnership
Interests to the Operating Partnership in exchange for OP Units in a transaction
in which no gain is recognized by such holders of Partnership Interests under
either Section 721 or Section 707 of the Code (other than as may be required
under Section 731 by reason of Section 752).
4.3. LIMITATION ON DIVIDENDS BY HOST AND HOST REIT
From the date of this Agreement to the Effective Date, Host and Host
REIT shall limit aggregate dividends to Host's stockholder's or Host REIT
shareholders (including for such purpose the Blackstone Entities' share (if any)
of any such distributions) to an amount (or value of securities or other
property, as determined in good faith by the Board of Directors of Host or the
Board of Trustees of Host REIT) equal to $_________.
5. CONDITIONS TO CLOSING
5.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS
The obligations of each party to effect the Merger and to consummate
the other transactions contemplated by this Agreement to occur at the Effective
Time shall be subject to satisfaction at or prior to the Effective Time of the
following conditions:
(a) The Limited Partner Approvals shall have been obtained.
(b) No Law shall have been enacted by any Governmental Entity that
makes the consummation of the Merger or any other material transaction
contemplated by this Agreement illegal.
(c) At the Effective Time, no temporary restraining order,
preliminary or permanent injunction or other order, legal restraint or
prohibition
16
<PAGE>
issued by any Governmental Entity preventing the consummation of the Merger or
any of the other transactions contemplated by this Agreement shall be in effect.
(d) All consents, authorizations, orders and approvals of (or filing
or registration with) any Governmental Entity required in connection with the
consummation of the Merger, the other transactions contemplated by this
Agreement and the REIT Conversion shall have been obtained and any applicable
waiting period under the HSR Act shall have expired or been terminated, except
for such consents, authorizations, orders, approvals, filings and registrations
which the failure to obtain would not reasonably be expected to have a
Partnership Material Adverse Effect or a Host Material Adverse Effect.
(e) Host REIT's Common Shares shall have been listed on the NYSE and
the Common Shares issuable under SECTION 1.6 hereof and the Common Shares
reserved for issuance upon redemption of OP Units issued in the Merger shall
have been approved for listing on the NYSE, subject to official notice of
issuance.
(f) Shareholders owning at least 66 2/3% of the outstanding shares of
Host's common stock shall have approved the merger of Host into Host REIT and
such merger shall have been consummated.
(g) 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 taxable year commencing
after the REIT Conversion, and Host REIT shall have received an opinion of
counsel substantially to such effect.
(h) All required third-party consents to the Mergers and the REIT
Conversion, including and consents to transfer material operating licenses and
permits and management agreements, shall have been received, except to the
extent that the failure to obtain such consents would not reasonably be expected
to have a Partnership Material Adverse Effect or a Host Material Adverse Effect.
(i) Host shall not have determined, in its discretion, that the
United States Congress has 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.
17
<PAGE>
5.2. CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIP
The obligations of the Partnership to effect the Merger and to
consummate the other transactions contemplated by this Agreement to occur at the
Effective Time shall be subject to satisfaction at or prior to the Effective
Time of each of the following further conditions, except to the extent that a
failure to fulfill any such condition would not reasonably be expected to have a
Host Material Adverse Effect:
(a) The representations and warranties of Host REIT, the Operating
Partnership and Merger Sub set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time, as though made on and as of the Effective Time, except to the
extent such representation or warranty is expressly limited by its terms to
another date.
(b) Host REIT, the Operating Partnership and Merger Sub shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Effective Time.
(c) Since the date of this Agreement, there shall have been no Host
Material Adverse Change.
5.3. CONDITIONS TO OBLIGATIONS OF HOST REIT, THE OPERATING PARTNERSHIP AND
MERGER SUB
The obligations of Host REIT, the Operating Partnership and Merger
Sub to effect the Merger and to consummate the other transactions contemplated
by this Agreement to occur at the Effective Time shall be subject to
satisfaction at or prior to the Effective Time of each of the following further
conditions, except to the extent that a failure to fulfill any such condition
would not reasonably be expected to have a Partnership Material Adverse Effect:
(a) The representations and warranties of the Partnership set forth
in this Agreement shall be true and correct in all material respects as of the
date of this Agreement and as of the Effective Time, as though made on and as of
the Effective Time, except to the extent such representation or warranty is
expressly limited by its terms to another date.
(b) The Partnership shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Effective Time.
(c) Since the date of this Agreement, there shall have been no
Partnership Material Adverse Change.
18
<PAGE>
6. TERMINATION, EXPENSES, AMENDMENT AND WAIVER
6.1. TERMINATION
This Agreement may be terminated at any time prior to the Effective
Time, whether before or after the limited partners of the Partnership have
approved the Merger or the Certificate of Merger has been filed with the
Delaware Secretary of State (provided the Effective Time has not yet occurred),
by mutual written agreement of the parties hereto.
6.2. EXPENSES
The Operating Partnership shall pay all costs and expenses of the
parties in connection with the Merger and the other transactions contemplated by
this Agreement.
6.3. AMENDMENT
This Agreement may be amended by the parties in writing by action of
their respective Board of Trustees or general partner at any time before or
after any Limited Partner Approvals are obtained and prior to the Effective
Time; provided, however, that, after the Limited Partner Approvals are obtained,
no such amendment shall be made which by law requires the further approval of
the limited partners of the Partnership with obtaining such further approval.
6.4. EXTENSION; WAIVER
At any time prior to the Effective Time, the parties may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties, (b) waive any inaccuracies in the representations and warranties
of the other parties contained in this Agreement or in any document delivered
pursuant to this Agreement or (c) subject to the proviso of SECTION 6.3, waive
compliance with any of the agreements or conditions of the other party contained
in this Agreement. Any agreement on the part of a party to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party and then only to the extent expressly specified therein. No
delay or failure of any party to this Agreement to exercise or assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of those
rights.
19
<PAGE>
7. MISCELLANEOUS
7.1. NOTICES
All notices, requests, claims, demands and other communications under
this Agreement shall be in writing and shall be delivered personally, sent by
overnight courier (providing proof of delivery) to the parties or sent by
telecopy (providing confirmation of transmission) at the following addresses or
telecopy numbers (or at such other address or telecopy number for a party as
shall be specified by like notice):
(a) if to the Partnership, to:
[PARTNERSHIP]
10400 Fernwood Road
Bethesda, MD 20817
Attention: Christopher G. Townsend
Facsimile: (301) 380-7574
(b) if to Host REIT, the Operating
Partnership or Merger Sub to:
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, MD 20817
Attention: Christopher G. Townsend
Facsimile: (301) 380-7574
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Warren Gorrell, Jr.
Bruce W. Gilchrist
Facsimile: (202) 637-5910
All notices shall be deemed given only when actually received.
7.2. ASSIGNMENT AND BINDING EFFECT
This Agreement and the rights and obligations of the parties hereunder
may not be assigned by any party without the prior written consent of
20
<PAGE>
the other party hereto. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
7.3. GOVERNING LAW
This Agreement, the rights and obligations of the parties hereto, and
any claims or disputes relating thereto, shall be governed and construed in
accordance with the laws of the State of Delaware (excluding the choice of law
rules thereof).
7.4. SEVERABILITY
If any part of any provision of this Agreement shall be invalid or
unenforceable in any respect, such part shall be ineffective to the extent of
such invalidity or unenforceability only, without in any way affecting the
remaining parts of such provision or the remaining provisions of this Agreement.
7.5. FURTHER ASSURANCES
In connection with this Agreement and the transactions contemplated
hereby, each party shall execute and deliver any additional documents and
instruments and perform any additional acts that may be necessary or appropriate
or reasonably requested by another party to effectuate and perform the
provisions of this Agreement and such transactions.
7.6. EXCULPATION
This Agreement shall not impose any personal liability on any
shareholder, trustee, officer, employee or agent of Host REIT, and all Persons
shall look solely to the property of Host REIT for the payment of any claim
hereunder or for the performance of this Agreement. This Agreement also shall
impose no liability on any partner of the Partnership in the event the Operating
Partnership or Merger Sub suffers a loss as the result of an inaccuracy in any
representation or warranty made by the Partnership herein. None of Host REIT,
the Operating Partnership or Merger Sub shall have any recourse against any of
the partners of the Partnership in the event they suffer a loss as a result of
any inaccuracy in any representations and warranties contained herein.
7.7. COUNTERPARTS
To facilitate execution, this Agreement may be executed in as many
counterparts as may be required. It shall not be necessary that the signatures
of, or on behalf of, each party, or that the signatures of all persons required
to bind any party, appear on each counterpart; but it shall be sufficient that
the signature of, or
21
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on behalf of, each party, or that the signatures of the persons required to bind
any party, appear on one or more of the counterparts. All counterparts shall
collectively constitute a single agreement. It shall not be necessary in making
proof of this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of, or on behalf of, all of
the parties hereto.
[Signatures on Next Page]
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement and Plan of Merger, or have caused this Agreement and Plan of Merger
to be duly executed on their behalf, as of the day and year first above written.
HOST MARRIOTT TRUST
By:
-------------------------------------------
Name:
Title:
HOST MARRIOTT, L.P.
By: HMC Real Estate L.L.C. its sole general
partner
By:
---------------------------------------
Name:
Title:
[MERGER SUB]
By: , its sole general partner
By:
---------------------------------------
Name:
Title:
[PARTNERSHIP]
By: , its sole general partner
By:
---------------------------------------
Name:
Title:
23
<PAGE>
Exhibit 3.1
-----------------------------------------
FORM OF
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HOST MARRIOTT, L.P.
-----------------------------------------
<PAGE>
TABLE OF CONTENTS
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.............15
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......................................19
Section 4.4 Other Contribution Provisions.............................19
Section 4.5 No Interest on Capital....................................20
ARTICLE V DISTRIBUTIONS......................................................20
Section 5.1 Requirement and Characterization of Distributions.........20
Section 5.2 Amounts Withheld..........................................23
Section 5.3 Distributions Upon Liquidation............................23
Section 5.4 Revisions to Reflect Issuance of Partnership Interests....23
ARTICLE VI ALLOCATIONS.......................................................23
Section 6.1 Allocations For Capital Account Purposes..................23
Section 6.2 Revisions to Allocations to Reflect Issuance of
Partnership Interests........................................24
ARTICLE VII MANAGEMENT AND OPERATIONS OF BUSINESS............................25
Section 7.1 Management................................................25
Section 7.2 Certificate of Limited Partnership........................29
Section 7.3 Title to Partnership Assets...............................30
Section 7.4 Reimbursement of the General Partner......................30
Section 7.5 Outside Activities of the General Partner;
Relationship of Shares to Units; Funding Debt................32
Section 7.6 Transactions with Affiliates..............................33
Section 7.7 Indemnification...........................................34
Section 7.8 Liability of the General Partner..........................36
Section 7.9 Other Matters Concerning the General Partner..............37
Section 7.10 Reliance by Third Parties.................................38
Section 7.11 Restrictions on General Partner's Authority...............38
Section 7.12 Loans by Third Parties....................................39
ARTICLE VIII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS......................39
Section 8.1 Limitation of Liability...................................39
Section 8.2 Management of Business....................................39
Section 8.3 Outside Activities of Limited Partners....................40
Section 8.4 Return of Capital.........................................40
Section 8.5 Rights of Limited Partners Relating to the Partnership....40
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Section 8.6 Unit Redemption Right.....................................42
ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS............................45
Section 9.1 Records and Accounting....................................45
Section 9.2 Fiscal Year...............................................45
Section 9.3 Reports...................................................45
ARTICLE X TAX MATTERS........................................................46
Section 10.1 Preparation of Tax Returns................................46
Section 10.2 Tax Elections.............................................46
Section 10.3 Tax Matters Partner.......................................46
Section 10.4 Organizational Expenses...................................48
Section 10.5 Withholding...............................................48
ARTICLE XI TRANSFERS AND WITHDRAWALS.........................................49
Section 11.1 Transfer..................................................49
Section 11.2 Transfers of Partnership Interests of General Partner.....49
Section 11.3 Limited Partners' Rights to Transfer......................50
Section 11.4 Substituted Limited Partners..............................52
Section 11.5 Assignees.................................................52
Section 11.6 General Provisions........................................53
ARTICLE XII RESTRICTION ON OWNERSHIP OF UNITS................................55
Section 12.1 Definitions...............................................55
Section 12.2 Ownership Limitation on Units.............................56
Section 12.3 Exceptions to the Ownership Limitation....................59
Section 12.4 Transfer of Units in Trust................................59
Section 12.5 Enforcement...............................................61
Section 12.6 Non-Waiver................................................61
ARTICLE XIII ADMISSION OF PARTNERS...........................................61
Section 13.1 Admission of a Successor General Partner..................61
Section 13.2 Admission of Additional Limited Partners..................62
Section 13.3 Amendment of Agreement and Certificate of
Limited Partnership.........................................62
ARTICLE XIV DISSOLUTION AND LIQUIDATION......................................63
Section 14.1 Dissolution...............................................63
Section 14.2 Winding Up................................................64
Section 14.3 Compliance with Timing Requirements of Regulations........65
Section 14.4 Rights of Limited Partners................................65
Section 14.5 Notice of Dissolution.....................................66
Section 14.6 Cancellation of Certificate of Limited Partnership........66
Section 14.7 Reasonable Time for Winding Up............................66
Section 14.8 Waiver of Partition.......................................66
Section 14.9 Liability of Liquidator...................................66
ARTICLE XV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS......................66
Section 15.1 Amendments................................................66
Section 15.2 Meetings of the Partners..................................68
ARTICLE XVI GENERAL PROVISIONS...............................................69
Section 16.1 Addresses and Notice......................................69
Section 16.2 Titles and Captions.......................................69
Section 16.3 Pronouns and Plurals......................................69
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Section 16.4 Further Action...........................................70
Section 16.5 Binding Effect...........................................70
Section 16.6 Creditors................................................70
Section 16.7 Waiver...................................................70
Section 16.8 Counterparts.............................................70
Section 16.9 Applicable Law...........................................70
Section 16.10 Invalidity of Provisions.................................71
Section 16.11 Power of Attorney........................................71
Section 16.12 Entire Agreement.........................................72
Section 16.13 No Rights as Shareholders................................72
Section 16.14 Limitation to Preserve REIT Status.......................72
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<PAGE>
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
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<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
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of such property at the time of contribution as determined by the General
Partner using such
<PAGE>
reasonable method of valuation as it may adopt; provided, however, subject to
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Exhibit B, the General Partner shall, in its sole and absolute discretion, use
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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.
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"Act" means the Delaware Revised Uniform Limited Partnership Act, as
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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.
"Adjusted Capital Account" means the Capital Account maintained for
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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,
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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
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been adjusted pursuant to Exhibit B.
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"Adjustment Date" has the meaning set forth in Section 4.2.B.
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"Affiliate" means, with respect to any Person, (i) any Person directly
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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
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<PAGE>
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
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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
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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
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Partnership, as it may be amended, supplemented or restated from time to time.
"Appraised Value" means, with respect to any hotel, the value set
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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
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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
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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 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
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<PAGE>
(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
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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
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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
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is a Partner on the date hereof shall be the amount set forth opposite such
Partner's name on Exhibit A hereto.
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"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
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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
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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
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Valuation Date of the Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to
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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.
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<PAGE>
"Class A" has the meaning set forth in Section 5.1.C.
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"Class A Share" has the meaning set forth in Section 5.1.C.
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"Class A Unit" means any Unit that is not specifically designated by
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the General Partner as being of another specified class of Units.
"Class B" has the meaning set forth in Section 5.1.C.
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"Class B Share" has the meaning set forth in Section 5.1.C.
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"Class B Unit" means a Unit that is specifically designated by the
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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
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other comparable equity interests) of the General Partner Entity.
"Consent" means the consent or approval of a proposed action by a
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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
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shall no longer constitute a Contributed Property for purposes of Exhibit B, but
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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
-5-
<PAGE>
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
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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 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)
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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.
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<PAGE>
"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
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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
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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 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,
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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.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
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amended.
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<PAGE>
"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.
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"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
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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 Partner executes and delivers a general assignment
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<PAGE>
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
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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.
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"Liquidator" has the meaning set forth in Section 14.2.A..
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"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
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<PAGE>
Income shall be determined in accordance with Exhibit B. If an item of income,
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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
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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
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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
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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
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or exchangeable securities having the right to subscribe for or purchase shares
of beneficial interest (or other comparable equity interest) of the 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
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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
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the form of Exhibit D.
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"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
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"Partners" means the General Partner and the Limited Partners.
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"Partner Minimum Gain" means an amount, with respect to each Partner
--------------------
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such
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<PAGE>
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.
"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
-11-
<PAGE>
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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<PAGE>
"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.
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<PAGE>
"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.
---------
"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
-14-
<PAGE>
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 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.
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<PAGE>
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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<PAGE>
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 Marriot 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 Limited Partnership Interest to the General Partner. On the date
hereof, the Partners made the Capital Contributions 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
-17-
<PAGE>
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.
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
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<PAGE>
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 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.
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.
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<PAGE>
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
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 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
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<PAGE>
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:
(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
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<PAGE>
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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<PAGE>
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
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<PAGE>
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.
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
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<PAGE>
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 the 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;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the
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<PAGE>
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;
-26-
<PAGE>
(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,
administrative proceedings, arbitrations or other forms of
dispute resolution, the incurring of legal expense and the
indemnification of any
-27-
<PAGE>
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.
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<PAGE>
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. 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
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<PAGE>
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 is qualified as a
REIT for federal income tax purposes or any taxes imposed on the 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
interests 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
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<PAGE>
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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<PAGE>
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
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<PAGE>
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 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
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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 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
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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.
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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 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
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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, 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
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<PAGE>
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.
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 the 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) provided, however, that the foregoing limitation shall not
apply to any leases of all or substantially all of the Partnership's assets
entered into by the Partnership that are required, in the General Partner's
judgment, in order to satisfy any REIT Requirements.
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<PAGE>
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
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<PAGE>
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 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;
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(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, 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.
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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
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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.
(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.
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(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 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.
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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.
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
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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
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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 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.
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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 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.
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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
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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 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
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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.
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
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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 vote such
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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
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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 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
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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.
"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
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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
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Own more than 4.9% by value of any class of Partnership Interests (the
"Ownership Limitation").
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
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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 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)
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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 and any Prohibited Owner. Each
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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 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
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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 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
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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 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
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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
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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 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.
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<PAGE>
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.
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
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<PAGE>
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,
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<PAGE>
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 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 ten percent (10%) 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 thereon
(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
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<PAGE>
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. 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 Interest 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 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.
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<PAGE>
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.
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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) though (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.
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<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
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<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>
<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
<PAGE>
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.
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.
B-2
<PAGE>
(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.
B-3
<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
<PAGE>
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.
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
C-2
<PAGE>
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.
---------
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
C-3
<PAGE>
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 such 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 (i) various affiliates
of the Blackstone Group and a series of funds controlled by Blackstone Real
Estate Partners pursuant to that certain contribution agreement dated April 16,
1998 and (ii) Hopeport, Ltd.(or, alternatively, its partners) and Timeport,
Ltd.(or, alternatively, its 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).
C-4
<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:
<PAGE>
EXHIBIT E
VALUE OF CONTRIBUTED PROPERTY
Contributed Property 704(c) Value Agreed Value
- -------------------- ------------ ------------
.............................$ $
.............................
------------ -----------
Subtotal.....................$ $
------------ -----------
.............................$ $
.............................
----------- -----------
Subtotal.....................$ $
----------- -----------
.............................$ $
.............................
------------ -----------
Subtotal.....................$ $
------------ -----------
.............................$ $
.............................
------------ -----------
Subtotal.....................$ $
------------ -----------
.............................$ $
.............................
------------ -----------
Subtotal.....................$ $
------------ -----------
.............................$ $
.............................
------------ -----------
Subtotal.....................$ $
------------ -----------
TOTAL CONTRIBUTED PROPERTY.............$ $
============ ===========
<PAGE>
Exhibit 3.12
HOST MARRIOTT TRUST
-------------------
DECLARATION OF TRUST
Host Marriott Trust, a Maryland real estate investment trust (the
"Trust") under Title 8 of the Corporations and Associations Article of the
Annotated Code of Maryland ("Title 8"), desires to make its Declaration of Trust
as the same may be amended hereafter (the "Declaration of Trust").
The following provisions are all the provisions of this Declaration of
Trust currently in effect:
ARTICLE I
FORMATION
The Trust is a real estate investment trust within the meaning of
Title 8. The Trust shall not be deemed to be a general partnership, limited
partnership, joint venture, joint stock company or, except as provided in Title
3, Subtitles 6 and 7, of the Corporations and Associations Article of the
Annotated Code of Maryland, a corporation (but nothing herein shall preclude the
Trust from being treated for tax purposes as an association under the Internal
Revenue Code of 1986, as amended (the "Code")).
ARTICLE II
NAME
The name of the Trust is: Host Marriott Trust.
So far as may be practicable, the business of the Trust shall be
conducted and transacted under that name, which name (and the word "Trust"
wherever used in this Declaration of Trust, except where the context otherwise
requires) shall refer to the Trustees (as hereinafter defined) collectively but
not individually or personally and shall not refer to the shareholders or to any
officers, employees or agents of the Trust or of such Trustees.
Under circumstances in which the Board of Trustees of the Trust (the
"Board of Trustees" or "Board") determines that the use of the name of the Trust
is not practicable, the Trust may use any other designation or name for the
Trust.
<PAGE>
ARTICLE III
PURPOSES AND POWERS
Section 3.1 Purposes. The purposes for which the Trust is formed are
--------
to invest in and to acquire, hold, finance, manage, administer, control and
dispose of property, including, without limitation or obligation, engaging in
business as a real estate investment trust (a "REIT") under the Code.
Section 3.2 Powers. The Trust shall have all of the powers granted
------
to real estate investment trusts by Title 8 and all other powers set forth in
this Declaration of Trust which are not inconsistent with law and are
appropriate to promote and attain the purposes set forth in this Declaration of
Trust.
Section 3.3 Investment Policy. The fundamental investment policy of
-----------------
the Trust is to make investments in such a manner as to comply (i) with the
provisions of the Code applicable to real estate investment trusts and (ii) with
the requirements of Title 8 with respect to the composition of the Trust's
investments and the derivation of its income. Subject to Section 5.1 hereof,
the Trustees will use their best efforts to carry out this fundamental
investment policy and to conduct the affairs of the Trust in such a manner as to
continue to qualify the Trust for the tax treatment provided for REITs in the
Code; provided, however, no Trustee, officer, employee or agent of the Trust
-------- -------
shall be liable for any act or omission resulting in the loss of tax benefits
under the Code, except to the extent provided in Section 8.2 hereof. The
Trustees may change from time to time by resolution or in the bylaws of the
Trust (the "Bylaws"), such investment policies as they determine to be in the
best interests of the Trust, including prohibitions or restrictions upon certain
types of investments.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Trust in the State of Maryland
is CSC-Lawyers Incorporating Service, 11 East Chase Street, Baltimore, Maryland
21202. Said resident agent is a Maryland corporation. The Trust may have such
offices or places of business within or outside the State of Maryland as the
Board of Trustees may from time to time determine.
ARTICLE V
BOARD OF TRUSTEES
Section 5.1 Powers. Subject to any express limitations contained in
------
this Declaration of Trust or in the Bylaws, (a) the business and affairs of the
Trust shall be managed under the direction of the Board of Trustees and (b) the
Board shall have full, exclusive and absolute power, control and authority over
any and all property of
-2-
<PAGE>
the Trust. The Board may take any action as in its sole judgment and discretion
is necessary or appropriate to conduct the business and affairs of the Trust.
This Declaration of Trust shall be construed with a presumption in favor of the
grant of power and authority to the Board. Any construction of this Declaration
of Trust or determination made in good faith by the Board concerning its powers
and authority hereunder shall be conclusive. The enumeration and definition of
particular powers of the Trustees included in this Declaration of Trust or in
the Bylaws shall in no way be limited or restricted by reference to or inference
from the terms of this or any other provision of this Declaration of Trust or
the Bylaws or construed or deemed by inference or otherwise in any manner to
exclude or limit the powers conferred upon the Board of Trustees under the
general laws of the State of Maryland as now or hereafter in force or any other
applicable laws.
The Board, without any action by the shareholders of the Trust, shall
have and may exercise, on behalf of the Trust, without limitation, the power to
terminate the Trust's status as a REIT under the Code; to adopt Bylaws of the
Trust, which may thereafter be amended or repealed as provided therein; to elect
officers in the manner prescribed in the Bylaws; to solicit proxies from holders
of shares of beneficial interest of the Trust; and to do any other acts and
deliver any other documents necessary or appropriate to the foregoing powers.
Section 5.2 Number. The number of Trustees (the "Trustees") shall
------
initially be two (2), and shall not thereafter be decreased to less than (2),
but may be increased to a maximum of (13) (and may subsequently be reduced to
not less than two (2)) pursuant to the Bylaws of the Trust. Notwithstanding the
foregoing, if for any reason any or all of the Trustees cease to be Trustees,
such event shall not terminate the Trust or affect this Declaration of Trust or
the powers of any remaining Trustees. The names and addresses of the initial
two (2) Trustees, who shall serve until the first annual meeting of shareholders
and until their successors are duly elected and qualified, are:
Name Address
---- -------
Robert E. Parsons, Jr. c/o Host Marriott Trust
10400 Fernwood Road
Bethesda, Maryland 20817
Christopher G. Townsend c/o Host Marriott Trust
10400 Fernwood Road
Bethesda, Maryland 20817
The Trustees may increase the number of Trustees and fill any vacancy,
whether resulting from an increase in the number of Trustees or otherwise, on
the Board of Trustees. At each annual meeting of shareholders, the successors
to the Trustees whose terms expire at such meeting shall be elected to hold
office for a
-3-
<PAGE>
term expiring at the next annual meeting of shareholders. Subject to the rights
of holders of one or more classes or series of Preferred Shares to elect one or
more Trustees, the election of Trustees by shareholders shall require the vote
and be in accordance with the procedures set forth in the Bylaws.
It shall not be necessary to list in this Declaration of Trust the
names and addresses of any Trustees hereafter elected.
Section 5.3 Resignation, Removal or Death. Any Trustee may resign by
-----------------------------
written notice to the Board, effective upon execution and delivery to the Trust
of such written notice or upon any future date specified in the notice. Subject
to the rights of holders of one or more classes or series of Preferred Shares,
as hereinafter defined, to elect one or more Trustees, a Trustee may be removed
at any time, only with cause, at a meeting of the shareholders, by the
affirmative vote of the holders of not less than two-thirds of the Shares (as
defined in Section 6.1) then outstanding and entitled to be cast for the
election of Trustees. Upon the resignation or removal of any Trustee, or his
otherwise ceasing to be a Trustee, he shall automatically cease to have any
right, title or interest in and to the property of the Trust and shall execute
and deliver such documents as the remaining Trustees require for the conveyance
of any property of the Trust held in his name, and shall account to the
remaining Trustees as they require for all property which he holds as Trustee.
Upon the incapacity or death of any Trustee, his legal representative shall
perform the acts described in the foregoing sentence.
Section 5.4 Title to Property of the Trust. Legal title to all
------------------------------
property of the Trust shall be vested in the Trustees, but they may cause legal
title to any property of the Trust to be held by or in the name of any Trustee,
or the Trust, or any other person as nominee. The right, title and interest of
the Trustees in and to the property of the Trust shall automatically vest in
successor and additional Trustees upon their qualification and acceptance of
election or appointment as Trustees, and they shall thereupon have all the
rights and obligations of Trustees, whether or not conveyancing documents have
been executed and delivered pursuant to Section 5.3 hereof or otherwise.
Written evidence of the qualification and acceptance of election or appointment
of successor and additional Trustees may be filed with the records of the Trust
and in such other offices, agencies or places as the Trustees may deem necessary
or desirable.
Section 5.5 Determination of Best Interest of Trust. In determining
---------------------------------------
what is in the best interest of the Trust, a Trustee shall consider the
interests of the shareholders of the Trust and, in his sole and absolute
discretion, may consider (a) the interests of the Trust's employees, suppliers,
creditors and customers, (b) the economy of the nation, (c) community and
societal interests and (d) the long-term as well as short-term interests of the
Trust and its shareholders, including the possibility that these interests may
be best served by the continued independence of the Trust.
-4-
<PAGE>
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1 Authorized Shares. The beneficial interest of the Trust
-----------------
shall be divided into shares of beneficial interest (the "Shares"). The Trust
has authority to issue 750 million common shares of beneficial interest, $.01
par value per share ("Common Shares"), and 50 million preferred shares of
beneficial interest, $.01 par value per share ("Preferred Shares"). The Board
of Trustees may amend this Declaration of Trust from time to time to increase or
decrease the aggregate number of Shares or the number of Shares of any class
that the Trust has authority to issue.
Section 6.2 Common Shares. Subject to the provisions of Article VII
-------------
or as otherwise provided in this Declaration of Trust, each Common Share shall
entitle the holder thereof to one vote on each matter upon which holders of
Common Shares are entitled to vote, and all Common Shares shall have equal
dividend, distribution, liquidation and other rights, and shall have no
preference, cumulative, preemptive, appraisal, conversion or exchange rights.
The Board of Trustees may reclassify any unissued Common Shares from time to
time into one or more classes or series of Shares by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications, or terms or
conditions of redemption of the Shares pursuant to Section 6.4.
Section 6.3 Preferred Shares. The Board of Trustees may classify any
----------------
unissued Preferred Shares and reclassify any previously classified but unissued
Preferred Shares of any series from time to time, into one or more series of
Shares by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or distributions,
qualifications, or terms or conditions of redemption of the Shares pursuant to
Section 6.4.
Section 6.4 Classified or Reclassified Shares. Prior to issuance of
---------------------------------
classified or reclassified Shares of any class or series, the Board of Trustees
by resolution shall (a) designate that class or series to distinguish it from
all other classes and series of Shares; (b) specify the number of Shares to be
included in the class or series; (c) set, subject to the provisions of Article
VII and subject to the express terms of any class or series of Shares
outstanding at the time, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or series;
and (d) cause the Trust to file Articles Supplementary with the State Department
of Assessments and Taxation of Maryland (the "SDAT"). Any of the terms of any
class or series of Shares set pursuant to clause (c) of this Section 6.4 may be
made dependent upon facts ascertainable outside the Declaration of Trust
(including, without limitation, the occurrence of any event or a determination
or action by the Trust or any other person or body) and may vary among holders
thereof, provided that the manner in which such facts or variations
-5-
<PAGE>
shall operate upon the terms of such class or series of Shares is clearly and
expressly set forth in the Articles Supplementary filed with the SDAT.
Section 6.5 Authorization by Board of Share Issuance. The Board of
----------------------------------------
Trustees may authorize the issuance from time to time of Shares of any class or
series, whether now or hereafter authorized, or securities or rights convertible
into Shares of any class or series, whether now or hereafter authorized, for
such consideration (whether in cash, property, past or future services,
obligation for future payment or otherwise) as the Board of Trustees may deem
advisable (or without consideration in the case of a Share split or Share
dividend), subject to such restrictions or limitations, if any, as may be set
forth in this Declaration of Trust or the Bylaws of the Trust.
Section 6.6 Dividends and Distributions. The Board of Trustees may
---------------------------
from time to time authorize, declare and pay to shareholders such dividends or
distributions, in cash or other assets of the Trust or in securities of the
Trust or from any other source as the Board of Trustees in its discretion shall
determine, including, without limitation, a dividend payable in Shares of one or
more classes or series to the holders of Shares of another class or series. The
Board of Trustees shall endeavor to declare and pay such dividends and
distributions as shall be necessary for the Trust to qualify as a real estate
investment trust under the Code; however, shareholders shall have no right to
any dividend or distribution unless and until authorized and declared by the
Board. The exercise of the powers and rights of the Board of Trustees pursuant
to this Section 6.6 shall be subject to the provisions of any class or series of
Shares at the time outstanding. The receipt by any person in whose name any
Shares are registered on the records of the Trust or by his duly authorized
agent shall be a sufficient discharge for all dividends or distributions payable
or deliverable in respect of such Shares and from all liability to see to the
application thereof. Notwithstanding any other provision in this Declaration of
Trust and unless the status of the Trust as a real estate investment trust under
the Code has been terminated by the Board of Trustees pursuant to Section 5.1
hereof, no determination shall be made by the Board of Trustees and no such
transaction shall be entered into by the Trust which would cause any Shares or
other beneficial interest in the Trust not to constitute "transferable shares"
or "transferable certificates of beneficial interest" under Section 856(a)(2) of
the Code or which would cause any distribution to constitute a preferential
dividend as described in Section 562(c) of the Code, and any such determination
or transaction shall be void ab initio.
-- ------
Section 6.7 General Nature of Shares. All Shares shall be personal
------------------------
property entitling the shareholders only to those rights provided in this
Declaration of Trust. The shareholders shall have no interest in the property
of the Trust and shall have no right to compel any partition, division, dividend
or distribution of the Trust or of the property of the Trust. The death of a
shareholder shall not terminate the Trust or give the shareholder's legal
representative any rights against other
-6-
<PAGE>
shareholders, the Trustees or the property of the Trust, except the right,
exercised in accordance with applicable provisions of the Bylaws, to receive a
new certificate for Shares in exchange for the certificate held by the deceased
shareholder. The Trust is entitled to treat as shareholders only those persons
in whose names Shares are registered as holders of Shares on the beneficial
interest ledger of the Trust.
Section 6.8 Fractional Shares. The Trust may, without the consent or
-----------------
approval of any shareholder, issue fractional Shares, eliminate a fraction of a
Share by rounding up or down to a full Share, arrange for the disposition of a
fraction of a Share by the person entitled to it, or pay cash for the fair value
of a fraction of a Share.
Section 6.9 Declaration and Bylaws. All shareholders are subject to
----------------------
the provisions of this Declaration of Trust and the Bylaws.
Section 6.10 Divisions and Combinations of Shares. Subject to an
------------------------------------
express provision to the contrary in the terms of any class or series of
beneficial interest hereafter authorized, the Board of Trustees shall have the
power to divide or combine the outstanding shares of any class or series of
beneficial interest, without a vote of shareholders.
ARTICLE VII
SHAREHOLDERS
Section 7.1 Meetings. There shall be an annual meeting of the
--------
shareholders, to be held on proper notice at such time (after the delivery of
the annual report) and convenient location as shall be determined by or in the
manner prescribed in the Bylaws, for the election of the Trustees, if required,
and for the transaction of any other business within the powers of the Trust.
Except as otherwise provided in the Declaration of Trust, special meetings of
shareholders may be called in the manner provided in the Bylaws. If there are
no Trustees, the officers of the Trust shall promptly call a special meeting of
the shareholders entitled to vote for the election of successor Trustees. Any
meeting may be adjourned and reconvened as the Trustees determine or as provided
in the Bylaws.
Section 7.2 Voting Rights. Subject to the provisions of any class or
-------------
series of Shares then outstanding, the shareholders shall be entitled to vote
only on the following matters: (a) election of Trustees as provided in Section
5.2 and the removal of Trustees as provided in Section 5.3; (b) amendment of the
Declaration of Trust as provided in Article IX; (c) termination of the Trust as
provided in Section 11.2; (d) merger or consolidation of the Trust, or the sale
of all or substantially all of the assets of the Trust, as provided in Article
X; (e) such other matters with respect to which the Board of Trustees has
adopted a resolution declaring that a proposed action is advisable and directing
that the matter be submitted to the shareholders for approval or ratification;
and (f) such other matters as may be properly brought before a meeting by a
shareholder pursuant to the
<PAGE>
Bylaws. Except with respect to the foregoing matters, no action taken by the
shareholders at any meeting shall in any way bind the Board of Trustees.
Section 7.3 No Preemptive and Appraisal Rights. Except as may be
----------------------------------
provided by the Board of Trustees in setting the terms of classified or
reclassified Shares pursuant to Section 6.4, no holder of Shares shall, as such
holder, (a) have any preemptive right to purchase or subscribe for any
additional Shares of the Trust or any other security of the Trust which the
Trust may issue or sell or (b), except as expressly required by Title 8, have
any right to require the Trust to pay such holder the fair value of such
holder's Shares in an appraisal or similar proceeding.
Section 7.4 Action By Shareholders without a Meeting. Subject to
----------------------------------------
Title 8 and any other applicable provisions of law, the Bylaws of the Trust may
provide that any action required or permitted to be taken by the shareholders
may be taken without a meeting by the unanimous written consent of all
shareholders entitled to vote on such matter.
ARTICLE VIII
LIABILITY LIMITATION, INDEMNIFICATION
AND TRANSACTIONS WITH THE TRUST
Section 8.1 Limitation of Shareholder Liability. No shareholder
-----------------------------------
shall be liable for any debt, claim, demand, judgment or obligation of any kind
of, against or with respect to the Trust by reason of being a shareholder, nor
shall any shareholder be subject to any personal liability whatsoever, in tort,
contract or otherwise, to any person in connection with the property or the
affairs of the Trust by reason of being a shareholder.
Section 8.2 Limitation of Trustee and Officer Liability. To the
-------------------------------------------
maximum extent that Maryland law in effect from time to time permits limitation
of the liability of trustees and officers of a real estate investment trust, no
Trustee or officer of the Trust shall be liable to the Trust or to any
shareholder for money damages. Neither the amendment nor repeal of this Section
8.2, nor the adoption or amendment of any other provision of this Declaration of
Trust inconsistent with this Section 8.2, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption. In
the absence of any Maryland statute limiting the liability of trustees and
officers of a Maryland real estate investment trust for money damages in a suit
by or on behalf of the Trust or by any shareholder, no Trustee or officer of the
Trust shall be liable to the Trust or to any shareholder for money damages
except to the extent that (a) the Trustee or officer actually received an
improper benefit or profit in money, property or services, for the amount of the
benefit or profit in money, property or services actually received; or (b) a
judgment or other final adjudication adverse to the Trustee or officer is
entered in a proceeding based upon a finding in the proceeding that the
Trustee's or officer's action or failure to act
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<PAGE>
was material to the cause of action adjudicated in the proceeding and was
committed in bad faith or was the result of active and deliberate dishonesty.
Section 8.3 Indemnification. The Trust shall have the power, to the
---------------
maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former shareholder, Trustee or officer of the Trust or (b) any
individual who, while a Trustee of the Trust and at the request of the Trust,
serves or has served as a director, officer, partner, trustee, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise from and against any claim or liability to which such
person may become subject or which such person may incur by reason of such
individual's status as a present or former shareholder, Trustee or officer of
the Trust or such individual's service, while a Trustee of the Trust and at the
request of the Trust, as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise. The Trust shall have the power, with the
approval of its Board of Trustees, to provide such indemnification and
advancement of expenses to a person who served a predecessor of the Trust in any
of the capacities described in (a) or (b) above and to any employee or agent of
the Trust or a predecessor of the Trust.
Section 8.4 Transactions Between the Trust and its Trustees,
------------------------------------------------
Officers, Employees and Agents. Subject to any express restrictions in this
- ------------------------------
Declaration of Trust or adopted by the Trustees in the Bylaws or by resolution,
the Trust may enter into any contract or transaction of any kind with any
person, including any Trustee, officer, employee or agent of the Trust or any
person affiliated with a Trustee, officer, employee or agent of the Trust,
whether or not any of them has a financial interest in such transaction.
Section 8.5 Express Exculpatory Clauses in Instruments. The Board of
------------------------------------------
Trustees shall cause to be inserted, in every written agreement, undertaking or
obligation made or issued on behalf of the Trust, an appropriate provision to
the effect that neither the shareholders nor the Trustees, officers, employees
or agents of the Trust shall be liable under any written instrument creating an
obligation of the Trust, and all persons shall look solely to the property of
the Trust for the payment of any claim under or for the performance of that
instrument. The omission of the foregoing exculpatory language from any
instrument shall not affect the validity or enforceability of such instrument
and shall not render any shareholder, Trustee, officer, employee or agent liable
thereunder to any third party nor shall the Trustees or any officer, employee or
agent of the Trust be liable to anyone for such omission.
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<PAGE>
ARTICLE IX
AMENDMENTS
Section 9.1 General. The Trust reserves the right from time to time
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to make any amendment to this Declaration of Trust, now or hereafter authorized
by law, including any amendment altering the terms or contract rights, as
expressly set forth in this Declaration of Trust, of any Shares. All rights and
powers conferred by this Declaration of Trust on shareholders, Trustees and
officers are granted subject to this reservation. Articles of Amendment to this
Declaration of Trust (a) shall be signed and acknowledged by at least a majority
of the Trustees, or an officer duly authorized by at least a majority of the
Trustees, (b) shall be filed for record as provided in Section 12.5 and (c)
shall become effective as of the later of the time the SDAT accepts the Articles
of Amendment for record or the time established in the Articles of Amendment,
not to exceed 30 days after the Articles of Amendment are accepted for record.
All references to this Declaration of Trust shall include all amendments
thereto.
Section 9.2 By Trustees. The Trustees may amend this Declaration of
-----------
Trust from time to time, in the manner provided by Title 8, without any action
by the shareholders, (a) to qualify as a real estate investment trust under the
Code or under Title 8 and (b) as otherwise provided in this Declaration of
Trust.
Section 9.3 By Shareholders. Except as otherwise provided in this
----------------
Declaration of Trust, any amendment to this Declaration of Trust shall be valid
only if proposed in a resolution adopted by the Board of Trustees, which
resolution shall set forth the proposed amendment and declare that it is
advisable, and approved at an annual or special meeting of shareholders by the
affirmative vote of not less than two-thirds of all the votes entitled to be
cast on the matter.
ARTICLE X
MERGER, CONSOLIDATION OR TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF
THE TRUST
Subject to the terms of any class or series of Shares at the time
outstanding, the Trust may merge with or into another entity, but any such
merger must be approved (i) by the Board of Trustees in the manner provided in
Title 8 and (ii) by shareholders to the extent required in Title 8. Subject to
the terms of any class or series of Shares at the time outstanding, the Trust
also may (a) to the extent permitted by law, consolidate the Trust with one or
more other entities into a new entity or (b) sell, lease, exchange, or otherwise
transfer all or substantially all of the assets of the Trust, but any such
action must be approved by the Board of Trustees and, after notice to all
shareholders entitled to vote on the matter, by the affirmative vote of two-
thirds of all the votes entitled to be cast on the matter (or
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<PAGE>
such higher vote as may be required by law). The following transactions shall
not constitute "a sale, lease, exchange, or other transfer of all or
substantially all of the assets of the Trust" for purposes of clause (b) in the
preceding sentence and the requirement of shareholder approval thereof: a sale,
lease, exchange, or other transfer of all or substantially all of the assets of
the Trust in the ordinary course of business actually conducted by it; a
mortgage, pledge or creation of any other security interest in any or all of the
assets of the Trust, whether or not in the ordinary course of its business; an
exchange of shares of stock through voluntary action under any agreement with
shareholders; or a sale, lease, exchange, or other transfer of all or
substantially all of the assets of the Trust to one or more persons if all the
equity interests of the person or persons are owned, directly or indirectly, by
the Trust.
ARTICLE XI
DURATION AND TERMINATION OF TRUST
Section 11.1 Duration. The Trust shall continue perpetually unless
--------
terminated pursuant to Section 11.2 or pursuant to any applicable provision of
Title 8.
Section 11.2 Termination.
-----------
(a) Subject to the provisions of any class or series of Shares at the
time outstanding, the Trust may be terminated at any meeting of shareholders, by
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter. Upon the termination of the Trust:
(i) The Trust shall carry on no business except for the purpose
of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under the Declaration of Trust shall
continue, including the powers to fulfill or discharge the Trust's contracts,
collect its assets, sell, convey, assign, exchange, transfer or otherwise
dispose of all or any part of the remaining property of the Trust's to one or
more persons at public or private sale for consideration which may consist in
whole or in part of cash, securities or other property of any kind, discharge or
pay its liabilities, and do all other acts appropriate to liquidate its
business.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and agreements as
they deem necessary for their protection, the Trustees may distribute the
remaining property of the Trust among the shareholders so that after payment in
full or the setting apart for payment of such preferential amounts, if any, to
which the holders of
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<PAGE>
any Shares at the time outstanding shall be entitled, the remaining property of
the Trust shall, subject to any participating or similar rights of Shares at the
time outstanding, be distributed ratably among the holders of Common Shares at
the time outstanding.
(b) After termination of the Trust, the liquidation of its business
and the distribution to the shareholders as herein provided, a majority of the
Trustees shall execute and file with the Trust's records a document certifying
that the Trust has been duly terminated, and the Trustees shall be discharged
from all liabilities and duties hereunder, and the rights and interests of all
shareholders shall cease.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Governing Law. This Declaration of Trust is executed by
-------------
the undersigned Trustees and delivered in the State of Maryland with reference
to the laws thereof, and the rights of all parties and the validity,
construction and effect of every provision hereof shall be subject to and
construed according to the laws of the State of Maryland without regard to
conflicts of laws provisions thereof.
Section 12.2 Reliance by Third Parties. Any certificate shall be
-------------------------
final and conclusive as to any person dealing with the Trust if executed by the
Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying
to: (a) the number or identity of Trustees, officers of the Trust or
shareholders; (b) the due authorization of the execution of any document; (c)
the action or vote taken, and the existence of a quorum, at a meeting of the
Board of Trustees or shareholders; (d) a copy of this Declaration of Trust or of
the Bylaws as a true and complete copy as then in force; (e) an amendment to
this Declaration of Trust; (f) the termination of the Trust; or (g) the
existence of any fact or relating to the affairs of the Trust. No purchaser,
lender, transfer agent or other person shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trust,
on its behalf or by any officer, employee or agent of the Trust.
Section 12.3 Severability.
------------
(a) The provisions of this Declaration of Trust are severable, and if
the Board of Trustees shall determine, with the advice of counsel, that any one
or more of such provisions (the "Conflicting Provisions") are in conflict with
the Code, Title 8 or other applicable federal or state laws, the Conflicting
Provisions, to the extent of the conflict, shall be deemed never to have
constituted a part of this Declaration of Trust, even without any amendment of
this Declaration of Trust pursuant to Article X and without affecting or
impairing any of the remaining provisions of this Declaration of Trust or
rendering invalid or improper any action taken or omitted prior to such
determination. No Trustee shall be liable for making or failing to make such a
determination. In the event of any such determination by
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<PAGE>
Exhibit 3.14
HOST MARRIOTT TRUST
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of Host Marriott
----------------
Trust (the "Trust") shall be located at such place or places as the Trustees may
designate.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices
------------------
at such places as the Trustees may from time to time determine or the business
of the Trust may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the
-----
principal office of the Trust or at such other place within the United States as
shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for
--------------
the election of Trustees and the transaction of any business within the powers
of the Trust shall be held during the month of May of each year, after the
delivery of the annual report referred to in Section 12 of this Article II, at a
convenient location and on proper notice, on a date and at the time set by the
Trustees, beginning with the year 1999. Failure to hold an annual meeting does
not invalidate the Trust's existence or affect any otherwise valid acts of the
Trust.
Section 3. SPECIAL MEETINGS. Only the Board of Trustees may call
----------------
special meetings of the shareholders. A special meeting need not be called to
consider any matter which is substantially the same as a matter voted on at any
meeting of the shareholders held during the preceding twelve months.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
------
meeting of shareholders, the Secretary shall give to each shareholder entitled
to vote at such meeting and to each shareholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by
<PAGE>
presenting it to such shareholder personally or by leaving it at his residence
or usual place of business. If mailed, such notice shall be deemed to be given
when deposited in the United States mail addressed to the shareholder at his
post office address as it appears on the records of the Trust, with postage
thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Trust may be
---------------
transacted at an annual meeting of shareholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of shareholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of the shareholders, the
------------
Chairman of the Board, if there is one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there is one, the Chief Executive Officer, if
there is one, the President, the Vice Presidents in their order of rank and
seniority, or a Chairman chosen by the shareholders entitled to cast a majority
of the votes which all shareholders present in person or by proxy are entitled
to cast, shall act as Chairman, and the Secretary, or, in his absence, an
Assistant Secretary, or in the absence of both the Secretary and Assistant
Secretaries, a person appointed by the Chairman shall act as Secretary.
Section 7. QUORUM. At any meeting of shareholders, the presence in
------
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the declaration of trust
("Declaration of Trust") for the vote necessary for the adoption of any measure.
If, however, such quorum shall not be present at any meeting of the
shareholders, the shareholders entitled to vote at such meeting, present in
person or by proxy, shall have the power to adjourn the meeting from time to
time to a date not more than 120 days after the original record date without
notice other than announcement at the meeting. At such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted at the meeting as originally notified.
Section 8. VOTING. Subject to the rights of the holders of any series
------
of Preferred Shares (as defined in the Declaration of Trust) to elect additional
Trustees under specified circumstances, a plurality of all the votes cast at a
meeting of shareholders duly called and at which a quorum is present shall be
sufficient to elect a Trustee. Each share may be voted for as many individuals
as there are Trustees to be elected and for whose election the share is entitled
to be voted. A majority of the votes cast at a meeting of shareholders duly
called and at which a quorum is present shall be sufficient to approve any other
matter which may
2
<PAGE>
properly come before the meeting, unless more than a majority of the votes cast
is required herein or by statute or by the Declaration of Trust. Unless
otherwise provided in the Declaration of Trust, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Section 9. PROXIES. A shareholder may cast the votes entitled to be
-------
cast by the shares owned of record by him either in person or by proxy executed
in writing by the shareholder or by his duly authorized attorney in fact. Such
proxy shall be filed with the Secretary of the Trust before or at the time of
the meeting. No proxy shall be valid after 11 months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust
-----------------------------------
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the
governing board of such corporation or other entity or agreement of the partners
of the partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such shares. Any trustee or other
fiduciary may vote shares registered in his name as such fiduciary, either in
person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be
voted at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Trustees may adopt by resolution a procedure by which a shareholder
may certify in writing to the Trust that any shares registered in the name of
the shareholder are held for the account of a specified person other than the
shareholder. The resolution shall set forth the class of shareholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share transfer
books, the time after the record date or closing of the share transfer books
within which the certification must be received by the Trust; and any other
provisions with respect to the procedure which the Trustees consider necessary
or desirable. On receipt of such certification, the person specified in the
certification shall be regarded as, for the purposes set forth in the
certification, the shareholder of record of the specified shares in place of the
shareholder who makes the certification.
3
<PAGE>
Section 11. INSPECTORS. At any meeting of shareholders, the chairman
----------
of the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares represented at
the meeting based upon their determination of the validity and effect of
proxies, count all votes, report the results and perform such other acts as are
proper to conduct the election and voting with impartiality and fairness to all
the shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
----- -----
Section 12. REPORTS TO SHAREHOLDERS. The Trustees shall submit to the
-----------------------
shareholders at or before the annual meeting of shareholders a report of the
business and operations of the Trust during the prior fiscal year, containing a
balance sheet and a statement of income and surplus of the Trust, accompanied by
the certification of an independent certified public accountant, and such
further information as the Trustees may determine is required pursuant to any
law or regulation to which the Trust is subject. Within the earlier of 20 days
after the annual meeting of shareholders or 120 days after the end of the fiscal
year of the Trust, the Trustees shall place the annual report on file at the
principal office of the Trust and with any governmental agencies as may be
required by law and as the Trustees may deem appropriate.
Section 13. NOMINATIONS AND PROPOSALS BY SHAREHOLDERS.
-----------------------------------------
(a) Annual Meetings of Shareholders. (1) Nominations of persons for
-------------------------------
election to the Board of Trustees and the proposal of business to be considered
by the shareholders may be made at an annual meeting of shareholders (i)
pursuant to the Trust's notice of meeting, (ii) by or at the direction of the
Trustees or (iii) by any shareholder of the Trust who was a shareholder of
record both at the time of giving of notice provided for in this Section 13(a)
and at the time of the annual meeting, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in this Section 13(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a shareholder pursuant to clause (iii) of paragraph
(a) (1) of this Section 13, the shareholder must have given timely notice
thereof in writing to the Secretary of the Trust and such other business must
otherwise be a proper matter for action by shareholders. To be timely, a
shareholder's notice shall
4
<PAGE>
be delivered to the Secretary at the principal executive offices of the Trust
not later than the close of business on the 60th day nor earlier than the close
of business on the 90th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
-------- -------
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date or if the Trust has not previously held an annual
meeting, notice by the shareholder to be timely must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made by the Trust. In no event shall the
public announcement of a postponement or adjournment of an annual meeting to a
later date or time commence a new time period for the giving of a shareholder's
notice as described above. Such shareholder's notice shall set forth as to each
person whom the shareholder proposes to nominate for election or reelection as a
Trustee all information relating to such person that is required to be disclosed
in solicitations of proxies for election of Trustees in an election contest, or
is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Trustee if elected); (ii) as to any other business that the
shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
shareholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the shareholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such shareholder, as they appear on the Trust's books, and of
such beneficial owner and (y) the number of each class of shares of the Trust
which are owned beneficially and of record by such shareholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a) (2) of this Section 13 to the contrary, in the event that the number of
Trustees to be elected to the Board of Trustees is increased and there is no
public announcement by the Trust naming all of the nominees for Trustee or
specifying the size of the increased Board of Trustees at least 70 days prior to
the first anniversary of the preceding year's annual meeting, a shareholder's
notice required by this Section 13(a) shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the Secretary at the principal executive offices of the
Trust not later than the close of business on the tenth day following the day on
which such public announcement is first made by the Trust.
5
<PAGE>
(b) Special Meetings of Shareholders. Only such business shall be
--------------------------------
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board of Trustees may be made at a special meeting of
shareholders at which Trustees are to be elected (i) pursuant to the Trust's
notice of meeting, (ii) by or at the direction of the Board of Trustees or (iii)
provided that the Board of Trustees has determined that Trustees shall be
elected at such special meeting, by any shareholder of the Trust who was a
shareholder of record both at the time of giving of notice provided for in this
Section 13(b) and at the time of the special meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Section 13(b). In addition to the foregoing requirements, for nominations or
other business to be properly brought before a special meeting by a shareholder,
such shareholder's notice containing the information required by paragraph
(a)(2) of this Section 13 must be delivered to the Secretary at the principal
executive offices of the Trust not earlier than the close of business on the
90th day prior to such special meeting and not later than the close of business
on the later of the 60th day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting. In no event shall the public announcement of a postponement or
adjournment of a special meeting to a later date or time commence a new time
period for the giving of a shareholder's notice as described above.
(c) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this Section 13 shall be eligible to serve as
Trustees and only such business shall be conducted at a meeting of shareholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 13. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 13 and, if any proposed
nomination or business is not in compliance with this Section 13, to declare
that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 13, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Trust with the Securities and Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 13,
a shareholder shall also comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 13. Nothing in this Section 13 shall be
deemed to affect any rights of shareholders to request inclusion of proposals
in, nor any of the
6
<PAGE>
rights of the Trust to omit a proposal from, the Trust's proxy statement
pursuant to Rule 14a-8 under the Exchange Act.
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Subject to the rights of
-------------------------------
the holders of any series of Preferred Shares to elect additional Trustees under
specified circumstances and notwithstanding the provisions of Section 13 of this
Article II, any action required or permitted to be taken at a meeting of
shareholders may be taken without a meeting if a consent in writing, setting
forth such action, is signed by all shareholders entitled to vote on such
matter.
Section 15. VOTING BY BALLOT. Voting on any question or in any
----------------
election at a meeting of shareholders may be viva voce unless the presiding
---- ----
officer shall order or any shareholder present at such meeting in person or by
proxy shall demand that voting be by ballot.
ARTICLE III
TRUSTEES
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The
-----------------------------------------------------
business and affairs of the Trust shall be managed under the direction of its
Board of Trustees. A Trustee shall be an individual at least 21 years of age
who is not under legal disability. In case of failure to elect Trustees at an
annual meeting of the shareholders, the Trustees holding over shall continue to
direct the management of the business and affairs of the Trust until their
successors are elected and qualify.
Section 2. NUMBER. At any regular meeting or at any special meeting
------
called for that purpose, a majority of the entire Board of Trustees may
establish, increase or decrease the number of Trustees, subject to any
limitations on the number of Trustees set forth in the Declaration of Trust.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
---------------------------
Trustees shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this Bylaw being necessary. The
Trustees may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
Trustees without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Trustees may be
----------------
called by or at the request of the Chairman of the Board or the President or by
a majority of the Trustees then in office. The person or persons authorized to
7
<PAGE>
call special meetings of the Trustees may fix any place, either within or
without the State of Maryland, as the place for holding any special meeting of
the Trustees called by them.
Section 5. NOTICE. Notice of any special meeting shall be given by
------
written notice delivered personally, telegraphed, facsimile-transmitted or
mailed to each Trustee at his business or residence address. Personally
delivered or telegraphed notices shall be given at least two days prior to the
meeting. Notice by mail shall be given at least five days prior to the meeting.
Telephone or facsimile-transmission notice shall be given at least 24 hours
prior to the meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. If given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. Telephone notice shall be deemed
given when the Trustee is personally given such notice in a telephone call to
which he is a party. Facsimile-transmission notice shall be deemed given upon
completion of the transmission of the message to the number given to the Trust
by the Trustee and receipt of a completed answer-back indicating receipt.
Neither the business to be transacted at, nor the purpose of, any annual,
regular or special meeting of the Trustees need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the Trustees shall constitute a quorum
------
for convening any meeting of the Trustees, provided that, if less than a
-------- ----
majority of such Trustees are present at said meeting, a majority of the
Trustees present may adjourn the meeting from time to time without further
notice, and provided further that if, pursuant to the Declaration of Trust or
these Bylaws, the vote of a majority of a particular group of Trustees is
required for action, a quorum must also include a majority of such group.
The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.
Section 7. VOTING. The action of the majority of the Trustees
------
present at a meeting at which a quorum is present when such meeting is convened
shall be the action of the Trustees, unless the concurrence of a greater
proportion is required for such action by applicable statute, the Declaration of
Trust or these Bylaws.
Section 8. TELEPHONE MEETINGS. Trustees may participate in a meeting
------------------
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
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Section 9. INFORMAL ACTION BY TRUSTEES. Any action required or
---------------------------
permitted to be taken at any meeting of the Trustees may be taken without a
meeting, if a consent in writing to such action is signed by each Trustee and
such written consent is filed with the minutes of proceedings of the Trustees.
Section 10. VACANCIES. If for any reason any or all of the Trustees
---------
cease to be Trustees, such event shall not terminate the Trust or affect these
Bylaws or the powers of the remaining Trustees hereunder. Any vacancy (including
a vacancy created by an increase in the number of Trustees) shall be filled, at
any regular meeting or at any special meeting called for that purpose, by a
majority of the Trustees. Any individual so elected as Trustee shall hold office
until the next annual meeting of shareholders and until his successor is elected
and qualified.
Section 11. COMPENSATION. (a) Trustees shall not receive any stated
------------
salary for their services as Trustees but, by resolution of the Trustees, may
receive fixed sums per year and/or per meeting and/or per visit to real property
owned or to be acquired by the Trust and for any service or activity they
perform or engage in as Trustees. Such fixed sums may be paid either in cash or
in shares of the Trust. Trustees may be reimbursed for expenses of attendance,
if any, at each annual, regular or special meeting of the Trustees or of any
committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as
Trustees; but nothing herein contained shall be construed to preclude any
Trustees from serving the Trust in any other capacity and receiving compensation
therefor.
(b) The Trust may lend money to, guarantee an obligation of or
otherwise assist a Trustee or a trustee or director of a direct or indirect
subsidiary of the Trust; provided, however, that such Trustee or other person is
also an executive officer of the Trust or of such subsidiary, or the loan,
guarantee or other assistance is in connection with the purchase of Shares. The
loan, guarantee or other assistance may be with or without interest, unsecured,
or secured in any manner that the Board of Trustees approves, including a pledge
of shares.
Section 12. REMOVAL OF TRUSTEES. The shareholders may, at any time,
-------------------
remove any Trustee in the manner provided in the Declaration of Trust. Subject
to the rights of the holders of any series of Preferred Shares to elect
additional Trustees resulting from the removal of one or more Trustees or under
other specified circumstances, the shareholders may elect a successor to fill a
vacancy on the Board of Trustees which results from the removal of a Trustee.
Section 13. LOSS OF DEPOSITS. No Trustee shall be liable for any loss
---- -- --------
which may occur by reason of the failure of the bank, trust company, savings
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and loan association, or other institution with whom moneys or shares have been
deposited.
Section 14. SURETY BONDS. Unless required by law, no Trustee shall be
------------
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 15. RELIANCE. Each Trustee, officer, employee and agent of the
--------
Trust shall, in the performance of his duties with respect to the Trust, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the Trust by any of its
officers or employees or by the advisers, accountants, appraisers or other
experts or consultants selected by the Trustees or officers of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
Section 16. CERTAIN RIGHTS OF TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS.
----------------------------------------------------------
The Trustees shall have no responsibility to devote their full time to the
affairs of the Trust. Any Trustee or officer, employee or agent of the Trust
(other than a full-time officer, employee or agent of the Trust), in his
personal capacity or in a capacity as an affiliate, employee or agent of any
other person, or otherwise, may have business interests and engage in business
activities similar or in addition to those of or relating to the Trust.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATION. The Trustees may appoint
--------------------------------
from among its members an Executive Committee, an Audit Committee and a
Compensation Committee, each composed of at least three Trustees, and other
committees, each composed of one or more Trustees, to serve at the pleasure of
the Trustees; provided, that the membership of the Compensation Committee shall
consist of a majority of Independent Trustees and the membership of the Audit
Committee shall consist only of Independent Trustees. An individual shall be
deemed to be an "Independent Trustee" hereunder if such individual is not an
affiliate of the Trust and is not an employee of the Trust.
Section 2. POWERS. The Trustees may delegate to committees appointed
------
under Section 1 of this Article IV any of the powers of the Trustees, except as
prohibited by law.
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Section 3. MEETINGS. Notice of committee meetings shall be given in the
--------
same manner as notice for special meetings of the Board of Trustees. One-third,
but not less than two (except for one-member committees), of the members of any
committee shall be present in person at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority present shall be the act of such committee. The Board of
Trustees may designate a chairman of any committee, and such chairman or any two
members of any committee (except for one-member committees) may fix the time and
place of its meetings unless the Board shall otherwise provide. In the absence
or disqualification of any member of any such committee, the members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another Trustee to act at the
meeting in the place of such absent or disqualified members.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Trustees at the next succeeding meeting, and any action
by the committee shall be subject to revision and alteration by the Board of
Trustees, provided that no rights of third persons shall be affected by any such
revision or alteration.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Trustees
-------------------
may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
-----------------------------
permitted to be taken at any meeting of a committee of the Trustees may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
---------
Trustees shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
Section 7. EMERGENCY. In the event of a state of disaster of
---------
sufficient severity to prevent the conduct and management of the affairs and
business of the Trust by its Trustees and officers as contemplated by the
Declaration of Trust and these Bylaws, any two or more available members of the
then incumbent Executive Committee shall constitute a quorum of that Committee
for the full conduct and management of the affairs and business of the Trust in
accordance with the provisions of this Article IV. In the event of the
unavailability,
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at such time, of a minimum of two members of the then incumbent Executive
Committee, the available Trustees shall elect an Executive Committee composed of
any two members of the Board of Trustees, whether or not they be officers of the
Trust, which two members shall constitute the Executive Committee for the full
conduct and management of the affairs of the Trust in accordance with the
foregoing provisions of this Section 7. This Section 7 shall be subject to
implementation by resolution of the Board of Trustees passed from time to time
for that purpose, and any provisions of the Bylaws (other than this Section 7)
and any resolutions which are contrary to the provisions of this Section 7 or
to the provisions of any such implementing resolutions shall be suspended until
it shall be determined by any interim Executive Committee acting under this
Section 7 that it shall be to the advantage of the Trust to resume the conduct
and management of its affairs and business under all the other provisions of
these Bylaws.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall include
------------------
a President, a Secretary and a Treasurer and may include a Chairman of the
Board, a Vice Chairman of the Board, a Chief Executive Officer, a Chief
Operating Officer, a Chief Financial Officer, a Chief Legal Counsel, one or more
Vice Presidents, one or more Assistant Secretaries and one or more Assistant
Treasurers. In addition, the Trustees may from time to time appoint such other
officers with such powers and duties as they shall deem necessary or desirable.
The officers of the Trust shall be elected annually by the Trustees at the first
meeting of the Trustees held after each annual meeting of shareholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Each officer shall hold office
until his successor is elected and qualifies or until his death, resignation or
removal in the manner hereinafter provided. Any two or more offices except
President and Vice President may be held by the same person. In their
discretion, the Trustees may leave unfilled any office except that of President
and Secretary. Election of an officer or agent shall not of itself create
contract rights between the Trust and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust
-----------------------
may be removed at any time by the Trustees if in their judgment the best
interests of the Trust would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Trust may resign at any time by giving written notice of his
resignation to the Trustees, the Chairman of the Board, the President or the
Secretary. Any resignation shall take effect at any time subsequent to the time
specified therein or,
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if the time when it shall become effective is not specified therein, immediately
upon its receipt. The acceptance of a resignation shall not be necessary to make
it effective unless otherwise stated in the resignation. Such resignation shall
be without prejudice to the contract rights, if any, of the Trust.
Section 3. VACANCIES. A vacancy in any office may be filled by the
---------
Trustees for the balance of the term.
Section 4. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The Trustees may
---------------------------------------
from time to time appoint a Chairman of the Board and a Vice Chairman of the
Board. The Chairman of the Board shall preside over the meetings of the Trustees
and of the shareholders at which he shall be present and shall in general
oversee all of the business and affairs of the Trust. In the absence of the
Chairman of the Board, the Vice Chairman of the Board shall preside at such
meetings at which he shall be present. The Chairman and the Vice Chairman of the
Board may execute any deed, mortgage, bond, contract or other instrument, except
in cases where the execution thereof shall be expressly delegated by the
Trustees or by these Bylaws to an officer or some other agent of the Trust or
shall be required by law to be otherwise executed. The Chairman of the Board and
the Vice Chairman of the Board shall perform such other duties as may be
assigned to him or them by the Trustees.
Section 5. CHIEF EXECUTIVE OFFICER. The Trustees may designate a Chief
-----------------------
Executive Officer from among the elected officers. The Chief Executive Officer
shall have responsibility for implementation of the policies of the Trust, as
determined by the Trustees, and for the administration of the business affairs
of the Trust. In the absence of both the Chairman and Vice Chairman of the
board, the Chief Executive Officer shall preside over the meetings of the
Trustees and of the shareholders at which he shall be present.
Section 6. CHIEF OPERATING OFFICER. The Trustees may designate a Chief
-----------------------
Operating Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the Trustees.
Section 7. CHIEF FINANCIAL OFFICER. The Trustees may designate a Chief
-----------------------
Financial Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the Trustees.
Section 8. CHIEF LEGAL COUNSEL. The Trustees may designate a Chief
-------------------
Legal Counsel from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President or the Trustees.
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Section 9. PRESIDENT. In the absence of the Chairman, the Vice
---------
Chairman of the Board and the Chief Executive Officer, the President shall
preside over the meetings of the Trustees and of the shareholders at which he
shall be present. In the absence of a designation of a Chief Executive Officer
by the Trustees, the President shall be the Chief Executive Officer and shall be
ex officio a member of all committees that may, from time to time, be
constituted by the Trustees. The President may execute any deed, mortgage, bond,
contract or other instrument, except in cases where the execution thereof shall
be expressly delegated by the Trustees or by these Bylaws to some other officer
or agent of the Trust or shall be required by law to be otherwise executed; and
in general shall perform all duties incident to the office of president and such
other duties as may be prescribed by the Chief Executive Officer or the Trustees
from time to time.
Section 10. VICE PRESIDENTS. In the absence of the President or in the
---------------
event of a vacancy in such office, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the President and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President; and shall perform such other duties as from time to time may be
assigned to him by the Chief Executive Officer, the President or the Trustees.
The Trustees may designate one or more Vice Presidents as Executive Vice
President, Senior Vice President or as Vice President for particular areas of
responsibility.
Section 11. TREASURER. The Treasurer shall have the custody of the
---------
funds and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the Trust in
such depositories as may be designated by the Trustees.
The Treasurer shall disburse the funds of the Trust as may be ordered by
the Trustees, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer, the President and the Trustees, at the regular
meetings of the Trustees or whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the Trust.
If required by the Trustees, the Treasurer shall give the Trust a bond
in such sum and with such surety or sureties as shall be satisfactory to the
Trustees for the faithful performance of the duties of his office and for the
restoration to the Trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his possession or under his control belonging to the Trust.
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Section 12. SECRETARY. The Secretary shall (a) keep the minutes of the
---------
proceedings of the shareholders, the Trustees and committees of the Trustees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the trust records and of the seal of the Trust; (d) keep a
register of the post office address of each shareholder which shall be furnished
to the Secretary by such shareholder; (e) have general charge of the share
transfer books of the Trust; and (f) in general perform such other duties as
from time to time may be assigned to him by the Chief Executive Officer, the
President or the Trustees.
Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
----------------------------------------------
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer, respectively,
or by the Chief Executive Officer, the President or the Trustees. The Assistant
Treasurers shall, if required by the Trustees, give bonds for the faithful
performance of their duties in such sums and with such surety or sureties as
shall be satisfactory to the Trustees.
Section 14. SALARIES. The salaries and other compensation of the
--------
officers shall be fixed from time to time by the Trustees and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a Trustee.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Trustees may authorize any officer or agent
---------
to enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the Trust and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
valid and binding upon the Trustees and upon the Trust when authorized or
ratified by action of the Trustees.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
-----------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Trust shall be signed by such officer or agent of the Trust in such
manner as shall from time to time be determined by the Trustees.
Section 3. DEPOSITS. All funds of the Trust not otherwise employed
--------
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trustees may designate.
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ARTICLE VII
SHARES
Section 1. CERTIFICATES. Each shareholder shall be entitled to a
------------
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interest held by him in the Trust. Each
certificate shall be signed by the Chief Executive Officer, the President or a
Vice President and countersigned by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and may be sealed with the seal, if any,
of the Trust. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Trust shall, from time to time,
issue several classes of shares, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets of the Trust upon liquidation or which are redeemable at the option
of the Trust, shall have a statement of such restriction, limitation, preference
or redemption provision, or a summary thereof, plainly stated on the
certificate. In lieu of such statement or summary, the Trust may set forth upon
the face or back of the certificate a statement that the Trust will furnish to
any shareholder, upon request and without charge, a full statement of such
information.
Section 2. TRANSFERS. Certificates shall be treated as negotiable and
---------
title thereto and to the shares they represent shall be transferred by delivery
thereof to the same extent as those of a Maryland stock corporation. Upon
surrender to the Trust or the transfer agent of the Trust of a share certificate
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, the Trust shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
The Trust shall be entitled to treat the holder of record of any share
or shares as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of beneficial
interest of the Trust will be subject in all respects to the Declaration of
Trust and all of the terms and conditions contained therein.
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Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
-----------------------
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the Trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of a
new certificate, an officer designated by the Trustees may, in his discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or the owner's legal representative to
advertise the same in such manner as he shall require and/or to give bond, with
sufficient surety, to the Trust to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
--------------------------------------------------
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
shareholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of shareholders not less
than ten days, before the date on which the meeting or particular action
requiring such determination of shareholders of record is to be held or taken.
In lieu of fixing a record date, the Trustees may provide that the share
transfer books shall be closed for a stated period but not longer than 20 days.
If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed
for the determination of shareholders, (a) the record date for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of shareholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the Trustees,
declaring the dividend or allotment of rights, is adopted.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the
17
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record date fixed for the original meeting, in either of which case a new record
date shall be determined as set forth herein.
Section 5. SHARE LEDGER. The Trust shall maintain at its principal
------------
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
shareholder and the number of shares of each class held by such shareholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may
------------------------------------
issue fractional shares or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the Declaration of Trust or these Bylaws, the Trustees may issue
units consisting of different securities of the Trust. Any security issued in a
unit shall have the same characteristics as any identical securities issued by
the Trust, except that the Trustees may provide that for a specified period
securities of the Trust issued in such unit may be transferred on the books of
the Trust only in such unit.
ARTICLE VIII
FISCAL YEAR
The Trustees shall have the power, from time to time, to fix the fiscal
year of the Trust by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
-------------
shares of beneficial interest of the Trust may be authorized and declared by the
Trustees, subject to the provisions of law and the Declaration of Trust.
Dividends and other distributions may be paid in cash, property or shares of the
Trust, subject to the provisions of law and the Declaration of Trust.
Section 2. CONTINGENCIES. Before payment of any dividends or other
-------------
distributions, there may be set aside out of any funds of the Trust available
for dividends or other distributions such sum or sums as the Trustees may from
time to time, in their absolute discretion, think proper as a reserve fund for
contingencies, for equalizing dividends or other distributions, for repairing or
maintaining any property of the Trust or for such other purpose as the Trustees
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shall determine to be in the best interest of the Trust, and the Trustees may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICIES
Subject to the provisions of the Declaration of Trust, the Board of
Trustees may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Trust as it shall deem appropriate
in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Trustees may authorize the adoption of a seal by
----
the Trust. The seal shall have inscribed thereon the name of the Trust and the
year of its formation. The Trustees may authorize one or more duplicate seals
and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Trust is permitted or required
-------------
to affix its seal to a document, it shall be sufficient to meet the requirements
of any law, rule or regulation relating to a seal to place the word "(SEAL)"
adjacent to the signature of the person authorized to execute the document on
behalf of the Trust.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Trust shall indemnify (a) any Trustee, officer or shareholder or any
former Trustee, officer or shareholder (including among the foregoing, for all
purposes of this Article XII and without limitation, any individual who, while a
Trustee, officer or shareholder and at the express request of the Trust, serves
or has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, shareholder,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise) who has been successful, on the
merits or otherwise, in the defense of a proceeding to which he was made a party
by reason of service in such capacity,
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against reasonable expenses incurred by him in connection with the proceeding,
(b) any Trustee or officer or any former Trustee or officer against any claim or
liability to which he may become subject by reason of such status unless it is
established that (i) his act or omission was material to the matter giving rise
to the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) he actually received an improper personal benefit in
money, property or services or (iii) in the case of a criminal proceeding, he
had reasonable cause to believe that his act or omission was unlawful and (c)
each shareholder or former shareholder against any claim or liability to which
he may become subject by reason of such status. In addition, the Trust shall,
without requiring a preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse, in advance of final disposition of a
proceeding, reasonable expenses incurred by a Trustee, officer or shareholder or
former Trustee, officer or shareholder made a party to a proceeding by reason
such status, provided that, in the case of a Trustee or officer, the Trust shall
have received (i) a written affirmation by the Trustee or officer of his good
faith belief that he has met the applicable standard of conduct necessary for
indemnification by the Trust as authorized by these Bylaws and (ii) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
Trust if it shall ultimately be determined that the applicable standard of
conduct was not met. The Trust may, with the approval of its Trustees, provide
such indemnification or payment or reimbursement of expenses to any Trustee,
officer or shareholder or any former Trustee, officer or shareholder who served
a predecessor of the Trust and to any employee or agent of the Trust or a
predecessor of the Trust. Neither the amendment nor repeal of this Article, nor
the adoption or amendment of any other provision of the Declaration of Trust or
these Bylaws inconsistent with this Article, shall apply to or affect in any
respect the applicability of this Article with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses
permitted by these Bylaws shall be furnished in accordance with the procedures
provided for indemnification or payment or reimbursement of expenses, as the
case may be, under Section 2-418 of the MGCL for directors of Maryland
corporations. The Trust may provide to Trustees, officers and shareholders such
other and further indemnification or payment or reimbursement of expenses, as
the case may be, to the fullest extent permitted by the MGCL, as in effect from
time to time, for directors of Maryland corporations.
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ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Declaration
of Trust or Bylaws or pursuant to applicable law, a waiver thereof in writing,
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice. Neither the business to be transacted at nor the purpose of any meeting
need be set forth in the waiver of notice, unless specifically required by
statute. The attendance of any person at any meeting shall constitute a waiver
of notice of such meeting, except where such person attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Trustees shall have the exclusive power to adopt, alter or repeal
any provision of these Bylaws and to make new Bylaws.
ARTICLE XV
MISCELLANEOUS
All references to the Declaration of Trust shall include any amendments
thereto. In these Bylaws, unless the context otherwise requires, words used in
the singular or in the plural include both the plural and singular and words
denoting any gender include all genders.
* * * *
The foregoing are certified as the Bylaws of the Trust adopted by the
Trustees as of September 8, 1998.
/s/ Christopher G. Townsend
---------------------------------------
Secretary
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Exhibit 3.15
AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF ATLANTA MARRIOTT MARQUIS II
LIMITED PARTNERSHIP
This Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership dated as of ______________, 1998 is made and entered into by and
among Marriott Marquis Corporation, a Delaware corporation, as general partner
(the "General Partner") and Class B Limited Partner, and those persons who have
been admitted as Class A Limited Partners and identified in the books and
records of the Partnership (the "Class A Limited Partners").
Atlanta Marriott Marquis II Limited Partnership (the "Partnership")
was formed pursuant to a Certificate of Limited Partnership filed with the
Secretary of State of the State of Delaware on July 9, 1997. An Amended and
Restated Certificate and Agreement of Limited Partnership was entered into by
the parties on December 31, 1997 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Class A Limited Partners which
amendments are intended to facilitate conversion to a real estate investment
trust ("REIT") of Host Marriott Corporation, an Affiliate of the General
Partner, and certain related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.C.(1) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01.C.(5) is hereby amended by adding "or lease" after
"sale" and before "of" in said subsection.
3. Section 5.01 is hereby amended by adding a new subsection G. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Hotel Partnership enter into a lease of
the Hotel with an Affiliate of the General Partner or any other Person, on such
terms as it determines to be commercially reasonable, without any further act,
approval, or vote of the Limited Partners."
4. Section 5.02(B)(2) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
all or substantially all of the assets of either of the Partnerships if it
proposed that the Partnership or the Hotel Partnership sell such assets to Host
or any Affiliate of
<PAGE>
Host; in such case, the following procedures shall be followed: (a) the General
Partner shall first give 30 days notice of the proposed sale to the Class A
Limited Partners, (b) the Partnership shall obtain an appraisal of the fair
market value of the Hotel, such appraisal to be prepared by an independent,
nationally recognized appraiser experienced in the valuation of hotel properties
and selected by the General Partner, (c) the appraiser selected under clause (b)
of this proviso shall have 30 days from the date of selection to prepare and
submit to the General Partner an appraisal of the fair market value of the Hotel
and (d) the General Partner shall thereafter make formal request for the
required Consent and in connection therewith shall submit the appraisal to the
Class A Limited Partners, with the cost of such appraisal to be borne by the
purchaser; provided further, however, that nothing contained in this Section
5.02(B)(2) shall be construed to require any Consent in connection with a
transfer of the Land and/or the Hotel to a bankruptcy remote entity wholly owned
by the Hotel Partnership, as contemplated in Section 6.01(C) of the Hotel
Partnership Agreement."
5. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Marriott Marquis Corporation
By:
---------------------------------
Name:
Title:
CLASS A LIMITED PARTNERS:
Marriott Marquis Corporation as
Attorney-in-Fact for the Class A
Limited Partners admitted to the
Partnership
By:
---------------------------------
Name:
Title:
CLASS B LIMITED PARTNER:
Marriott Marquis Corporation
By:
---------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF DESERT SPRINGS
MARRIOTT LIMITED PARTNERSHIP
This Amendment No. 1 to Second Amended and Restated Agreement of
Limited Partnership dated as of ______________, 1998 is made and entered into by
and among Marriott Desert Springs Corporation, a Delaware corporation, as
general partner (the "General Partner"), and those persons who have been
admitted as limited partners and identified in the books and records of the
Partnership (the "Limited Partners").
Desert Springs Marriott Limited Partnership (the "Partnership") was
formed pursuant to a Certificate of Limited Partnership filed with the Secretary
of State of the State of Delaware on February 26, 1987. An Amended and Restated
Agreement of Limited Partnership was entered into by the parties on April 24,
1987 and a Second Amended and Restated Agreement of Limited Partnership was
entered into as of September 26, 1997 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion to a real estate investment trust ("REIT")
of Host Marriott Corporation, an Affiliate of the General Partner, and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01 is hereby amended by adding a new subsection G. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of the
Hotel with an Affiliate of the General Partner or any other Person, on such
terms as it determines to be commercially reasonable, without any further act,
approval, or vote of the Limited Partners."
3. Section 5.02(B)(2) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
the Hotel to the General Partner or an Affiliate of the General Partner;
provided, however, that if it is proposed that the Partnership sell the Hotel to
the General Partner or an Affiliate of the General Partner, the following
procedures shall be
<PAGE>
followed: (a) the General Partner shall first give 30 days notice of the
proposed sale to the Limited Partners, (b) the Partnership shall obtain an
appraisal of the fair market value of the Hotel, such appraisal to be prepared
by an independent, nationally recognized appraiser experienced in the valuation
of hotel properties and selected by the General Partner, (c) the appraiser
selected under clause (b) of this proviso shall have 30 days from the date of
selection to prepare and submit to the General Partner an appraisal of the fair
market value of the Hotel, and (d) the General Partner shall thereafter make
formal request for the required Consent and in connection therewith shall submit
the appraisal to the Class A Limited Partners, with the cost of such appraisal
to be borne by the purchaser."
4. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Marriott Desert Springs Corporation
By:
--------------------------------------
Name:
Title:
LIMITED PARTNERS:
Marriott Desert Springs Corporation
as Attorney-in-Fact for the
Limited Partners admitted to the
Partnership
By:
--------------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF HANOVER MARRIOTT
LIMITED PARTNERSHIP
This Amendment No. 1 to Second Amended and Restated Agreement of
Limited Partnership dated as of ______________, 1998 is made and entered into by
and among Marriott Hanover Hotel Corporation, a Delaware corporation, as general
partner (the "General Partner"), and those persons who have been admitted as
limited partners and identified in the books and records of the Partnership (the
"Limited Partners").
Hanover Marriott Limited Partnership. (the "Partnership") was formed
pursuant to a Certificate of Limited Partnership filed with the Secretary of
State of the State of Delaware on October 8, 1986. An Amended and Restated
Agreement of Limited Partnership was entered into by the parties on April 3,
1997 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion of Host Marriott Corporation, an Affiliate
of the General Partner, to a real estate investment trust ("REIT") and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01 is hereby amended by adding a new subsection G. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of the
Hotel with an Affiliate of the General Partner or any other Person, on such
terms as it determines to be commercially reasonable, without any further act,
approval, or vote of the Limited Partners."
3. Section 5.02(B)(ii) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
the Hotel to the General Partner or an Affiliate of the General Partner;
provided, however, that if it is proposed that the Partnership sell the Hotel to
the General Partner or an Affiliate of the General Partner, the following
procedures shall be followed: (a) the General Partner shall first give 30 days
notice of the proposed sale
<PAGE>
to the Limited Partners, (b) the Partnership shall obtain an appraisal of the
fair market value of the Hotel, such appraisal to be prepared by an independent,
nationally recognized appraiser experienced in the valuation of hotel properties
and selected by the General Partner, (c) the appraiser selected under clause (b)
of this proviso shall have 30 days from the date of selection to prepare and
submit to the General Partner an appraisal of the fair market value of the
Hotel, and (d) the General Partner shall thereafter make formal request for the
required Consent and in connection therewith shall submit the appraisal to the
Limited Partners, with the cost of such appraisal to be borne by the purchaser."
4. Section 5.02.B.(viii) is hereby amended to add "except as a
result of a merger of the General Partner with an Affiliate," before "admit."
5. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Marriott Hanover Hotel Corporation
By:
--------------------------------------
Name:
Title:
LIMITED PARTNERS:
Marriott Hanover Hotel Corporation
as Attorney-in-Fact for the Limited
Partners admitted to the Partnership
By:
--------------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF MARRIOTT DIVERSIFIED AMERICAN
HOTELS, L.P.
This Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership dated as of ______________, 1998 is made and entered into by and
among MDAH One Corporation, a Delaware corporation, as general partner (the
"General Partner"), and those persons who have been admitted as limited partners
and identified in the books and records of the Partnership (the "Limited
Partners").
Marriott Diversified America Hotels, L.P. (the "Partnership") was
formed pursuant to a Certificate of Limited Partnership dated as of October 4,
1989, filed with the Secretary of State of the State of Delaware on October 6,
1989. An Amended and Restated Agreement of Limited Partnership was entered into
by the parties on February 7, 1990 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion to a real estate investment trust ("REIT")
of Host Marriott Corporation, an Affiliate of the General Partner, and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01 is hereby amended by adding a new subsection G. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of the
Hotel with an Affiliate of the General Partner or any other Person, on such
terms as it determines to be commercially reasonable, without any further act,
approval, or vote of the Limited Partners."
3. Section 5.02.A.(v) is hereby amended to add ",except as a result
of a merger of the General Partner with an Affiliate," after "or" and before "as
a General Partner," in said subsection.
4. Section 5.02(B)(ii) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of the Fairview Park Hotel, or any interest
therein, or more than two of the other Hotels, or any interest therein, whether
in
<PAGE>
one transaction or more than one transaction during the term of the Partnership;
provided, however, that if it is proposed that the Partnership sell any Hotel or
interest therein to the General Partner or an Affiliate of the General Partner,
the Consent of the Limited Partners must be obtained after the following
procedures have been followed: (a) the General Partner shall first give not less
than 30 days notice of the proposed sale to the Limited Partners, (b) the
Partnership shall obtain an appraisal of the fair market value of the Hotel or
Hotels to be sold, such appraisal to be prepared by an independent, nationally
recognized appraiser experienced in the valuation of hotel properties and
selected by the General Partner, (c) such appraiser shall not have, directly or
indirectly, any material interest in or material business or professional
relationship with the General Partner or any of its Affiliates and the
compensation of such appraiser shall be determined and embodied in a written
contract before such appraisal is prepared; (d) no real estate commission may be
paid by the Partnership in connection with such sale, (e) the appraiser selected
under clause (b) of this proviso shall have 30 days from the date of selection
to prepare and submit to the General Partner an appraisal of the fair market
value of the Hotel or Hotels to be sold, and (g) the General Partner shall
thereafter make formal request for the required Consent and in connection
therewith shall submit the appraisal to the Limited Partners, with the cost of
such appraisal to be borne by the purchaser."
5. Section 5.03.B. is hereby amended to delete clause (ii) therefrom
in its entirety and to renumber the succeeding clauses accordingly.
6. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Marriott MDAH One Corporation
By:
-------------------------------
Name:
Title:
LIMITED PARTNERS:
Marriott MDAH One Corporation
as Attorney-in-Fact for the Limited
Partners admitted to the Partnership
By:
-------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF MARRIOTT HOTEL
PROPERTIES LIMITED PARTNERSHIP
This Amendment No. 1 to Second Amended and Restated Agreement of
Limited Partnership dated as of ______________, 1998 is made and entered into by
and among Hotel Properties Management, Inc., a Delaware corporation, as general
partner (the "General Partner"), and those persons who have been admitted as
limited partners and identified in the books and records of the Partnership (the
"Limited Partners").
Marriott Hotel Properties Limited Partnership (the "Partnership") was
formed pursuant to a Certificate and Agreement of Limited Partnership filed with
the Secretary of State of the State of Delaware on August 22, 1984. An Amended
and Restated Certificate of Limited Partnership was filed on November 1, 1985.
A Second Amended and Restated Agreement of Limited Partnership was entered into
by the parties on January 15, 1997 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion to a real estate investment trust ("REIT")
of Host Marriott Corporation, an Affiliate of the General Partner, and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 2.03 is hereby amended to add "lease" after "own," and
before "and" in the first line thereof.
2. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
3. Section 5.01 is hereby amended by adding a new subsection F. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of any
Hotel or Hotels with an Affiliate of the General Partner or any other Person, on
such terms as it determines to be commercially reasonable, without any further
act, approval, or vote of the Limited Partners."
4. Section 5.02.A.(v) is hereby amended to add ", except as a result
of a merger of the General Partner with an Affiliate," before "admit" in said
subsection.
<PAGE>
5. Section 5.02(B)(ii) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
any assets of the Partnership which had an original cost in excess of 25% of the
original cost basis of all assets of the Partnership to any of the general
partners of the Partnerships or an Affiliate of any such general partner or vote
the Partnership's general partnership interest in the Harbor Beach Partnership
in favor of the sale or other disposition of any assets of the Harbor Beach
Partnership which had an original cost in excess of 25% of the original cost of
all assets of the Harbor Beach Partnership to any of the general partners of the
Partnerships or an Affiliate of any such general partner; provided, however,
that if it is proposed that one of the Partnerships sell one or more of the
Hotels to any of the general partners of the Partnerships or an Affiliate of any
such general partner, the following procedures shall be followed: (a) the
General Partner shall first give not less than 30 days notice of the proposed
sale to the Limited Partners, (b) the Partnership shall obtain an appraisal of
the fair market value of the Hotel or Hotels to be sold, such appraisal to be
prepared by an independent, nationally recognized appraiser experienced in the
valuation of hotel properties and selected by the General Partner, (c) the
appraiser selected under clause (b) of this proviso shall have 30 days from the
date of selection to prepare and submit to the General Partner an appraisal of
the fair market value of the Hotel in question, and (d) the General Partner
shall thereafter make formal request for the required Consent and in connection
therewith shall submit the appraisal to the Limited Partners, with the cost of
such appraisal to be borne by the purchaser."
6. Section 5.02.B.(x) is hereby amended to add ", except as a result
of a merger of the General Partner with an Affiliate," before "admit" in said
subsection.
7. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Hotel Properties Management, Inc.
By:
----------------------------------
Name:
Title:
LIMITED PARTNERS:
Hotel Properties Management, Inc.,
as Attorney-in-Fact for the Limited
Partners admitted to the Partnership
By:
----------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF MARRIOTT HOTEL
PROPERTIES II LIMITED PARTNERSHIP
This Amendment No. 1 to Second Amended and Restated Agreement of
Limited Partnership dated as of ______________, 1998 is made and entered into by
and among Marriott MHP Two Corporation., a Delaware corporation, as general
partner (the "General Partner"), and those persons who have been admitted as
limited partners and identified in the books and records of the Partnership (the
"Limited Partners").
Marriott Hotel Properties II Limited Partnership (the "Partnership")
was formed pursuant to a Certificate of Limited Partnership dated as of
September 13, 1988 and filed with the Secretary of State of the State of
Delaware on September 20, 1988. An Amended and Restated Certificate of Limited
Partnership was entered into by the parties on March 20, 1989. A Second Amended
and Restated Agreement of Limited Partnership was entered into by the parties on
____________, 1996 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion to a real estate investment trust ("REIT")
of Host Marriott Corporation, an Affiliate of the General Partner, and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01 is hereby amended by adding a new subsection F. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of any
Hotel or Hotels with an Affiliate of the General Partner or any other Person, on
such terms as it determines to be commercially reasonable, without any further
act, approval, or vote of the Limited Partners."
3. Section 5.02.A.(v) is hereby amended to add ", except as a result
of a merger of the General Partner with an Affiliate," after "or" and before "as
a General Partner" in said subsection.
<PAGE>
4. Section 5.02(B)(ii) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
any Hotel or the Partnership's interest in the Santa Clara Partnership (except
as permitted in Section 5.02.C. below), or any interest in any of the foregoing,
provided, however, that if it is proposed that the Partnership sell any Hotels
or interests therein to the General Partner or an Affiliate of the General
Partner, the Consent of the Limited Partners must be obtained after the
following procedures are followed: (a) the General Partner shall give not less
than 30 days notice of the proposed sale to the Limited Partners, which notice
shall set forth the price and other material terms and conditions on which the
proposed transaction is to be effected; (b) the Partnership shall obtain an
appraisal of the fair market sales value of the Hotel or Hotels to be sold, such
appraisal to be prepared by an independent, nationally recognized appraiser
experienced in the valuation of hotel properties and selected by the General
Partner; (c) such appraiser shall not have, directly or indirectly, any material
interest in or material business or professional relationship with the General
Partner or any of its Affiliates and the compensation of such appraiser shall be
determined and embodied in a written contract before such appraisal is prepared;
(d) the no real estate commission may be paid by the Partnership in connection
with such sale; and (e) the General Partner shall include copies of the
appraisal with the aforesaid notice to the Limited Partners, with the cost of
such appraisal to be borne by the purchaser.
5. Section 5.03.B is hereby amended to delete clause (ii) thereof in
its entirety and to renumber the remaining clauses accordingly.
6. Section 9.06 is hereby amended by adding the following sentence
thereto: "In accordance with this section, the Partnership shall cause an
interim closing of the books at the time of the closing of the acquisition of
the Partnership by Host Marriott, L.P. through a merger of an indirect wholly-
owned subsidiary of Host Marriott, L.P. and Host Marriott Trust with and into
the Partnership, with the Interests in the Partnership being exchanged for and
converted into units of limited partnership interest in Host Marriott, L.P."
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Marriott MHP Two Corporation
By:
---------------------------------
Name:
Title:
LIMITED PARTNERS:
Marriott MHP Two Corporation.,
as Attorney-in-Fact for the Limited
Partners admitted to the Partnership
By:
---------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF MUTUAL BENEFIT CHICAGO MARRIOTT
SUITE HOTEL PARTNERS, L.P.
This Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership dated as of ______________, 1998 is made and entered into by and
among MOHS Corporation, a Delaware corporation, as general partner (the "General
Partner"), and those persons who have been admitted as limited partners and
identified in the books and records of the Partnership (the "Limited Partners").
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the
"Partnership") was formed pursuant to a Certificate of Limited Partnership filed
with the Secretary of State of the State of Rhode Island on August 31, 1988. An
Amended and Restated Agreement of Limited Partnership was entered into by the
parties on June 12, 1989 (the "Partnership Agreement").
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the conversion of Host Marriott Corporation, an Affiliate
of the General Partner, to a real estate investment trust ("REIT") and certain
related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 5.01.E.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
2. Section 5.01 is hereby amended by adding a new subsection I. to
read as follows: "Notwithstanding anything in this Agreement to the contrary,
the General Partner may require that the Partnership enter into a lease of the
Hotel with an Affiliate of the General Partner or any other Person, on such
terms as it determines to be commercially reasonable."
3. Section 5.02.A.(iv) is hereby amended to add "except as a result
of a merger of the General Partner with an Affiliate," before "admit."
4. Section 5.02(B)(ii) is hereby amended in its entirety to read as
follows: "sell or otherwise dispose of or consent to the sale or disposition of
the Hotel to the General Partner or an Affiliate of the General Partner;
provided, however, that if it is proposed that the Partnership sell the Hotel to
the General Partner or an Affiliate of the General Partner, the following
procedures shall be
<PAGE>
followed: (a) the General Partner shall first give 30 days notice of the
proposed sale to the Limited Partners, (b) the Partnership shall obtain an
appraisal of the fair market value of the Hotel, such appraisal to be prepared
by an independent, nationally recognized appraiser experienced in the valuation
of hotel properties and selected by the General Partner, (c) the appraiser
selected under clause (b) of this proviso shall have 30 days from the date of
selection to prepare and submit to the General Partner an appraisal of the fair
market value of the Hotel, and (d) the General Partner shall thereafter make
formal request for the required Consent and in connection therewith shall submit
the appraisal to the Limited Partners, with the cost of such appraisal to be
borne by the purchaser."
5. Section 9.05 is hereby amended by changing "(a)" and "(b)" to "A."
and "B." and by deleting "but in consultation with MOHS."
6. Section 9.06.A. is hereby amended by replacing "MBIP" with "MOHS."
7. A new Section 9.07 is hereby added to the Partnership Agreement,
which shall read as follows:
9.07. Interim Closing of the Books. There shall be an interim
closing of the books of account of the Partnership (i) at any time a taxable
year of the Partnership ends pursuant to the Code and (ii) at such other times
as the general Partners shall determine are required by good accounting practice
or may be appropriate under the circumstances. In accordance with this section,
the Partnership shall cause an interim closing of the books at the time of the
closing of the acquisition of the Partnership by Host Marriott, L.P. through a
merger of an indirect wholly-owned subsidiary of Host Marriott, L.P. and Host
Marriott Trust with and into the Partnership, with the Interests in the
Partnership being exchanged for and converted into units of limited partnership
interest in Host Marriott, L.P.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
MOHS Corporation
By:
--------------------------------------
Name:
Title:
LIMITED PARTNERS:
MOHS Corporation as Attorney-in-
Fact for the Limited Partners
admitted to the Partnership
By:
--------------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 1 TO AMENDED AND RESTATED CERTIFICATE AND
AGREEMENT OF LIMITED PARTNERSHIP OF POTOMAC HOTEL
LIMITED PARTNERSHIP
This Amendment No. 1 to Amended and Restated Certificate and Agreement
of Limited Partnership dated as of ______________, 1998 is made and entered into
by and among Host Marriott Corporation, a Delaware corporation, as general
partner (the "General Partner"), and those persons who have been admitted as
limited partners and identified in the books and records of the Partnership (the
"Limited Partners").
Potomac Hotel Limited Partnership (the "Partnership") was formed
pursuant to a Certificate and Agreement of Limited Partnership filed with the
Secretary of State of the State of Delaware on December 17, 1981. An Amended
and Restated Certificate and Agreement of Limited Partnership was entered into
by the parties on July 16, 1982 (the "Partnership Agreement")
The partners of the Partnership are adopting this Amendment to the
Partnership Agreement to effect certain amendments to the Partnership Agreement
approved by the General Partner and the Limited Partners which amendments are
intended to facilitate the General Partner's conversion to a real estate
investment trust ("REIT") and certain related transactions.
In consideration of the mutual agreements made herein, the parties
hereby agree to amend the Partnership Agreement as follows:
1. Section 2.03 is hereby amended by inserting ", lease" after "own"
and before "and" in clause (i) of said section.
2. Section 5.01.C.(i) is hereby amended by adding "leases," after
"contracts," and before "documents," in said subsection.
3. Section 5.01 is hereby amended by adding a new subsection F
thereto to read as follows: "Notwithstanding anything in this Agreement to the
contrary, the General Partner may require that the Partnership enter into a
lease of any or all of the Hotels with an Affiliate of the General Partner or
any other Person on such terms as it determines to be commercially reasonable,
without any further act, approval, or vote of the Limited Partners."
4. Section 5.02.A.(v) is hereby amended to add "except as a result of
a merger of the General Partner with Host or an Affiliate of Host," before
"admit."
<PAGE>
5. Section 5.02.B. is hereby amended by adding a new subsection (vi)
thereto to read a follows: "sell or otherwise dispose of (or consent to the sale
or other disposition of), directly or indirectly, including by way of merger or
other business combination, in one transaction or a series of related
transaction any or all of the Hotels."
6. Section 9.05.B is hereby amended by adding "754" after "Section."
7. A new Section 9.06 is hereby added to the Partnership Agreement,
which shall read as follows:
Section 9.06. Interim Closing of the Books. There shall be an
interim closing of the books of account of the Partnership (i) at any time a
taxable year of the Partnership ended pursuant to the Code and (ii) at such
other times as the General Partner shall determine are required by good
accounting practice or may be appropriate under the circumstances. In
accordance with this section, the Partnership shall cause an interim closing of
the books at the time of the closing of the merger of the Partnership into
________________ [Merger Sub] to reflect the exchange by the General Partner
and Limited Partners of their Interests in the Partnership for units of limited
partnership interests in Host Marriott, L.P.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
GENERAL PARTNER:
Host Marriott Corporation
By:
--------------------------------
Name:
Title:
LIMITED PARTNERS:
Host Marriott Corporation as
Attorney-in-Fact for the Limited
Partners admitted to the Partnership
By:
--------------------------------
Name:
Title:
<PAGE>
Exhibit 4.1
- --------------------------------------------------------------------------------
HOST MARRIOTT, L.P.,
ISSUER
MARINE MIDLAND BANK,
AS TRUSTEE
-------------------
INDENTURE
DATED AS OF , 1998
---------
$
----------------
6.56% NOTES DUE 2005
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE........................1
Section 1.1. Definitions.................................................1
Section 1.2. Other Definitions...........................................7
Section 1.3. Incorporation by Reference of Trust Indenture Act...........8
Section 1.4. Rules of Construction.......................................8
ARTICLE 2. THE SECURITIES....................................................8
Section 2.1. Issuable in Series; Form and Dating.........................8
Section 2.2. Establishment of Terms of Series of Securities..............9
Section 2.3. Execution and Authentication................................9
Section 2.4. Registrar and Paying Agent.................................10
Section 2.5. Paying Agent to Hold Money in Trust........................10
Section 2.6. Securityholder Lists.......................................11
Section 2.7. Transfer and Exchange......................................11
Section 2.8. Mutilated, Destroyed, Lost and Stolen Securities...........11
Section 2.9. Outstanding Securities.....................................12
Section 2.10. Treasury Securities.......................................12
Section 2.11. Temporary Securities......................................12
Section 2.12. Cancellation..............................................13
Section 2.13. Defaulted Interest........................................13
Section 2.14. CUSIP Numbers.............................................13
ARTICLE 3. REDEMPTION.......................................................13
Section 3.1. Optional Redemption........................................13
Section 3.2. Mandatory Redemption.......................................13
Section 3.3. Notice to Trustee..........................................14
Section 3.4. Selection of Securities to be Redeemed.....................14
Section 3.5. Notice of Redemption.......................................14
Section 3.6. Effect of Notice of Redemption.............................15
Section 3.7. Deposit of Redemption Price................................15
Section 3.8. Securities Redeemed in Part................................15
ARTICLE 4. COVENANTS........................................................15
Section 4.1. Payment of Principal and Interest..........................15
Section 4.2. Reports....................................................16
Section 4.3. Compliance Certificate.....................................16
Section 4.4. Corporate Existence........................................16
Section 4.5. Limitation on Incurrences of Indebtedness..................16
Section 4.6. Maintenance of Office or Agency............................16
ARTICLE 5. SUCCESSORS.......................................................17
Section 5.1. When Company May Merge, Etc................................17
Section 5.2. Successor Person Substituted...............................17
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ARTICLE 6. DEFAULTS AND REMEDIES............................................18
Section 6.1. Events of Default..........................................18
Section 6.2. Acceleration of Maturity; Rescission and Annulment.........19
Section 6.3. Collection of Indebtedness and Suits for Enforcement by
Trustee...................................................20
Section 6.4. Trustee May File Proofs of Claim...........................20
Section 6.5. Trustee May Enforce Claims Without Possession of
Securities................................................21
Section 6.6. Application of Money Collected.............................21
Section 6.7. Limitation on Suits........................................22
Section 6.8. Unconditional Right of Holders to Receive Principal and
Interest..................................................22
Section 6.9. Restoration of Rights and Remedies.........................22
Section 6.10. Rights and Remedies Cumulative............................23
Section 6.11. Delay or Omission Not Waiver..............................23
Section 6.12. Control by Holders........................................23
Section 6.13. Waiver of Past Defaults...................................23
Section 6.14. Undertaking for Costs.....................................24
ARTICLE 7. TRUSTEE..........................................................24
Section 7.1. Duties of Trustee..........................................24
Section 7.2. Rights of Trustee..........................................26
Section 7.3. Individual Rights of Trustee...............................26
Section 7.4. Trustee's Disclaimer.......................................27
Section 7.5. Notice of Defaults.........................................27
Section 7.6. Reports by Trustee to Holders..............................27
Section 7.7. Compensation and Indemnity.................................27
Section 7.8. Replacement of Trustee.....................................28
Section 7.9. Successor Trustee by Merger, etc...........................29
Section 7.10. Eligibility; Disqualification.............................29
Section 7.11. Preferential Collection of Claims Against Company.........29
ARTICLE 8. SATISFACTION AND DISCHARGE; DEFEASANCE...........................29
Section 8.1. Satisfaction and Discharge of Indenture....................29
Section 8.2. Application of Trust Funds; Indemnification................30
Section 8.3. Legal Defeasance of Securities of any Series...............31
Section 8.4. Covenant Defeasance........................................32
Section 8.5. Repayment to Company.......................................33
Section 8.6. Reinstatement..............................................33
ARTICLE 9. AMENDMENTS AND SUPPLEMENTS.......................................34
Section 9.1. Without Consent of Holders.................................34
Section 9.2. With Consent of Holders....................................34
Section 9.3. Limitations................................................35
Section 9.4. Compliance with Trust Indenture Act........................35
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<PAGE>
Section 9.5. Revocation and Effect of Consents..........................35
Section 9.6. Notation on or Exchange of Securities......................36
Section 9.7. Trustee Protected..........................................36
ARTICLE 10. MISCELLANEOUS...................................................36
Section 10.1. Trust Indenture Act Controls..............................36
Section 10.2. Notices...................................................37
Section 10.3. Communication by Holders with Other Holders...............37
Section 10.4. Certificate and Opinion as to Conditions Precedent........37
Section 10.5. Statements Required in Certificate or Opinion.............38
Section 10.6. Rules by Trustee and Agents...............................38
Section 10.7. Legal Holidays............................................38
Section 10.8. No Recourse Against Others................................38
Section 10.9. Counterparts..............................................39
Section 10.10. Governing Laws...........................................39
Section 10.11. No Adverse Interpretation of Other Agreements............39
Section 10.12. Successors...............................................39
Section 10.13. Severability.............................................39
Section 10.14. Table of Contents, Headings, Etc.........................39
iii
<PAGE>
Reconciliation and tie between the Trust Indenture Act of 1939, as amended and
the Indenture, dated as of _________ __, 1998.
Trust Indenture
Act Section Indenture Section
--------------- -----------------
(S)310(a)(1)..................................................7.10
(a)(2)......................................................7.10
(a)(3)............................................Not Applicable
(a)(4)...........................................Not Applicable
(a)(5)......................................................7.10
(b).......................................................7.10
(S)311(a)...................................................7.11
(b).......................................................7.11
(c).............................................Not Applicable
(S)312(a)....................................................2.6
(b).......................................................10.3
(c).......................................................10.3
(S)313(a)....................................................7.6
(b)(1).......................................................7.6
(b)(2).......................................................7.6
(c)(1).......................................................7.6
(d)........................................................7.6
(S)314(a)...................................................10.5
(b).............................................Not Applicable
(c)(1)......................................................10.4
(c)(2)......................................................10.4
(c)(3)............................................Not Applicable
(d).............................................Not Applicable
(e).......................................................10.5
(f).............................................Not Applicable
(S)315(a)....................................................7.1
(b)........................................................7.5
(c)........................................................7.1
(d)........................................................7.1
(e).......................................................6.14
(S)316(a)...................................................2.10
(a)(1)(A)....................................................6.12
(a)(1)(B)....................................................6.13
(b)........................................................6.8
(S)317(a)(1)...................................................6.3
(a)(2).......................................................6.4
(b)........................................................2.5
(S)318(a)...................................................10.1
Note: This reconciliation and tie shall not, for any purposes, be deemed to be
part of this Indenture.
iv
<PAGE>
Indenture, dated as of _____ __, 1998 (the "Indenture"), by and
between Host Marriott, L.P., a Delaware limited partnership (the "Company"), and
Marine Midland Bank, as Trustee (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Securities issued under
this Indenture.
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. DEFINITIONS.
-----------
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company or assumed in connection with an
Asset Acquisition and not incurred in connection with or in contemplation or
anticipation of such event, provided that Indebtedness of such Person which is
redeemed, defeased (including the deposit of funds in a valid trust for the
exclusive benefit of holders and the trustee thereof, sufficient to repay such
Indebtedness in accordance with its terms), retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise; provided that a beneficial owner of 10% or more of the total
Voting Stock of a person shall for such purposes be deemed to constitute
control; provided, further, that (i) the right to designate a member of the
Board of a Person or a Parent of that Person will not, by itself, be deemed to
constitute control and (ii) Marriott International and its subsidiaries shall
not be deemed to be Affiliates of the Company or its Parent or Subsidiaries.
"Agent" means any Registrar, Paying Agent or Service Agent.
"Asset Acquisition" means (i) an investment by the Company or any of its
Subsidiaries in any other Person pursuant to which such Person shall become a
Subsidiary or shall be merged or consolidated into or with the Company or any of
its Subsidiaries or (ii) an acquisition by the Company or any of its
Subsidiaries from any other Person that constitutes all or substantially all of
a division or line of business, or one or more real estate properties, of such
Person.
"Board" means (i) with respect to any corporation, the board of directors
of such corporation or any committee of the board of directors of such
corporation authorized, with respect to any particular matter, to exercise the
power of the board of directors of such corporation, (ii) with respect to any
partnership, any partner (including, without limitation, in the case of any
partner that is a corporation, the board of directors of such corporation or any
authorized committee thereof) with the authority to cause the partnership to act
with respect to the matter at issue, (iii) in the case of a trust, any trustee
or board of trustees with the authority to cause the trust to act with respect
to the matter at issue, (iv) in the case of a limited liability company (a
"LLC"), the managing member, management committee or other Person or
<PAGE>
group with the authority to cause the LLC to act with respect to the matter at
issue, and (v) with respect to any other entity, the Person or group exercising
functions similar to a board of directors of a corporation.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary or equivalent authorized person of the General Partner
to have been duly adopted by the Board or pursuant to authorization by the Board
and to be in full force and effect on the date of the certificate (and delivered
to the Trustee, if appropriate).
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents (however designated, whether
voting or non-voting), including partnership interests, whether general or
limited, in the equity of such Person, whether outstanding on the Closing Date
or issued thereafter, including, without limitation, all Common Stock, Preferred
Stock and Units.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease as reflected on the balance sheet
of such Person in accordance with GAAP.
"Closing Date" means _______, 1998.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting), which have no preference on liquidation or with respect
to distributions over any other class of Capital Stock, including partnership
interests, whether general or limited, of such Person's equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of common stock.
"Company" means Host Marriott, L.P., a Delaware limited partnership, and
its successors and assigns.
"Company Order" means a written order signed in the name of the Company by
the General Partner and two Officers, one of whom must be the General Partner's
principal executive officer, principal financial officer or principal accounting
officer.
"Company Request" means a written request signed in the name of the Company
by the General Partner and its Chairman of the Board, a President or a Vice
President, and by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary, and delivered to the Trustee.
"Consolidated" or "consolidated" means, with respect to any Person, the
consolidation of the accounts of the Subsidiaries of such Person with those of
such Person; provided that (i) "consolidation" will not include consolidation
of the accounts of any other Person other than a Subsidiary of such Person with
such Person and (ii) "consolidation" will include consolidation of the
accounts of any Subsidiary,
2
<PAGE>
whether or not such consolidation would be required or permitted under GAAP (it
being understood that the accounts of such Person's Subsidiaries shall be
consolidated only to the extent of such Person's proportionate interest
therein). The terms "consolidated" and "consolidating" have correlative meanings
to the foregoing.
"Corporate Trust Office" means the office of the Trustee at which any
particular time its corporate trust business shall be principally administered.
"Default" means any event that is or after notice or passage of time or
both would be an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"FF&E" means furniture, fixtures and equipment, and other tangible personal
property other than real property.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States of America.
"General Partner" means the general partner of the Company.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"Holder" or "Securityholder" means a Person in whose name a Security is
registered.
"Host REIT" means Host Marriott Trust, a Maryland real estate investment
trust and the sole general partner of the Company, and its successors and
assigns.
"Hotel" means a hotel owned by a Public Partnership prior to the
Partnership Merger of such Partnership.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to (including
as a result of an acquisition), or become responsible for, the payment of,
contingently or otherwise, such Indebtedness (including Acquired
3
<PAGE>
Indebtedness); provided that neither the accrual of interest nor the accretion
of original issue discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" of any Person means, without duplication, (i) all
liabilities and obligations, contingent or otherwise, of such Person, (a) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof), (b) evidenced
by bonds, notes, debentures or similar instruments, (c) representing the balance
deferred and unpaid of the purchase price of any property or services, except
those incurred in the ordinary course of its business that would constitute
ordinarily a trade payable to trade creditors, (d) evidenced by bankers'
acceptances, (e) for the payment of money relating to a Capitalized Lease
Obligation, or (f) evidenced by a letter of credit or a reimbursement obligation
of such Person with respect to any letter of credit; (ii) all net obligations of
such Person under Interest Swap and Hedging Obligations; and (iii) all
liabilities and obligations of others of the kind described in the preceding
clause (i) or (ii) that such Person has guaranteed or that is otherwise its
legal liability or which are secured by any assets or property of such Person.
"Indenture" means this Indenture as amended or supplemented from time to
time and shall include the form and terms of particular Series of Securities
established as contemplated hereunder.
"Indenture Obligations" means all obligations arising under this Indenture,
from time to time, with respect to the payment of principal of or interest, if
any, on the Securities of any Series.
"Interest Payment Date" means, with respect to Securities of any Series,
the stated due date of an installment of interest on the Securities of that
Series.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of
this Indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such Person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such Person, then in each such case, the amount of
such obligations shall be the net amount so determined, plus any premium due
upon default by such Person.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
privilege, hypothecation, other encumbrance or charge of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof or any agreement to give any security interest) upon
or with respect to any property of any kind now owned or hereinafter acquired.
"Marriott International" means Marriott International, Inc., a Delaware
corporation, and its successors and assigns.
"Maturity" when used with respect to any Security or installment of
principal thereof, means the date on which the principal of such Security or
such installment of principal becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption, notice of option to elect repayment or otherwise.
"Offering" means the offering of the Securities for sale by the Company.
4
<PAGE>
"Officer" means the President, any Vice-President, the Treasurer, the
Secretary, any Assistant Treasurer or any Assistant Secretary of the General
Partner or equivalent authorized Person.
"Officers' Certificate" means a certificate signed on behalf of the Company
by the General Partner and an Officer of the General Partner who must be the
principal executive officer, the principal financial officer, the treasurer or
the principal accounting officer of the General Partner.
"Opinion of Counsel" means a written opinion of legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company.
"Parent" of any Person means a corporation which at the date of
determination owns, directly or indirectly, a majority of the Voting Stock of
such Person or of a Parent of such Person.
"Partnership Mergers" means the merger of one or more Subsidiaries of the
Company into one or more of the Public Partnerships in connection with the REIT
Conversion.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust, REIT,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting), which have a preference on liquidation or with respect to
distributions over any other class of Capital Stock, including preferred
partnership interests, whether general or limited and whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all series and
classes of such Preferred Stock.
"Public Partnerships" mean, collectively, the following Subsidiaries of the
Company: Atlanta Marriott Marquis II Limited Partnership, a Delaware limited
partnership; Desert Springs Marriott Limited Partnership, a Delaware limited
partnership; Hanover Marriott Limited Partnership, a Delaware limited
partnership; Marriott Diversified American Hotels, L.P., a Delaware limited
partnership; Marriott Hotel Properties Limited Partnership, a Delaware limited
partnership; Marriott Hotel Properties II Limited Partnership, a Delaware
limited partnership; Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.,
a Rhode Island limited partnership; and Potomac Hotel Limited Partnership, a
Delaware limited partnership; or, as the context may require, any such entity
together with its Subsidiaries, or any of such Subsidiaries.
"real estate assets" means real property and all FF&E associated or used in
connection therewith.
"Record Date" means, with respect to Securities of any Series, the Record
Date specified in the Securities of that Series, whether or not such Record Date
is a Business Day.
"Redemption Date" when used with respect to any Security to be redeemed,
means the date fixed for such redemption pursuant to Article III of this
Indenture.
"Registration Statement" means the Company's registration statement on Form
S-4 (No. 333-55807), as amended, relating to the registration of, among other
securities, the Securities under the Act, together with the exhibits thereto and
all subsequent amendments.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code.
5
<PAGE>
"REIT Conversion" means the various transactions to be carried out in
connection with the conversion of Host Marriott Corporation to a REIT, as
generally described in the Registration Statement.
"Responsible Officer" means any officer of the Trustee in its Corporate
Trust Office with direct responsibility for the administration of this Indenture
and also means, with respect to a particular corporate trust matter, any other
officer to whom any corporate trust matter is referred because of his or her
knowledge of and familiarity with a particular subject.
"SEC" means the Securities and Exchange Commission.
"Securities" means the notes of the Company of any Series authenticated and
delivered under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Series" or "Series of Securities" means each series of notes of the
Company created pursuant to Section 2.1 and 2.2 hereof.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1-02(w) of Regulation S-X
promulgated by the SEC as in effect as of the Closing Date.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means (i) a corporation, partnership, limited liability
company, trust, REIT or other entity a majority of the voting power of the
voting equity securities of which are owned, directly or indirectly, by the
Company or by one or more Subsidiaries of the Company, (ii) a partnership,
limited liability company, trust, REIT or other entity not treated as a
corporation for federal income tax purposes, a majority of the equity interests
of which are owned, directly or indirectly, by the Company or a Subsidiary of
the Company, or (iii) one or more corporations which, either individually or in
the aggregate, would be Significant Subsidiaries (as defined above, except that
the investment, asset and equity thresholds for purposes of this definition
shall be 5%), the majority of the value of the equity interests of which are
owned, directly or indirectly, by the Company or by one or more Subsidiaries.
"Tax" or "Taxes" means all Federal, state, local, and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties applicable
thereto, imposed by any domestic or foreign governmental authority responsible
for the administration of any such taxes.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S)77aaa-
77bbbb), as amended from time to time, and as in effect on the date of this
Indenture; provided, however, that in the event the Trust Indenture Act of 1939
is amended after such date, "TIA" means, to the extent required by any such
amendment, the Trust Indenture Act as so amended.
"Total Assets" means the sum of (i) Undepreciated Real Estate Assets and
(ii) all other assets (excluding intangibles) of the Company and its
Subsidiaries determined on a consolidated basis (it being
6
<PAGE>
understood that the accounts of Subsidiaries shall be consolidated with those of
the Company only to the extent of the Company's proportionate interest therein).
"Total Market Capitalization" means, as of any date, the sum of (i) the
product of (x) the closing price of a Common Share of Host REIT on the New York
Stock Exchange on the immediately preceding trading day times (y) the total
number of Units then outstanding (including Units held by Host REIT), plus (ii)
the aggregate liquidation preference of all outstanding preferred units of
limited partnership interest in the Company, plus (iii) the aggregate principal
amount of all outstanding Indebtedness 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 Indebtedness on such date and
the application of the proceeds thereof).
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder, and if at any time there is
more than one such Person, "Trustee" as used with respect to the Securities of
any Series shall mean the Trustee with respect to Securities of that Series.
"Undepreciated Real Estate Assets" means, as of any date, the cost (being
the original cost to the Company or any of its Subsidiaries plus capital
improvements) of real estate assets of the Company and its Subsidiaries on such
date, before depreciation and amortization of such real estate assets,
determined on a consolidated basis (it being understood that the accounts of
Subsidiaries shall be consolidated with those of the Company only to the extent
of the Company's proportionate interest therein).
"Units" means the limited partnership units of the Company.
"U.S. Government Obligations" means securities which are (i) direct
obligations of The United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of The United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by The United States of America, and which in the case of (i)
and (ii) are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such U.S. Government Obligation or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian for the account of the holder of a depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation evidenced by such depository receipt.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such subsidiary (other than
any director's qualifying shares or investments by individuals mandated by
applicable law) by such Person and/or one or more Wholly Owned Subsidiaries of
such Person.
7
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SECTION 1.2. OTHER DEFINITIONS.
-----------------
DEFINED IN
TERM SECTION
---- -------
"Acceleration Notice" 6.2
"Bankruptcy Law" 6.1
"Custodian" 6.1
"Event of Default" 6.1
"Legal Holiday" 10.7
"Paying Agent" 2.4
"Redemption Price" 3.1
"Registrar" 2.4
"Service Agent" 2.4
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA term used in this Indenture has the following meaning:
"obligor" on the Securities means the Company and any successor
obligor upon the Securities.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
and not otherwise defined herein are used herein as so defined.
SECTION 1.4. RULES OF CONSTRUCTION.
---------------------
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(c) references to "GAAP" shall mean GAAP in effect as of
the time when and for the period as to which such accounting principles are
to be applied;
(d) "or" is not exclusive;
(e) words in the singular include the plural, and in the
plural include the singular; and
(f) provisions apply to successive events and transactions.
8
<PAGE>
ARTICLE 2.
THE SECURITIES
SECTION 2.1. ISSUABLE IN SERIES; FORM AND DATING.
-----------------------------------
The aggregate principal amount of Securities that may be authenticated
and delivered under this Indenture is limited to $___________. The Securities
may be issued in one or more Series, not to exceed eight Series. All Securities
within a Series and among Series shall be identical except as may be set forth
in a Board Resolution, a supplemental indenture or an Officers' Certificate
detailing the adoption of the terms thereof pursuant to the authority granted
under a Board Resolution.
The Securities, and the Trustee's certificate of authentication in
respect thereof, shall be substantially in the form of Exhibit A hereto, which
Exhibit is part of this Indenture. The Securities may have notations, legends
or endorsements required by law, stock exchange rule or usage. The Company
shall approve the form of the Securities and any notation, legend or endorsement
on them. Any such notations, legends or endorsements not contained in the form
of Security attached as Exhibit A hereto shall be delivered in writing to the
Trustee. Each Security shall be dated the date of its authentication.
The terms and provisions contained in the form of Securities shall
constitute, and are hereby expressly made, a part of this Indenture and, to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, expressly agree to such terms and provisions and to be bound
thereby.
SECTION 2.2. ESTABLISHMENT OF TERMS OF SERIES OF SECURITIES.
----------------------------------------------
At or prior to the issuance of any Securities within a Series, the
following shall be established by a Board Resolution, a supplemental indenture
or an Officers' Certificate pursuant to authority granted under a Board
Resolution:
2.2.1. the title of the Series (which shall distinguish the
Securities of that particular Series from the Securities of any other Series);
and
2.2.2. the limit upon the aggregate principal amount of the
Securities of the Series which may be authenticated and delivered under this
Indenture (except for Securities authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Securities of the
Series pursuant to Section 2.7, 2.8, 2.11, 3.8 or 9.6).
SECTION 2.3. EXECUTION AND AUTHENTICATION.
----------------------------
Two Officers shall sign, or one Officer shall sign and one Officer
shall attest to, the Securities for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Security no longer holds that
office at the time the Security is authenticated, the Security shall
nevertheless be valid.
A Security shall not be valid until authenticated by the manual
signature of the Trustee or an authenticating agent. The signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture.
9
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The Trustee shall at any time, and from time to time, authenticate
Securities for original issue in the principal amount provided in the related
Board Resolution, supplemental indenture hereto or Officers' Certificate, upon
receipt by the Trustee of a Company Order. Such Company Order may authorize
authentication and delivery pursuant to oral or electronic instructions from the
Company or its duly authorized agent or agents, which oral instructions shall be
promptly confirmed in writing. Each Security shall be dated the date of its
authentication unless otherwise provided by a Board Resolution, a supplemental
indenture hereto or an Officers' Certificate.
The aggregate principal amount of Securities of any Series outstanding
at any time may not exceed any limit upon the maximum principal amount for such
Series set forth in the Board Resolution, supplemental indenture hereto or
Officers' Certificate delivered pursuant to Section 2.2, except as provided in
Section 2.9, and the aggregate principal amount of all Securities outstanding at
any time may not exceed the limit set forth in Section 2.1.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Securities. Such an authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate.
SECTION 2.4. REGISTRAR AND PAYING AGENT.
--------------------------
The Company shall maintain, with respect to each Series of Securities,
an office or agency in the Borough of Manhattan, The City of New York, where
Securities of a Series may be presented or surrendered for payment ("Paying
Agent"), where Securities of such Series may be surrendered for registration of
transfer or exchange ("Registrar"), and where notices and demands to or upon the
Company in respect of the Securities of such Series and this Indenture may be
served ("Service Agent"). The Registrar shall keep a register with respect to
each Series of Securities and to their transfer and exchange. The Company will
give prompt written notice to the Trustee of the name and address, and any
change in the name or address, of each Registrar, Paying Agent or Service Agent.
If at any time the Company shall fail to maintain any such required Registrar,
Paying Agent or Service Agent or shall fail to furnish the Trustee with the name
and address thereof, such presentations, surrenders, notices and demands may be
made or served at the Corporate Trust Office of the Trustee, and the Company
hereby appoints the Trustee as its agent to receive all such presentations,
surrenders, notices and demands.
The Company may also from time to time designate one or more co-
registrars, additional paying agents or additional service agents and may from
time to time rescind such designations; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its
obligations to maintain a Registrar, Paying Agent and Service Agent as specified
in this Section 2.4. The Company will give prompt written notice to the Trustee
of any such designation or rescission and of any change in the name or address
of any such co-registrar, additional paying agent or additional service agent.
The term "Registrar" includes any co-registrar; the term "Paying Agent" includes
any additional paying agent; and the term "Service Agent" includes any
additional service agent.
The Company hereby appoints the Trustee the initial Registrar, Paying
Agent and Service Agent for each Series unless another Registrar, Paying Agent
or Service Agent, as the case may be, is appointed prior to the time Securities
of that Series are first issued.
10
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SECTION 2.5. PAYING AGENT TO HOLD MONEY IN TRUST.
-----------------------------------
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust, for the benefit of
Securityholders of any Series of Securities, or the Trustee, all money held by
the Paying Agent for the payment of principal of or interest on the Series of
Securities, and will notify the Trustee of any default by the Company in making
any such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Company at any
time may require a Paying Agent to pay all money held by it to the Trustee.
Upon payment over to the Trustee, the Paying Agent (if other than the Company or
a Subsidiary) shall have no further liability for the money. If the Company or
its Subsidiary acts as Paying Agent, it shall segregate and hold in a separate
trust fund for the benefit of Securityholders of any Series of Securities all
money held by it as Paying Agent.
SECTION 2.6. SECURITYHOLDER LISTS.
--------------------
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders of each Series of Securities and shall otherwise comply with TIA
(S)312(a). If the Trustee is not the Registrar, the Company shall furnish to
the Trustee at least ten days before each interest payment date and at such
other times as the Trustee may request in writing a list, in such form and as of
such date as the Trustee may reasonably require, of the names and addresses of
Securityholders of each Series of Securities.
SECTION 2.7. TRANSFER AND EXCHANGE.
---------------------
Where Securities of a Series are presented to the Registrar or a co-
registrar with a request to register a transfer or to exchange them for an equal
principal amount of Securities of the same Series, the Registrar shall register
the transfer or make the exchange if its requirements for such transactions are
met. To permit registrations of transfers and exchanges, the Trustee shall
authenticate Securities at the Registrar's request. No service charge shall be
made for any registration of transfer or exchange (except as otherwise expressly
permitted herein), but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer tax or similar governmental charge
payable upon exchanges pursuant to Sections 2.11, 3.8 or 9.6).
Neither the Company nor the Registrar shall be required (a) to issue,
register the transfer of, or exchange Securities of any Series for the period
beginning at the opening of business fifteen Business Days immediately preceding
the mailing of a notice of redemption of Securities of that Series selected for
redemption and ending at the close of business on the day of such mailing, or
(b) to register the transfer of or exchange Securities of any Series selected,
called or being called for redemption as a whole or the portion being redeemed
of any such Securities selected, called or being called for redemption in part.
SECTION 2.8. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
------------------------------------------------
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of the same Series and of like tenor and principal
amount and bearing a number not contemporaneously outstanding.
11
<PAGE>
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and make available for delivery, in lieu of any such destroyed,
lost or stolen Security, a new Security of the same Series and of like tenor and
principal amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any Series issued pursuant to this Section in
lieu of any destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities of that Series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.9. OUTSTANDING SECURITIES.
----------------------
The Securities outstanding at any time are all the Securities
authenticated by the Trustee except for those canceled by it, those delivered to
it for cancellation and those described in this Section as not outstanding.
If a Security is replaced pursuant to Section 2.8, it ceases to be
outstanding until the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds on the Maturity of Securities of a Series money
sufficient to pay such Securities payable on that date, then on and after that
date such Securities of the Series cease to be outstanding and interest on them
ceases to accrue.
A Security does not cease to be outstanding because the Company or an
Affiliate holds the Security.
SECTION 2.10. TREASURY SECURITIES.
-------------------
In determining whether the Holders of the required principal amount of
Securities of a Series have concurred in any request, demand, authorization,
direction, notice, consent or waiver, Securities of a Series owned by the
Company or an Affiliate shall be disregarded, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
request, demand,
12
<PAGE>
authorization, direction, notice, consent or waiver, only Securities of a Series
that a Responsible Officer of the Trustee knows are so owned shall be so
disregarded.
SECTION 2.11. TEMPORARY SECURITIES.
--------------------
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities upon a Company
Order. Temporary Securities shall be substantially in the form of definitive
Securities but may have variations that the Company considers appropriate for
temporary Securities. Without unreasonable delay, the Company shall prepare and
the Trustee upon request shall authenticate definitive Securities of the same
Series and date of maturity in exchange for temporary Securities. Until so
exchanged, temporary securities shall have the same rights under this Indenture
as the definitive Securities.
SECTION 2.12. CANCELLATION.
------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee shall cancel all Securities surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
such canceled Securities (subject to the record retention requirement of the
Exchange Act) and deliver a certificate of such destruction to the Company,
unless the Company otherwise directs. The Company may not issue new Securities
to replace Securities that it has paid or delivered to the Trustee for
cancellation.
SECTION 2.13. DEFAULTED INTEREST.
------------------
If the Company defaults in a payment of interest on a Series of
Securities, it shall pay the defaulted interest to the Persons who are
Securityholders of the Series on a subsequent special record date. The Company
shall fix the record date and payment date. At least 30 days before the record
date, the Company shall mail to the Trustee and to each Securityholder of the
Series a notice that states the record date, the payment date and the amount of
interest to be paid. The Company may pay defaulted interest in any other lawful
manner.
SECTION 2.14. CUSIP NUMBERS.
-------------
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other elements of
identification printed on the Securities, and any such redemption shall not be
affected by any defect in or omission of such numbers.
ARTICLE 3.
REDEMPTION
SECTION 3.1. OPTIONAL REDEMPTION.
-------------------
The Securities of any Series may be redeemed at any time at the option
of the Company, in whole or from time to time in part, at a redemption price
equal to the sum of the principal amount of
13
<PAGE>
the Securities being redeemed plus accrued interest thereon to the Redemption
Date (the "Redemption Price").
SECTION 3.2. MANDATORY REDEMPTION.
--------------------
In the event that any Public Partnership (a) sells or otherwise
disposes of any Hotel and realizes net cash proceeds in excess of (i) the amount
required to repay mortgage Indebtedness (outstanding immediately prior to the
Partnership Mergers) secured by such Hotel or otherwise required to be applied
to the reduction of Indebtedness of such Public Partnership and (ii) the costs
incurred by the Public Partnership in connection with such sale or other
disposition or (b) refinances (whether at maturity or otherwise) any
Indebtedness secured by any Hotel and realizes net cash proceeds in excess of
(i) the amount of Indebtedness secured by such Hotel at the time of the
Partnership Mergers, calculated prior to any repayment or other reduction in the
amount of such Indebtedness in the Partnership Mergers, and (ii) the costs
incurred by the Company or such Public Partnership in connection with such
refinancing (in either case, the "Net Cash Proceeds"), the Company shall be
required within 90 days of the receipt of the total Net Cash Proceeds to prepay
at the Redemption Price an aggregate amount of principal of the particular
Series of the Securities which were issued to the Persons who were partners of
such Public Partnership prior to the REIT Conversion equal to 80% of such Net
Cash Proceeds.
SECTION 3.3. NOTICE TO TRUSTEE.
-----------------
If the Company elects to redeem Securities pursuant to Section 3.1 or
is required to redeem Securities pursuant to Section 3.2, it shall notify the
Trustee of the Redemption Date and the principal amount of Series of Securities
to be redeemed. The Company shall give the notice at least 45 days before the
Redemption Date (or such shorter notice as may be acceptable to the Trustee).
Any such notice may be cancelled at any time prior to notice of such redemption
being mailed to any Holder and shall thereby be void and of no effect.
SECTION 3.4. SELECTION OF SECURITIES TO BE REDEEMED.
--------------------------------------
If less than all the Securities of a Series are to be redeemed, the
Trustee shall select the Securities of the Series to be redeemed in any manner
that the Trustee deems fair and appropriate. The Trustee shall make the
selection from Securities of the Series outstanding not previously called for
redemption.
SECTION 3.5. NOTICE OF REDEMPTION.
--------------------
At least 30 days but not more than 60 days before a Redemption Date,
the Company shall mail a notice of redemption by first-class mail to each Holder
whose Securities are to be redeemed.
The notice shall identify the Securities of the Series to be redeemed
and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the Paying Agent;
(d) that Securities of the Series called for redemption
must be surrendered to the Paying Agent to collect the
Redemption
14
<PAGE>
Price;
(e) the principal amount of Securities of a Series to be
redeemed;
(f) that the notice is being sent pursuant to this Section
3.5 and pursuant to either the optional or the
mandatory redemption provisions of Section 3.1 or 3.2,
as the case may be;
(g) that interest on Securities of the Series called for
redemption ceases to accrue on and after the Redemption
Date; and
(h) any other information as may be required by the terms
of the particular Series or the Securities of a Series
being redeemed.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense.
SECTION 3.6. EFFECT OF NOTICE OF REDEMPTION.
------------------------------
Once notice of redemption is mailed or published as provided in
Section 3.5, Securities of a Series called for redemption become due and payable
on the Redemption Date and at the Redemption Price. A notice of redemption may
not be conditional. Upon surrender to the Paying Agent, such Securities shall
be paid at the Redemption Price plus accrued interest to the Redemption Date.
SECTION 3.7. DEPOSIT OF REDEMPTION PRICE.
---------------------------
On or before the Redemption Date, the Company shall deposit with the
Paying Agent cash or U.S. Government Obligations sufficient to pay the
Redemption Price of and accrued interest, if any, on all Securities to be
redeemed on that date. The Paying Agent shall promptly return to the Company
any cash or U.S. Government Obligations so deposited which is not used for that
purpose.
SECTION 3.8. SECURITIES REDEEMED IN PART.
---------------------------
Upon surrender of a Security that is redeemed in part, the Company
shall issue and the Trustee shall authenticate for the Holder a new Security of
the same Series and the same maturity equal in principal amount to the
unredeemed portion of the Security surrendered.
ARTICLE 4.
COVENANTS
The following covenants shall be applicable with respect to Securities
of any Series. For the purpose of Securities of any Series issued hereunder,
when used in this Article 4, the term "Securities" shall mean Securities of that
Series.
SECTION 4.1. PAYMENT OF PRINCIPAL AND INTEREST.
---------------------------------
The Company covenants and agrees for the benefit of the Holders of
each Series of Securities that it will duly and punctually pay the principal of
and interest on the Securities of that Series in accordance with the terms of
such Securities and this Indenture.
15
<PAGE>
SECTION 4.2. REPORTS.
-------
The Company shall at all times comply with TIA (S)3.14(a).
SECTION 4.3. COMPLIANCE CERTIFICATE.
----------------------
The Company shall deliver to the Trustee, within 120 days after the
end of its fiscal year, an Officers' Certificate complying with TIA (S)
314(a)(4).
SECTION 4.4. CORPORATE EXISTENCE.
-------------------
Subject to Article 5, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence in
accordance with its organizational documents (as the same may be amended from
time to time) and the rights (charter and statutory) and franchises of the
Company; provided, however, that the Company shall not be required to preserve
any such right, franchise or existence if the Board shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Subsidiaries taken as a whole.
SECTION 4.5. LIMITATION ON INCURRENCES OF INDEBTEDNESS.
-----------------------------------------
(a) The Company will not, and will not permit any of its
Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness)
other than intercompany Indebtedness (representing Indebtedness to which
the only parties are the Company, Host REIT and/or any of their
subsidiaries, but only so long as such Indebtedness is held solely by any
of such parties) that is subordinate in right of payment to the Securities,
if immediately after giving effect to the Incurrence of such Indebtedness,
the aggregate principal amount of all outstanding Indebtedness of the
Company and its Subsidiaries on a consolidated basis, determined in
accordance with GAAP, is (i) greater than 60% of the Total Market
Capitalization of the Company or (ii) greater than 75% of the Company's
Total Assets.
(b) For purposes of determining any particular amount of
Indebtedness under this Section 4.5, Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included as
additional Indebtedness.
(c) Indebtedness of any Person that is not a Subsidiary of
the Company, which Indebtedness is outstanding at the time such Person
becomes a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, shall be
deemed to have been Incurred at the time such Person becomes a Subsidiary
of the Company or is merged with or into or consolidated with the Company,
or a Subsidiary of the Company, and Indebtedness which is assumed at the
time of the acquisition of any asset shall be deemed to have been Incurred
at the time of such acquisition.
SECTION 4.6. MAINTENANCE OF OFFICE OR AGENCY.
-------------------------------
The Company shall maintain in the Borough of Manhattan, The City of
New York, an office or agency where Securities may be
16
<PAGE>
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Securities and this Indenture
may be served. The Company shall give prompt written notice to the Trustee and
the Paying Agent of the location, and any change in the location, of such office
or agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee and the Paying Agent, if
different, with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the address of the Trustee set forth in Section
10.2.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York, for such purposes. The Company
shall give prompt written notice to the Trustee and the Paying Agent, if
different, of any such designation or rescission and of any change in the
location of any such other office or agency. The Company hereby initially
designates the corporate trust office of the Paying Agent as such office.
ARTICLE 5.
SUCCESSORS
SECTION 5.1. WHEN COMPANY MAY MERGE, ETC.
---------------------------
The Company will not merge with or into, or sell, lease, convey, or
transfer, or otherwise dispose of all or substantially all of its property and
assets (as an entirety or substantially as an entirety in one transaction or a
series of related transactions) to any Person or permit any Person to merge with
or into the Company, unless:
(a) either the Company shall be the continuing Person or the
Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired such property and assets of
the Company shall be an entity organized and validly existing under the
laws of the United States of America or any state or jurisdiction thereof
and shall expressly assume, by a supplemental indenture, executed and
delivered to the Trustee, all of the obligations of the Company, on the
Securities and under this Indenture;
(b) immediately after giving effect, on a pro forma basis, to
such transaction, no Default or Event of Default shall have occurred and be
continuing; and
(c) the Company will have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with.
SECTION 5.2. SUCCESSOR PERSON SUBSTITUTED.
----------------------------
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company, in accordance with Section 5.1,
the successor Person formed by such consolidation or
17
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into which the Company is merged or to which such transfer is made, shall
succeed to, be substituted for, and may exercise every right and power of the
Company under this Indenture with the same effect as if such successor Person
had been named therein as the Company and the Company shall be released from the
obligations under the Securities and this Indenture.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.
-----------------
"Event of Default," wherever used herein with respect to Securities of
any Series, means any one of the following events:
(a) the failure by the Company to pay any installment of
interest on the Securities of that Series as and when the same becomes due
and payable and the continuance of any such failure for 30 days;
(b) the failure by the Company to pay all or any part of the
principal of the Securities of that Series when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise;
(c) the failure by the Company to make any mandatory
redemption pursuant to the terms of and within the period specified in
Section 3.2;
(d) the failure by the Company to observe or perform any other
covenant or agreement contained in the Securities of that series or this
Indenture with respect to that Series of Securities and the continuance of
such failure for a period of 60 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Securities of that Series
outstanding;
(e) the Company or any of its Significant Subsidiaries
pursuant to or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief
against it in an involuntary case,
(iii) consents to the appointment of a Custodian of it
or for all or substantially all of its property, or
(iv) makes a general assignment for the benefit of its
creditors;
(f) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any of its
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Significant Subsidiaries in an involuntary case;
(ii) appoints a Custodian of the Company or any of its
Significant Subsidiaries or for all or substantially all of its
property; or
(iii) orders the liquidation of the Company or any of
its Significant Subsidiaries and the order or decree remains unstayed
and in effect for 60 days.
The term "Bankruptcy Law" means title 11 of the U.S. Code or any
similar Federal or State law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
SECTION 6.2. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
--------------------------------------------------
If an Event of Default with respect to the Securities of any Series at
the time outstanding occurs and is continuing (other than an Event of Default
specified in Section 6.1(e) or (f), above, relating to the Company), then either
the Trustee or the Holders of 25% in aggregate principal amount of the
Securities of that Series then outstanding, by notice in writing to the Company
(and to the Trustee if given by Holders) (an ``Acceleration Notice''), may
declare all principal and accrued interest thereon to be due and payable
immediately.
If an Event of Default specified in Section 6.1(e) or (f) shall occur
as to the Company, the principal amount (or specified amount) of and accrued and
unpaid interest, if any, on all outstanding Securities of that Series shall ipso
----
facto become and be immediately due and payable without any declaration or other
- -----
act on the part of the Trustee or any Holder.
At any time after such a declaration of acceleration with respect to
any Series has been made and before a judgment or decree for payment of the
money due has been obtained by the Trustee as hereinafter provided in this
Article 6, the Holders of a majority (or such greater amount if the Event of
Default resulting in such acceleration related to a Default in a provision of
this Indenture that may not be amended without the consent of a greater amount)
in principal amount of the outstanding Securities of that Series, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(i) all overdue interest, if any, on all Securities
of that Series;
(ii) the principal of any Securities of that Series
which have become due (otherwise than by such declaration of
acceleration) and interest thereon at the rate or rates prescribed
therefor in such Securities; and
(iii) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other
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amounts due the Trustee under Section 7.7; and
(b) all Events of Default with respect to Securities of that
Series, other than the non-payment of the principal of and interest on
Securities of that Series which have become due solely by such declaration
of acceleration, have been cured or waived as provided in Section 6.13.
No such rescission shall effect any subsequent Default or impair any
right consequent thereon.
SECTION 6.3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
-------------------------------------------------------
TRUSTEE.
-------
The Company covenants that if:
(a) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days; or
(b) default is made in the payment of principal of any
Security at the Maturity thereof;
then, the Company will, upon demand of the Trustee, pay to it, for the benefit
of the Holders of such Securities, the whole amount then due and payable on such
Securities for principal and interest at the rate or rates prescribed therefor
in such Securities, and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and any other amounts due the Trustee under Section 7.7.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon such Securities and collect the
moneys adjudged or deemed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon such Securities, wherever
situated.
If an Event of Default with respect to any Securities of any Series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of Securities of such
Series by such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 6.4. TRUSTEE MAY FILE PROOFS OF CLAIM.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the
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Trustee shall have made any demand on the Company for the payment of overdue
principal or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise:
(a) to file and prove a claim for the whole amount of
principal and interest owing and unpaid in respect of the Securities and to
file such other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee (including any claim for the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and any other amounts due the Trustee under
Section 7.7) and of the Holders allowed in such judicial proceeding; and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same,
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any other
amounts due the Trustee under Section 7.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 6.5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
------------------------------------------------
SECURITIES.
----------
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 6.6. APPLICATION OF MONEY COLLECTED.
------------------------------
Any money collected by the Trustee pursuant to this Article 6 shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or interest,
upon presentation of the Securities and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee
under Section 7.7; and
Second: To the payment of the amounts then due and unpaid for
principal of and interest on the Securities in respect of
which or for the benefit of which such money has been
collected, ratably, without preference or priority of any
kind, according to the amounts due and payable on such
Securities for principal and interest, respectively; and
Third: To the Company.
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SECTION 6.7. LIMITATION ON SUITS.
-------------------
No Holder of any Security of any Series shall have any right to
institute any proceeding, judicial or otherwise, with respect to this Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless:
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Securities of
that Series;
(b) the Holders of not less than 25% in principal amount of
the outstanding Securities of that Series shall have made written request
to the Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the outstanding Securities of that Series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all such
Holders.
SECTION 6.8. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND
-------------------------------------------------------
INTEREST.
--------
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and interest, if any, on such Security on
the Stated Maturity or Stated Maturities expressed in such Security (or, in the
case of redemption, on the Redemption Date) and to institute suit for the
enforcement of any such payment, and such rights shall not be impaired without
the consent of such Holder.
SECTION 6.9. RESTORATION OF RIGHTS AND REMEDIES.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
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SECTION 6.10. RIGHTS AND REMEDIES CUMULATIVE.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in Section 2.8, no
right or remedy herein conferred upon or reserved to the Trustee or to the
Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 6.11. DELAY OR OMISSION NOT WAIVER.
----------------------------
No delay or omission of the Trustee or of any Holder of any Securities
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article 6 or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
SECTION 6.12. CONTROL BY HOLDERS.
------------------
The Holders of a majority in principal amount of the outstanding
Securities of any Series shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Securities of such Series, provided that:
(a) such direction shall not be in conflict with any rule of
law or with this Indenture;
(b) the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction; and
(c) subject to the provisions of Section 6.1, the Trustee
shall have the right to decline to follow any such direction if the Trustee
in good faith shall, by a Responsible Officer of the Trustee, determine
that the proceeding so directed would involve the Trustee in personal
liability or be unduly prejudicial to Holders of Securities of such Series
not joining therein.
SECTION 6.13. WAIVER OF PAST DEFAULTS.
-----------------------
The Holders of a majority in aggregate principal amount of the
outstanding Securities of a Series may waive on behalf of all the Holders any
Default with respect to such Series and its consequences, except a Default with
respect to any provision requiring supermajority approval to amend, which
Default may only be waived by such a supermajority with respect to such Series,
and except a default in the payment of principal of or interest on any Security
of that Series not yet cured or a Default with respect to any covenant or
provision which cannot be modified or amended without the consent of the Holder
of each outstanding Security of that Series affected, provided, however, that
pursuant to Section 6.2 hereof, Holders of a majority or a supermajority (as the
case may be) in aggregate principal amount of the Securities of any Series may
rescind an acceleration and its consequences including any payment default that
resulted from such acceleration. Upon any such waiver, such Default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been cured, for every purpose
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of this Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
SECTION 6.14. UNDERTAKING FOR COSTS.
---------------------
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the outstanding Securities of any Series, or to any suit instituted by
any Holder for the enforcement of the payment of the principal of or interest on
any Security on or after the Stated Maturity or Stated Maturities expressed in
such Security (or, in the case of redemption, on the Redemption Date).
ARTICLE 7.
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
-----------------
(a) If an Event of Default has occurred and is continuing,
the Trustee shall exercise the rights and powers vested in it by this
Indenture and use the same degree of care and skill in their exercise as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee need perform only those duties that
are specifically set forth in this Indenture and no others;
(ii) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon Officers'
Certificates or Opinions of Counsel furnished to the Trustee and
conforming to the requirements of this Indenture; however, in the case
of any such Officers' Certificates or Opinions of Counsel which by any
provisions hereof are specifically required to be furnished to the
Trustee, the Trustee shall examine such Officers' Certificates and
Opinions of Counsel to determine whether or not they conform to the
requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of
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paragraph (b) of this Section 7.1;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts;
(iii) the Trustee shall not be liable with respect to
any action taken, suffered or omitted to be taken by it with respect
to Securities of any Series in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
outstanding Securities of such Series relating to the time, method and
place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture with respect to the Securities of such Series.
(d) Every provision of this Indenture that in any way
relates to the Trustee is subject to paragraph (a), (b) and (c) of this
Section.
(e) Subject to the provisions of this Article and the rest
of this Indenture relating to the duties of the Trustee, the Trustee will
be under no obligation to exercise any of its rights or powers under this
Indenture at the request, order or direction of any of the Holders, unless
such Holders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which might be incurred by it in
compliance with such request, order or direction.
(f) The Trustee shall not be liable for interest on any
money received by it except as the Trustee may agree in writing with the
Company. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee
to risk its own funds or otherwise incur any financial liability in the
performance of any of its duties, or in the exercise of any of its rights
or powers, if it shall have reasonable grounds for believing that repayment
of such funds or adequate indemnity against such risk is not reasonably
assured to it.
(h) The Paying Agent, the Registrar and any authenticating
agent shall be entitled to the protections, immunities and standard of care
as are set forth in paragraphs (a), (b) and (c) of this Section and Section
7.2 with respect to the Trustee.
SECTION 7.2. RIGHTS OF TRUSTEE.
-----------------
(a) The Trustee may rely on and shall be protected in acting
or refraining from acting upon any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need
not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee
shall not be liable for any action it takes or omits to take in good faith
in reliance on such Officers' Certificate or
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Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes
or omits to take in good faith which it believes to be authorized or within
its rights or powers.
(e) The Trustee may consult with counsel and the advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(f) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion,
may make such further inquiry or investigation into such facts or matters
as it may see fit.
(g) The Trustee shall not be required to give any bond or
surety in respect of the performance of its powers and duties hereunder.
(h) The permissive rights of the Trustee to do things
enumerated in this Indenture shall not be construed as duties.
(i) The Trustee shall not be charged with knowledge of any
Default or Event of Default or of the identity of any Subsidiary unless
either (i) a Responsible Officer shall have actual knowledge thereof or
(ii) the Trustee shall have received written notice thereof from the
Company or any Holder.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
Affiliate with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. The Trustee is also subject to Sections 7.10
and 7.11.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
--------------------
The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Securities, it shall not
be accountable for the Company's use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Company in this Indenture or
the Securities other than its certificate of authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
------------------
If a Default or Event of Default occurs and is continuing with respect
to the Securities of any Series and if it is known to a Responsible Officer of
the Trustee, the Trustee shall mail to each Securityholder of the Securities of
that Series notice of a Default or Event of Default within 90 days after it
occurs or, if later than the end of such 90-day period, after a Responsible
Officer of the Trustee has
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knowledge of such Default or Event of Default.
Except in the case of a Default or Event of Default in payment of principal of
or interest on any Security of any Series, the Trustee may withhold the notice
if and so long as its corporate trust committee or a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of Securityholders of that Series.
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS.
-----------------------------
Within 60 days after May 15 in each year, the Trustee shall transmit
by mail to all Securityholders, as their names and addresses appear on the
register kept by the Registrar, a brief report dated as of such May 15, in
accordance with, and to the extent required under, TIA (S)313.
A copy of each report at the time of its mailing to Securityholders of
any Series shall be filed with the SEC and each stock exchange, if any, on which
the Securities of that Series are listed. The Company shall promptly notify the
Trustee when Securities of any Series are listed on any stock exchange.
SECTION 7.7. COMPENSATION AND INDEMNITY.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses
incurred by it. Such expenses shall include the reasonable compensation and
expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee (including the cost of
defending itself) against any loss, liability or expense incurred by it
(including in the enforcement of this Section 7.7), except as set forth in the
next paragraph, arising out of or in connection with the acceptance or
administration of this trust or in the performance of its duties under this
Indenture as Trustee or Agent. The Trustee shall notify the Company promptly of
any claim for which it may seek indemnity. The Company shall defend the claim
and the Trustee shall cooperate in the defense. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of such
counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld. This indemnification shall
apply to officers, directors, employees, shareholders and agents of the Trustee.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee or by any officer, director, employee,
shareholder or agent of the Trustee through negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities of any Series on all money or
property held or collected by the Trustee, except that which is held in trust to
pay principal and interest on particular Securities of that Series.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(e) or (f) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
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SECTION 7.8. REPLACEMENT OF TRUSTEE.
----------------------
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign with respect to the Securities of one or more
Series by so notifying the Company. The Holders of a majority in principal
amount of the Securities of any Series may remove the Trustee with respect to
that Series by so notifying the Trustee and the Company. The Company may remove
the Trustee with respect to Securities of one or more Series if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged a bankrupt or an insolvent or
an order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the
Trustee or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Securities may appoint
a successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee with respect to the Securities of any one or
more Series does not take office within 60 days after the retiring Trustee
resigns or is removed, the retiring Trustee, the Company or the Holders of at
least 10% in principal amount of the Securities of the applicable Series may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If the Trustee with respect to the Securities of any one or more
Series fails to comply with Section 7.10, any Securityholder of the applicable
Series may petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after that,
the retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee subject to the lien provided for in Section 7.7, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
with respect to each Series of Securities for which it is acting as Trustee
under this Indenture. A successor Trustee shall mail a notice of its succession
to each Securityholder of each such Series. Notwithstanding replacement of the
Trustee pursuant to this Section 7.8, the Company's obligations under Section
7.7 hereof shall continue for the benefit of the retiring trustee with respect
to expenses and liabilities incurred by it prior to such replacement.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.
--------------------------------
If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
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SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
-----------------------------
This Indenture shall always have a Trustee who satisfies the
requirements of TIA (S)310(a)(1), (2) and (5). The Trustee shall always have a
combined capital and surplus of at least $25,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with TIA
(S)310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
-------------------------------------------------
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S)311(b). A Trustee who has resigned or been removed
shall be subject to TIA (S)311(a) to the extent indicated.
ARTICLE 8.
SATISFACTION AND DISCHARGE; DEFEASANCE
SECTION 8.1. SATISFACTION AND DISCHARGE OF INDENTURE.
---------------------------------------
This Indenture shall upon Company Order cease to be of further effect
(except as hereinafter provided in this Section 8.1) with respect to any Series
of Securities, and the Trustee, at the expense of the Company, shall execute
proper instruments acknowledging such satisfaction and discharge of this
Indenture with respect to such Series, when:
(a) either:
(i) all Securities of such Series theretofore
authenticated and delivered (other than Securities of such Series that
have been destroyed, lost or stolen and that have been replaced or
paid) have been delivered to the Trustee for cancellation; or
(ii) all such Securities not theretofore delivered to
the Trustee for cancellation:
(1) have become due and payable; or
(2) will become due and payable at their Stated
Maturity within one year; or
(3) are to be called for redemption within one
year under arrangements satisfactory to the
Trustee for the giving of notice of
redemption by the Trustee in the name, and
at the expense, of the Company; or
(4) are deemed paid and discharged pursuant to
Section 8.3, as applicable;
and the Company, in the case of (1), (2) or (3) above, has deposited or caused
to be deposited (in U.S. legal tender or U.S. Government Obligations or a
combination thereof) with the Trustee as trust funds in trust an amount
sufficient for the purpose of paying and discharging the entire Indebtedness on
such
29
<PAGE>
Securities not theretofore delivered to the Trustee for cancellation, for
principal and interest to the date of such deposit (in the case of Securities
which have become due and payable on or prior to the date of such deposit) or to
the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 7.7, and, if money shall
have been deposited with the Trustee pursuant to clause (a) of this Section, the
provisions of Sections 2.4, 2.7, 2.8, 2.11, 7.1, 8.1 8.2 and 8.5 shall survive.
SECTION 8.2. APPLICATION OF TRUST FUNDS; INDEMNIFICATION.
-------------------------------------------
(a) Subject to the provisions of Section 8.5, all money and
U.S. Government Obligations deposited with the Trustee pursuant to Sections
8.1, 8.3 or 8.4 and all money received by the Trustee in respect of U.S.
Government Obligations deposited with the Trustee pursuant to Sections 8.1,
8.3 or 8.4, shall be held in trust and applied by it, in accordance with
the provisions of the Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the persons entitled
thereto, of the principal and interest for whose payment such money has
been deposited with or received by the Trustee or to make analogous
payments as contemplated by Sections 8.3 or 8.4.
(b) The Company shall pay and shall indemnify the Trustee
against any tax, fee or other charge imposed on or assessed against U.S.
Government Obligations deposited pursuant to Sections 8.1, 8.3 or 8.4 or
the interest and principal received in respect of such obligations other
than any payable by or on behalf of Holders.
(c) The Trustee shall deliver or pay to the Company from
time to time upon Company Request any U.S. Government Obligations or money
held by it as provided in Sections 8.1, 8.3 or 8.4 which, in the opinion of
a nationally recognized firm of independent certified public accountants
expressed in a written certification thereof delivered to the Trustee, are
then in excess of the amount thereof which then would have been required to
be deposited for the purpose for which such U.S. Government Obligations or
money were deposited or received. This provision shall not authorize the
sale by the Trustee of any U.S. Government Obligations held under this
Indenture.
SECTION 8.3. LEGAL DEFEASANCE OF SECURITIES OF ANY SERIES.
--------------------------------------------
The Company shall be deemed to have paid and discharged the entire
Indebtedness on all the outstanding Securities of such Series on the 91st day
after the date of the deposit referred to
30
<PAGE>
below, and the provisions of this Indenture, as it relates to such outstanding
Securities of such Series, shall no longer be in effect (and the Trustee, at the
expense of the Company, shall, at Company Request, execute proper instruments
acknowledging the same), except as to:
(a) the rights of Holders of Securities of such Series to
receive, from the trust funds described below, payment of the principal of
and each installment of principal of and interest on the outstanding
Securities of such Series on the Stated Maturity of such principal or
installment of principal or interest on the day on which such payments are
due and payable in accordance with the terms of this Indenture and the
Securities of such Series;
(b) the provisions of Sections 2.5, 2.7, 2.8, 2.11, 4.6 and this
Article 8; and
(c) the rights, powers, trust and immunities of the Trustee
hereunder;
provided that, the following conditions shall have been satisfied:
(i) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Securities of such
Series, (A) U.S. legal tender or U.S. Government Obligations, or any
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay the principal of and interest on such Securities
on the stated date for payment thereof or on the Redemption Date of
such principal or installment of principal of or interest on
Securities of such Series;
(ii) the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to
Trustee confirming that (A) the Company has received from, or there
has been published by the Internal Revenue Service, a ruling or (B)
since the date of this Indenture, there has been a change in the
applicable Federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders of the Securities of such Series will not recognize income,
gain or loss for Federal income tax purposes as a result of such Legal
Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(iii) no Default or Event of Default shall have occurred with
respect to such Series and be continuing on the date of such deposit
or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after
the date of deposit;
(iv) such defeasance shall not result in a breach or
31
<PAGE>
violation of, or constitute a default under this Indenture or any
other material agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(v) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of such Securities
over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of
the Company or others; and
(vi) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the conditions precedent provided
for have been complied with.
SECTION 8.4. COVENANT DEFEASANCE.
-------------------
On and after the 91st day after the date of the deposit referred to in
subparagraph (a) hereof, the Company may omit to comply with any term, provision
or condition set forth under Sections 4.2, 4.3, 4.4 and 4.5 and Article 5 (and
the failure to comply with any such covenants shall not constitute a Default or
Event of Default under Section 6.1) with respect to the Securities of such
Series, provided that the following conditions shall have been satisfied:
(a) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Securities of such Series,
(A) U.S. legal tender or U.S. Government Obligations, or any combination
thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of and interest on such Securities on the stated date for payment
thereof or on the Redemption Date of such principal or installment of
principal of or interest on Securities of such Series;
(b) the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to such
Trustee confirming that the Holders of the Securities of such Series will
not recognize income, gain or loss for Federal income tax purposes as a
result of the defeasance contemplated by this Section 8.4 and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(c) no Default or Event of Default shall have occurred with
respect to such Series and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(d) such defeasance shall not result in a breach or
violation of, or constitute a default under this Indenture or any other
material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
32
<PAGE>
(e) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of the Securities of such Series
over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Company or
others; and
(f) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the conditions precedent provided for
have been complied with.
SECTION 8.5. REPAYMENT TO COMPANY.
--------------------
The Trustee and the Paying Agent shall pay to the Company upon request
any money held by them for the payment of principal and interest that remains
unclaimed for two years. After that, Securityholders entitled to the money must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another Person.
SECTION 8.6. REINSTATEMENT.
-------------
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Article 8 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to this Article 8
until such time as the Trustee or Paying Agent is permitted to apply all such
money or U.S. Government Obligations in accordance with this Article 8; provided
that if the Company has made any payment of interest on or principal of any
Securities because of the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Securities to receive such
payment from the money or U.S. Government Obligations held by the Trustee or
Paying Agent.
ARTICLE 9.
AMENDMENTS AND SUPPLEMENTS
SECTION 9.1. WITHOUT CONSENT OF HOLDERS.
--------------------------
The Company and the Trustee may amend or supplement this Indenture or
the Securities of one or more Series without the consent of any Securityholder:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Article 5;
(c) to provide for uncertificated Securities in addition to
or in place of certificated Securities;
(d) to make any change that does not adversely affect the
rights of any Securityholder;
(e) to provide for the issuance of and establish the form
and terms and conditions of Securities of any Series as permitted by this
Indenture;
33
<PAGE>
(f) to add to the covenants of the Company or to add Events
of Default for the benefit of Securityholders or to surrender any right or
power conferred upon the Company in this Indenture;
(g) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee with respect to the Securities
of one or more Series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee;
(h) to provide for guarantors or collateral for the
Securities of any Series; or
(i) to comply with requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the TIA.
SECTION 9.2. WITH CONSENT OF HOLDERS.
-----------------------
Except as provided elsewhere in this Article 9, the Company and the
Trustee may enter into a supplemental indenture with the written consent of the
Holders of not less than a majority in aggregate principal amount of the
outstanding Securities of each Series affected by such supplemental indenture
(including consents obtained in connection with a tender offer or exchange offer
for the Securities of such Series) for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this Indenture
or of any supplemental indenture or of modifying in any manner the rights of the
Securityholders of each such Series. Except as provided in Section 6.13, the
Holders of at least a majority in principal amount of the outstanding Securities
of each Series affected by such waiver by notice to the Trustee (including
consents obtained in connection with a tender offer or exchange offer for the
Securities of such Series) may waive compliance by the Company with any
provision of this Indenture or the Securities with respect to such Series.
It shall not be necessary for the consent of the Holders of Securities
under this Section 9.2 to approve the particular form of any proposed
supplemental indenture or waiver, but it shall be sufficient if such consent
approves the substance thereof. After a supplemental indenture or waiver under
this Section 9.2 becomes effective, the Company shall mail to the Holders of
Securities affected thereby a notice briefly describing the supplemental
indenture or waiver. Any failure by the Company to mail or publish such notice,
or any defect therein, shall not, however, in any way impair or affect the
validity of any such supplemental indenture or waiver.
SECTION 9.3. LIMITATIONS.
-----------
Without the consent of each Securityholder affected, an amendment or
waiver may not:
(a) change the Stated Maturity of the principal of, or any
installment of interest on, any Security;
(b) reduce the principal amount of or interest on any
Security;
(c) change the place of payment, or the coin or currency,
for the payment of principal of or interest on any Security;
34
<PAGE>
(d) impair the right to institute suit for the enforcement
of any payment on or after the Stated Maturity (or, in the case of a
redemption, on or after the Redemption Date) of any Security;
(e) reduce the percentages of outstanding Securities the
consent of whose Holders is necessary to modify or amend this Indenture;
(f) waive a default in the payment of principal of or
interest on the Securities (except a recission of acceleration of the
Securities of any Series and a waiver of the payment default that resulted
from such acceleration pursuant to Section 6.2 hereof); or
(g) reduce the percentage or aggregate principal amount of
outstanding Securities of a Series the consent of whose Holders is
necessary for waiver of compliance with certain provisions of this
Indenture or for waiver of certain defaults in Section 6.8, 6.13 or this
9.3.
SECTION 9.4. COMPLIANCE WITH TRUST INDENTURE ACT.
-----------------------------------
Every amendment to this Indenture or the Securities of one or more
Series shall be set forth in a supplemental indenture hereto that complies with
the TIA as then in effect.
SECTION 9.5. REVOCATION AND EFFECT OF CONSENTS.
---------------------------------
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Security is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made on
any Security. However, any such Holder or subsequent Holder may revoke the
consent as to his Security or portion of a Security if the Trustee receives the
notice of revocation before the date on which the Trustee receives an Officers'
Certificate certifying that the Holders of the requisite principal amount of
Securities of the applicable Series have consented (and not theretofore revoked
such consent) to the amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which record date shall be the date so fixed by the
Company, notwithstanding the provisions of the TIA. If a record date is fixed,
then notwithstanding the last sentence of the immediately preceding paragraph,
those Persons who were Holders at such record date, and only those Persons ( or
their duly designated proxies), shall be entitled to revoke any consent
previously given (up to the time such consent becomes non-revocable in
accordance with such sentence), whether or not such Persons continue to be
Holders after such record date.
Any amendment or waiver once effective shall bind every Securityholder
of each Series affected by such amendment or waiver unless it is of the type
described in any of clauses (a) through (g) of Section 9.3. In that case, the
amendment or waiver shall bind each Holder of a Security who has consented to it
and every subsequent Holder of a Security or portion of a Security that
evidences the same debt as the consenting Holder's Security.
35
<PAGE>
SECTION 9.6. NOTATION ON OR EXCHANGE OF SECURITIES.
-------------------------------------
The Trustee may place an appropriate notation about an amendment or
waiver on any Security of any Series thereafter authenticated. The Company in
exchange for Securities of that Series may issue and the Trustee shall
authenticate upon request new Securities of that Series that reflect the
amendment or waiver. Any failure to make any appropriate notation or to issue a
new Security of that Series shall not affect the validity of such amendment or
waiver.
SECTION 9.7. TRUSTEE PROTECTED.
-----------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article 9 or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 7.1) shall be fully protected in relying upon,
an Opinion of Counsel complying with Section 10.4(b) and stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee shall sign all supplemental indentures, except that the
Trustee need not sign any supplemental indenture that adversely affects its
rights.
ARTICLE 10.
MISCELLANEOUS
SECTION 10.1. TRUST INDENTURE ACT CONTROLS.
----------------------------
If any provision of this Indenture limits, qualifies, or conflicts
with another provision which is required or deemed to be included in this
Indenture by the TIA, such required or deemed provision shall control.
SECTION 10.2. NOTICES.
-------
Any notice or communication by the Company or the Trustee to the other
is duly given if in writing and delivered in person or mailed by first-class
mail:
if to the Company:
Host Marriott, L.P.
10400 Fernwood Road
Bethesda, Maryland
Attention: General Counsel
if to the Trustee:
Marine Midland Bank
140 Broadway
12th Floor
New York, New York 10005
Attention: Corporate Trust Department
36
<PAGE>
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication to a Securityholder shall be mailed by
first-class mail to his address shown on the register kept by the Registrar.
Failure to mail a notice or communication to a Securityholder of any Series or
any defect in it shall not affect its sufficiency with respect to other
Securityholders of that or any other Series.
If a notice or communication is mailed or published in the manner
provided above, within the time prescribed, it is duly given, whether or not the
Securityholder receives it.
If the Company mails a notice or communication to Securityholders, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 10.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
-------------------------------------------
Securityholders of any Series may communicate pursuant to TIA
(S)312(b) with other Securityholders of that Series or any other Series with
respect to their rights under this Indenture or the Securities of that Series or
all Series. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA (S)312(c).
SECTION 10.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
--------------------------------------------------
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of
such counsel, all such conditions precedent have been complied with.
SECTION 10.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
---------------------------------------------
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA (S)314(a)(4)) shall comply with the provisions of TIA
(S)314(e) and shall include:
(a) a statement that the person making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
37
<PAGE>
(d) a statement as to whether or not, in the opinion of
such person, such condition or covenant has been complied with.
SECTION 10.6. RULES BY TRUSTEE AND AGENTS.
---------------------------
The Trustee may make reasonable rules for action by or a meeting of
Securityholders of one or more Series. Any Agent may make reasonable rules and
set reasonable requirements for its functions.
SECTION 10.7. LEGAL HOLIDAYS.
--------------
Unless otherwise provided by Board Resolution, Officers' Certificate
or supplemental indenture for a particular Series, a "Legal Holiday" is any day
that is not a Business Day. If a payment date is a Legal Holiday at a place of
payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period.
SECTION 10.8. NO RECOURSE AGAINST OTHERS.
--------------------------
No recourse for the payment of the principal of or interest on the
Securities or for any claim based thereon or otherwise in respect thereof, and
no recourse under or upon any obligation, covenant or agreement of the Company
in this Indenture, or in the Securities or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator,
partner, stockholder, officer, director, employee or controlling Person of the
Company, the General Partner or any successor Person thereof, except as an
obligor of the Securities pursuant to this Indenture. Each Holder, by accepting
the Securities, waives and releases all such liability.
SECTION 10.9. COUNTERPARTS.
------------
This Indenture may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
SECTION 10.10. GOVERNING LAWS.
--------------
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING, WITHOUT
LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW
AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B). THE COMPANY HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN
THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN
THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES,
AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT
38
<PAGE>
THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
SECTION 10.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
---------------------------------------------
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 10.12. SUCCESSORS.
----------
All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 10.13. SEVERABILITY.
------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.14. TABLE OF CONTENTS, HEADINGS, ETC.
--------------------------------
The Table of Contents, Reconciliation between the TIA, and headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
HOST MARRIOTT, L.P.
By:
-------------------------------
Name:
Title:
MARINE MIDLAND BANK
By:
-------------------------------
Name:
Its:
39
<PAGE>
EXHIBIT A
6.56% SERIES ___ SENIOR NOTE DUE 2005
CUSIP No. ___________
No. ___ [$_________]
Host Marriott, L.P., a Delaware limited partnership (hereinafter
called the "Company", which term includes any successors under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________________, or registered assigns, the principal sum of [$________],
on December 15, 2005. This Security is one of the 6.56% Series ___ Senior Notes
due 2005 referred to in such Indenture (hereinafter referred to collectively as
the "Securities.")
Interest Payment Dates: June 15 and December 15
Record Dates: June 1 and December 1
Reference is made to the further provisions of this Security on the
reverse side, which will, for all purposes, have the same effect as if set forth
at this place.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Instrument to be duly
executed.
Dated: ______ __, 1998
HOST MARRIOTT, L.P.,
a Delaware limited partnership
By:
----------------------------
Name:
Title:
Attest:
----------------------------
Name:
Title:
2
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series designated therein
referred to in the within-mentioned Indenture.
MARINE MIDLAND BANK,
as Trustee
By:
------------------------------
Authorized Signatory
<PAGE>
EXHIBIT A
HOST MARRIOTT, L.P.
6.56% Series ___ Senior Note due 2005
1. Interest.
--------
Host Marriott, L.P., a Delaware limited partnership
(hereinafter called the "Company," which term includes any successors under the
Indenture hereinafter referred to), promises to pay interest on the principal
amount of this Security at the rate of 6.56% per annum from __________ __, 1998
until maturity.
The Company will pay interest semi-annually on June 15 and
December 15 of each year (each, an "Interest Payment Date"), commencing June 15,
1999. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid on the Securities, from
___________ __, 1998. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
2. Method of Payment.
-----------------
The Company shall pay interest on the Securities (except defaulted
interest) to the Persons who are the registered Holders at the close of business
on the Record Date immediately preceding the Interest Payment Date. Holders
must surrender Securities to a Paying Agent to collect principal payments.
Principal of and interest on the Securities will be payable in United States
dollars at the office or agency of the Company maintained for such purpose, in
the Borough of Manhattan, The City of New York or at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Securities
at the addresses set forth upon the registry books of the Company.
3. Paying Agent and Registrar.
---------------------------
Initially, Marine Midland Bank will act as Paying Agent and
Registrar. The Company may change any Paying Agent, Registrar or co-Registrar
without notice to the Holders. The Company or any of its Subsidiaries may,
subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar.
4. Indenture.
----------
The Company issued the Securities under an Indenture, dated as
of _______ __, 1998 (the "Indenture"), between the Company and the Trustee.
Capitalized terms herein are used as defined in the Indenture unless otherwise
defined herein. The Securities are limited in aggregate principal amount to
$_______. The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as in effect on the date of the Indenture. The Securities are subject to
all such terms, and Holders of Securities are referred to the Indenture and said
Act for a statement of them. The Securities are senior, general and unsecured
obligations of the Company. Each Holder of this Security, by
<PAGE>
accepting the same, (a) agrees to and shall be bound by the provisions of the
Indenture, (b) authorizes and directs the Trustee on his behalf to take such
action as may be provided in the Indenture and (c) appoints the Trustee his
attorney-in-fact for such purpose.
5. Redemption.
-----------
The Securities may be redeemed in whole or from time to time
in part at any time at the option of the Company, at a redemption price equal to
the sum of the principal amount of the Securities being redeemed plus accrued
interest thereon to the Redemption Date (the "Redemption Price").
In the event that any Public Partnership (a) sells or
otherwise disposes of any Hotel or (b) refinances (whether at maturity or
otherwise) any Indebtedness secured by any Hotel and, in either case, realizes
Net Cash Proceeds therefrom, the Company shall be required within 90 days of the
receipt of the total of such Net Cash Proceeds to prepay at the Redemption Price
an aggregate amount of principal of the particular Series of the Securities
which were issued to the Persons who were partners of such Public Partnership
prior to the REIT Conversion equal to 80% of such Net Cash Proceeds.
Any such redemption will comply with Article 3 of the
Indenture.
6. Notice of Redemption.
--------------------
Notice of redemption will be sent by first class mail, at
least 30 days and not more than 60 days prior to the Redemption Date to the
Holder of each Security to be redeemed at such Holder's last address as then
shown upon the registry books of the Registrar.
Except as set forth in the Indenture, from and after any
Redemption Date, if monies for the redemption of the Securities called for
redemption shall have been deposited with the Paying Agent on such Redemption
Date, the Securities called for redemption will cease to bear interest and the
only right of the Holders of such Securities will be to receive payment of the
Redemption Price.
7. Transfer and Exchange.
----------------------
A Holder may register the transfer of, or exchange Securities
in accordance with, the Indenture. The Registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and to
pay any taxes and fees required by law or permitted by the Indenture. The
Registrar need not register the transfer of or exchange any Securities (a)
selected for redemption except the unredeemed portion of any Security being
redeemed in part or (b) for a period beginning 15 Business Days before the
mailing of a notice of an offer to repurchase or redemption and ending at the
close of business on the day of such mailing.
8. Persons Deemed Owners.
---------------------
2
<PAGE>
The registered Holder of a Security may be treated as the owner of it
for all purposes.
9. Unclaimed Money.
----------------
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee and the Paying Agent(s) will pay the money
back to the Company at its request. After that, all liability of the Trustee and
such Paying Agent(s) with respect to such money shall cease, and Holders
entitled to the money must look to the Company for payment as general creditors
unless an applicable abandoned property law designates another Person.
10. Discharge Prior to Redemption or Maturity.
------------------------------------------
As set forth in the Indenture, if the Company irrevocably
deposits with the Trustee, in trust, for the benefit of the Holders, U.S. legal
tender, U.S. Government Obligations or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of and interest on such
Securities on the stated date for payment thereof or on the redemption date of
such principal or installment of principal of or interest on such Securities,
the Company will be discharged from certain provisions of the Indenture and the
Securities (including the covenant described in paragraph 12 below, but
excluding its obligation to pay the principal of and interest on the
Securities). Upon satisfaction of certain additional conditions set forth in the
Indenture, the Company may elect to have its obligations discharged with respect
to outstanding Securities.
11. Amendment; Supplement; Waiver.
------------------------------
The Company and the Trustee may amend the Indenture or enter into a
supplemental indenture without the consent of the Holders for certain limited
purposes including, among other things, to cure any ambiguity, defect or
inconsistency, or to make any other change that does not adversely affect the
rights of any Holder of a Security. Subject to certain exceptions, the
Indenture or the Securities may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the outstanding Securities of each Series affected by such amendment or
supplement, and any existing Default or Event of Default with respect to a
Series or compliance with any provision with respect to a Series may be waived
with the consent of the Holders of a majority in aggregate principal amount of
the outstanding Securities of such Series.
12. Limitation on Incurrence of Indebtedness.
----------------------------------------
The Indenture imposes a limitation on the ability of the
Company and any of its Subsidiaries to incur additional Indebtedness. The
limitation is subject to certain qualifications and exceptions.
13. Successor.
----------
3
<PAGE>
When a successor assumes all the obligations of its predecessor under
the Securities and the Indenture, the predecessor will be released from those
obligations.
14. Defaults and Remedies.
----------------------
If an Event of Default with respect to the Securities occurs and is
continuing (other than an Event of Default relating to bankruptcy, insolvency or
reorganization of the Company), then either the Trustee or the Holders of 25% in
aggregate principal amount of the Securities then outstanding may declare all
Securities to be due and payable immediately in the manner and with the effect
provided in the Indenture. Holders of Securities may not enforce the Indenture
or the Securities, except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Securities.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Securities may direct the Trustee in its exercise of any trust
or power with respect to such Securities. The Trustee may withhold from Holders
of Securities notice of any continuing Default or Event of Default (except a
Default in payment of principal or interest) if it determines that withholding
notice is in their interest.
15. Trustee and Agent Dealings with Company.
----------------------------------------
The Trustee and each Agent under the Indenture, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company, any of its Subsidiaries or any of their
respective Affiliates, and may otherwise deal with such Persons as if it were
not the Trustee or such Agent.
16. No Recourse Against Others.
--------------------------
No recourse for the payment of the principal of or interest on
the Securities or for any claim based thereon or otherwise in respect thereof,
and no recourse under or upon any obligation, covenant or agreement of the
Company in the Indenture, or in the Securities or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator,
partner, stockholder, officer, director, employee or controlling Person of the
Company or of any successor Person thereof, except as an obligor of the
Securities pursuant to the Indenture. Each Holder, by accepting the Securities,
waives and releases all such liability.
17. Authentication.
--------------
This Security shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on the other side
of this Security.
18. Abbreviations and Defined Terms.
--------------------------------
Customary abbreviations may be used in the name of a Holder of
a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
4
<PAGE>
19. CUSIP Numbers.
-------------
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company will cause CUSIP numbers
to be printed on the Securities as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of such numbers as
printed on the Securities and reliance may be placed only on the other
identification numbers printed hereon.
20. Governing Law.
-------------
THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING,
WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL
OBLIGATIONS LAW AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B).
5
<PAGE>
[FORM OF ASSIGNMENT]
I or we assign this Security to
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of
assignee
- -------------------------------
and irrevocably appoint ________________ agent to transfer this Security on the
books of the Company. The agent may substitute another to act for him.
Dated: Signed:
-----------------
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee*
- ---------------------------
* NOTICE: The Signature must be guaranteed by an Institution which is a
member of one of the following recognized signature Guarantee Programs:
(i) The Securities Transfer Agent Medallion Program (STAMP); (ii) The
New York Stock Exchange Medallion Program (MNSP); (iii) The Stock
Exchange Medallion Program (SEMP); or (iv) in such other guarantee
program acceptable to the Trustee.
6
<PAGE>
EXHIBIT 10.18
CONTRIBUTION AGREEMENT
AMONG
HOST MARRIOTT CORPORATION
("HMC"),
HOST MARRIOTT, L.P.
("OPERATING PARTNERSHIP")
AND
The Contributors Named Herein
("CONTRIBUTORS")
Dated as of April 16, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I CONTRIBUTION.....................................................1
1.1 Definitions........................................................1
1.2 Contributions......................................................7
1.3 Specified Liabilities..............................................8
1.4 Burlingame.........................................................8
1.5 Beverly Hills Note.................................................8
1.6 Boston Ritz........................................................8
ARTICLE II EXCHANGE AMOUNT AND FORM OF CONSIDERATION.......................9
2.1 Exchange Amount....................................................9
2.2 Distribution of Units..............................................11
2.3 Registration Rights................................................11
2.4 Redemption Rights..................................................12
ARTICLE III CONTRIBUTORS' REPRESENTATIONS, WARRANTIES
AND COVENANTS...........................................................12
3.1 Good Standing......................................................12
3.2 Title..............................................................12
3.3 Due Authorization..................................................13
3.4 No Violations or Defaults..........................................13
3.5 Litigation.........................................................13
3.6 Taxes..............................................................13
3.7 Insurance..........................................................14
3.8 Condemnation Actions...............................................15
3.9 Contracts..........................................................15
3.10 Space Leases.......................................................15
3.11 Employees..........................................................16
3.12 Pension and Benefit Plans..........................................16
3.13 Commitments........................................................17
3.14 Financial Information..............................................17
3.15 Intellectual Property..............................................17
3.16 Disclosure.........................................................17
3.17 Securities Law and Related Matters.................................18
3.18 Third Party Loans and Mortgage Loans...............................19
3.19 Assignment to Creditors............................................20
3.20 Membership Interests...............................................20
3.21 No Corporate Stock.................................................21
3.22 Environmental Indemnities..........................................21
ARTICLE IV HMC'S OPERATING
PARTNERSHIP'S REPRESENTATIONS, WARRANTIES AND COVENANTS.................21
4.1 Good Standing......................................................21
4.2 Due Authorization..................................................22
4.3 No Violations or Defaults..........................................23
4.4 Financial Statements...............................................23
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<PAGE>
4.5 Limitation on Disposition of Property and Maintenance of Debt......23
4.6 Board Representation...............................................23
4.7 Capitalization.....................................................25
4.8 SEC Filings; Material Adverse Change...............................26
4.9 REIT Conversion; Related Provisions................................26
4.10 Absence of Litigation..............................................27
4.11 Third Party Loans..................................................27
4.12 Business of Host REIT..............................................27
ARTICLE V CLOSING..........................................................28
5.1 Closing............................................................28
5.2 Fees and Expenses..................................................30
ARTICLE VI ACTIONS PENDING CLOSING.........................................30
6.1 Conduct of Business; Maintenance and Operation of Property.........30
6.2 Title Insurance....................................................30
6.3 Survey.............................................................30
6.4 HSR Compliance.....................................................30
6.5 Cooperation........................................................31
6.6 Inspection.........................................................31
6.7 Capitalization of Property Owning Entity...........................31
6.8 Conduct of Business of HMC.........................................32
6.9 Non-Solicitation...................................................32
6.10 New York Stock Exchange Listing....................................32
6.11 SEC Filings........................................................32
6.12 Reasonable Efforts.................................................33
ARTICLE VII CONDITIONS PRECEDENT TO CLOSING................................33
7.1 Conditions to Obligations of Operating Partnership.................33
7.2 Conditions to Obligations of Contributors..........................35
7.3 Exclusion of Assets................................................36
ARTICLE VIII DELIVERIES....................................................37
8.1 General Closing Deliveries.........................................37
8.2 Asset Project Closing Deliveries...................................38
8.4 Membership Interest Transfers......................................39
8.5 Mortgage Loans Contribution........................................39
8.6 Management Interest Contribution...................................40
8.7 Assignments........................................................40
ARTICLE IX TERMINATION AND DEFAULT.........................................40
9.1 Termination........................................................40
9.2 Operating Partnership's Default....................................41
9.3 Pre-Closing Contributor Default....................................41
9.4 Contributors' Default..............................................44
ARTICLE X RESERVED.........................................................44
ARTICLE XI CASUALTY AND CONDEMNATION.......................................44
11.1 Casualty and Condemnation..........................................44
11.2 Risk of Loss.......................................................45
ARTICLE XII APPORTIONMENTS.................................................45
12.1 Hotel Project and Membership Interest Apportionments...............45
12.2 Office Apportionments..............................................46
12.3 Boston Loan Apportionments.........................................49
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<PAGE>
12.4 Management Interest Apportionments.................................49
12.5 Reduction of Assessments...........................................49
12.6 Accounting.........................................................49
ARTICLE XIII MISCELLANEOUS.................................................50
13.1 Survival...........................................................50
13.2 Assignment.........................................................50
13.3 Consents...........................................................51
13.4 Applicable Law.....................................................51
13.5 Headings; Schedules................................................51
13.6 Notices............................................................51
13.7 Waiver.............................................................52
13.8 Partial Invalidity.................................................52
13.9 Entire Agreement...................................................52
13.10 Waiver of Jury Trial..............................................52
13.11 Counterparts......................................................53
13.12 Publicity.........................................................53
13.13 Confidentiality, Standstill and Exclusivity.......................53
13.14 Brokers...........................................................57
13.15 Operating Partnership's Lender....................................57
13.16 Time for Performance..............................................57
13.17 Definitions.......................................................58
--iii-
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Restated Operating Partnership Agreement
Exhibit B Registration Rights Agreement
Exhibit C Agreement to Hold Certain Properties and to
Maintain Certain Indebtedness
Exhibit D Special Partnership Agreement
Exhibit E [Intentionally Omitted]
Exhibit F Management Agreement Estoppel
Exhibit G Contributor's Opinion Form
Exhibit H HMC and Operating Partnership's Opinion Form
Exhibit I Title Affidavit Forms
Exhibit J [Intentionally Omitted]
Schedule 1 Contributors
Schedule 1.1(a) Asset Projects, Office Projects and Hotel Projects
Schedule 1.1(w) Land
Schedule 1.1(ee) Excluded Personal Property
Schedule 1.1(ii) Property Owning Entities and Members of Property
Owning Entities
Schedule 2.1(e) Allocations of Exchange Amount
Schedule 3.5 Uninsured Litigation
Schedule 3.7 Insurance Policies
Schedule 3.9(a) Contracts and Material Contracts
Schedule 3.9(b) Existing Management Agreements; Existing Managers
Schedule 3.10 Space Leases
Schedule 3.11(b) Labor Disputes
Schedule 3.11(c) Employment Claims
Schedule 3.14 Financial Information
Schedule 3.15 Intellectual Property
Schedule 3.17(e) Operating Partnership and HMC Materials
Schedule 3.18 Third Party Loans and Mortgage Loans
Schedule 4.8 Material Adverse Change
Schedule 4.9(b) Ownership Limitations
Schedule 4.10 Operating Partnership Litigation
Schedule 6.1 Operating Standards
Schedule 7.1(c) Permitted Exceptions
Schedule 7.1(f) Required Third Party Consents for HMC
Schedule 7.2(d) Required Third Party Consents for Contributor
Schedule 13.17 Definitions
<PAGE>
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (this "Agreement") is executed as of the
16th day of April, 1998 by and among (i) Host Marriott Corporation, a Delaware
corporation ("HMC"), (ii) Host Marriott, L.P., a Delaware limited partnership
("Operating Partnership"), and (iii) those entities set forth on Schedule 1
----------
hereto (each, a "Contributor" and, together, the "Contributors").
RECITALS
(a) Contributors own, directly or indirectly, (i) interests in hotels,
mortgage notes secured by hotels, certain office buildings, and other related
assets located in Florida, Georgia, Pennsylvania, California, Virginia,
Illinois, Massachusetts and New York, and (ii) an interest in a hotel management
company, all as more particularly described in this Agreement.
(b) Operating Partnership and each Contributor desire to effect the
transfer (by means of contribution) of certain assets of each Contributor in
exchange for cash, Class A units of limited partnership interest in the
Operating Partnership (or, in the event that Closing under this Agreement is not
concurrent with the REIT Conversion (as hereafter defined), Class B units of
limited partnership interest in the Operating Partnership) (each such class
being referred to as "Units") and other consideration as provided herein, and
the Operating Partnership desires to accept such property for consideration of
cash, Units and other consideration as provided herein, all upon the terms and
subject to the conditions set forth in this Agreement (the "Contribution").
Simultaneously with the closing of the transactions contemplated herein,
Operating Partnership intends to admit each Contributor which receives Units as
a limited partner of Operating Partnership as provided for in the Amended and
Restated Agreement of Limited Partnership of Operating Partnership, which shall
be in the form substantially set forth as Exhibit A hereto (the "Restated
---------
Operating Partnership Agreement").
NOW THEREFORE, in consideration of and in reliance upon the above
Recitals, the terms, covenants, and conditions contained in this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties to this Agreement hereby agree as follows:
ARTICLE I
Contribution
------------
1.1. Definitions. For purposes of this Agreement the following terms
-----------
shall have the definitions set forth in this Section 1.1:
-----------
(a) "Asset Projects" shall mean the hotels and office buildings
listed on Schedule 1.1(a) as Asset Projects.
---------------
(b) "Beverly Hills Loan" shall mean the mortgage loan evidenced by
the Beverly Hills Note and the Beverly Hills Loan Documents.
-1-
<PAGE>
(c) "Beverly Hills Loan Documents" shall mean that certain Leasehold
Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated
as of October 31, 1989 from BWH to Chicago Title Insurance Corporation as
trustee for the benefit of Japan Leasing (U.S.A.), Inc., as agent, as assigned
to BRE/Burton Way L.L.C.; and other related documents evidencing and securing
the indebtedness evidenced by the Beverly Hills Note.
(d) "Beverly Hills Note" shall mean the collective reference to (i)
that certain Promissory Note dated as of October 31, 1989 from BWH to the order
of Japan Leasing (U.S.A.), Inc., in the principal amount of $20,000,000, (ii)
that certain Promissory Note dated as of October 31, 1989 from BWH to the order
of Nittetsu Leasing (U.S.A.) Inc. in the principal amount of $10,000,000; (iii)
that certain Promissory Note dated as of October 31, 1989 from BWH to the order
of SEFCO (U.S.A.) Inc. in the principal amount of $10,000,000; (iv) that certain
Promissory Note dated as of October 31, 1989 from BWH to the order of YTB
Leasing (America) Inc. in the principal amount of $6,000,000; and (v) that
certain Promissory Note dated as of October 31, 1989 from BWH to the order of
Inter-Lease (U.S.A.) Corporation in the principal amount of $10,000,000, as each
has been assigned to BRE/Burton Way L.L.C.
(e) "Boston Loan" shall mean the mortgage loan evidenced by the
Boston Note and the Boston Loan Documents.
(f) "Boston Loan Documents" shall mean collectively, that certain
(i) Mortgage A Extension Agreement; Security Agreement; Assignment of Leases and
Rents dated as of March 6, 1998 between RAJ and BRE/Ritz Boston, LLC, (ii)
Mortgage B Extension Agreement; Security Agreement; Assignment of Leases and
Rents dated as of March 6, 1998 between RAJ and BRE/Ritz Boston LLC, (iii)
Mortgage C Extension Agreement; Security Agreement; Assignment of Leases and
Rents dated as of March 6, 1998 between RAJ and BRE/Ritz Boston LLC, and (iv)
Building Loan Mortgage; Security Agreement; Assignment of Leases and Rents dated
as of March 6, 1998 between RAJ and BRE/Ritz Boston, LLC.
(g) "Boston Note" shall mean, collectively, that certain (i)
Extended Mortgage Note A, dated as of March 6, 1998, in the original principal
amount of Fifty Million and no/00 Dollars ($50,000,000) from RAJ, a
Massachusetts limited partnership, to BRE/Ritz Boston, LLC, (ii) Extended
Mortgage Note B, dated as of March 6, 1998, in the original principal amount of
Thirteen Million Nine Hundred Thousand Dollars ($13,900,000) from RAJ, to
BRE/Ritz Boston, LLC, (iii) Extended Mortgage Note C, dated as of March 6, 1998,
in the original principal amount of One Hundred Forty-Seven Million Seven
Hundred Eighty-One Thousand Six Hundred Twenty and 51/100 Dollars
($147,781,620.51) from RAJ, to BRE/Ritz Boston, LLC, and (iv) Building Loan
Note, dated as of March 6, 1989, in the original principal amount of Twenty Five
Million Dollars ($25,000,000) from RAJ, to BRE/Ritz Boston, LLC.
(h) "Burlingame Loan" shall mean the mortgage loan evidenced by the
Burlingame Notes and the Burlingame Loan Documents.
(i) "Burlingame Loan Documents" shall mean that certain Deed of
Trust dated October 1, 1986 by and between HTKG and Windy City Holdings, First
-2-
<PAGE>
National Bank of Chicago and Kleinwort Benson Limited, and other related
documents evidencing and securing the indebtedness evidenced by the Burlingame
Notes, as the same has been amended or modified or assigned from time to time.
(j) "Burlingame Notes" shall mean, collectively, (i) that certain
Promissory Note in the original principal amount of Sixty Million and no/100
Dollars ($60,000,000.00) dated October 1, 1986, as amended, and (ii) that
certain Promissory Note in the original principal amount of Twenty-Five Million
and no/100 Dollars ($25,000,000.00) dated October 1, 1986, as amended, each from
HTKG to Windy City Holdings, First National Bank of Chicago and Kleinwort Benson
Limited as the same has been amended or modified or assigned from time to time.
(k) "BWH" shall mean Burton Way Hotels, Ltd., a California general
partnership.
(l) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(m) "Ground Lease" shall mean that certain Ground Lease dated
November 5, 1985 by and between ACC Company, as landlord, and BWH, as tenant, as
amended by First Amendment to Ground Lease dated October 31, 1989.
(n) "HMC Common Stock" shall mean the common stock, par value $1.00
per share, of HMC.
(o) "HMC Party" shall mean any of HMC, the Operating Partnership,
Host REIT, the Special Partnership and SLSC.
(p) "Host REIT" shall mean the Maryland real estate investment
trust, organized to be the general partner (or the entity owning, directly or
indirectly, all of the equity interests of the general partner) of Operating
Partnership, that will be the surviving entity in a merger with HMC in
connection with the REIT Conversion and that will qualify for taxation as a REIT
for federal income tax purposes from and after the later of January 1, 1999 and
the Closing Date.
(q) "Host REIT Shares" shall mean the common Shares (as defined in
the Restated Operating Partnership Agreement) of beneficial interest that may be
issued to Limited Partners (as defined in the Restated Operating Partnership
Agreement) which redeem Class A Units of the Operating Partnership in accordance
with Section 8.6(B) of the Restated Operating Partnership Agreement.
(r) "Hotel Personal Property" shall mean: (a) all furniture,
furnishings, fixtures, fittings, vehicles, rugs, mats, draperies, carpeting,
appliances, signage, devices, engines, telephone and other communications
equipment, artwork, televisions and other audio and video equipment, computers,
software and rights thereto, plumbing fixtures and other equipment located in or
used in the operation of the Hotel Projects, to the extent owned by any
Contributor (the "FF&E"), but excluding any property leased pursuant to the
Equipment Leases; (b) all items included within the definition of "Property and
Equipment" under the Uniform System of Accounts for Hotels, Eighth Revised
Edition, 1986, as published by the Hotel Association of New York City, Inc.
-3-
<PAGE>
as adopted by the American Hotel Association (the "Uniform System of Accounts"),
including, without limitation, linen, china, glassware, tableware, uniforms and
similar items, in use or in circulation in connection with the operation of the
Hotel Projects, to the extent owned by any Contributor, subject to such
depletion and including such resupplies prior to the Closing Date as shall occur
in the ordinary course of business and as provided in this Agreement (the "Fixed
Asset Supplies"); (c) all "Inventories" as defined in the Uniform System of
Accounts, such as provisions in refrigerators, pantries, and kitchens, beverages
in wine cellars and bars, alcoholic and non-alcoholic beverages, other
merchandise intended for sale or resale, fuel, engineering and mechanical
supplies, stationery, guest supplies, maintenance and housekeeping supplies
including soap and cleaning materials, and other supplies and similar items, in
use or in circulation in connection with the operation of the Hotel Projects, to
the extent owned by any Contributor (the "Inventories"); (d) all of any
Contributor's right, title and interest in and to (i) all surveys,
architectural, consulting and engineering blueprints, plans and specifications
(together with architects' certificates, if any, indicating that renovation and
reconstruction to the Hotel Projects has been completed in accordance
therewith), drawings and reports related to the Hotel Projects, (ii) all books
and records (financial and otherwise) of the Hotel Projects, and (iii) all
telephone numbers and customer and guest lists for the Hotel Projects, to the
extent owned by Contributors; (e) all of any Contributor's right, title and
interest in Intellectual Property (described in Section 3.15) relating to the
------------
Hotel Projects; (f) all operating accounts and reserves, including without
limitation FF&E reserves and working capital reserves of the Hotel Projects, to
the extent owned by any Contributor; and (g) all of Contributor's right, title
and interest in and to other items of personalty located on, or used in
connection with the operation of, the Hotel Projects necessary to operate the
Hotels in the manner in which they were operated before the Closing Date, but
excluding (i) property of guests, and (ii) items owned by the Existing Managers
(as hereinafter defined).
(s) "Hotel Project" shall mean each individual hotel which is listed
as an Asset Project on Schedule 1.1(a), (collectively, the "Hotel Projects").
---------------
(t) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and all regulations promulgated thereto or
in connection therewith.
(u) "HTKG" shall mean HTKG Development Associates, a California
limited partnership.
(v) "Improvements" shall mean the buildings and other improvements
that are located on the Land.
(w) "Land" shall mean those parcels of land of the Asset Projects,
as more particularly described on Schedule 1.1(w) attached hereto, including all
---------------
right, title and interest of Contributors, if any, in and to the land lying in
the bed of any street or highway adjoining each such parcel to the center line
thereof, all water and mineral rights, development rights and all easements,
rights and other interests appurtenant thereto.
-4-
<PAGE>
(x) "Management Company" shall mean Swissotel Management (U.S.A.)
L.L.C., a Delaware limited liability company.
(y) "Management Interest" shall mean all of the Management Interest
Contributor's right, title and interest in and to the Economic Interest (as
defined in the Amended and Restated Limited Liability Company Agreement of
Swissotel (U.S.A.) L.L.C. dated as of August 1, 1997) in the Management Company.
(z) "Management Interest Contributor" shall mean BRE/Swiss
Management L.L.C., a Delaware limited liability company.
(aa) "Membership Interest" shall have the meaning set forth in
Section 1.2(b).
- --------------
(bb) "Mortgage Loan Collateral" shall mean the real property
encumbered by the Loan Documents.
(cc) "Mortgage Loans" shall mean the Boston Loan and the Beverly
Hills Loan, and such other loans which may become, collectively, Mortgage Loans
pursuant to the terms of this Agreement.
(dd) "Nonparticipating Member" means the members or partners of
Property Owning Entities holding membership (or partnership) interests that are
not to be contributed to the Operating Partnership pursuant to this Agreement,
as listed on Schedule 1.1(ii).
----------------
(ee) "Office Personal Property" shall mean: (a) all furniture,
furnishings, fixtures, equipment, appliances, supplies, machinery, maintenance
vehicles and equipment, tools, parts, recreational equipment, rugs, window
treatments, stationery and other office supplies, artwork, and other tangible
personal property located in or used in connection with the Office Projects, to
the extent owned by any Contributor, together with all replacements and
substitutions therefor made by Contributors subsequent to the date hereof in
accordance with the provisions of this Agreement; (b) all of Contributors'
right, title and interest in (i) all existing surveys, blue prints, drawings,
plans and specifications (including structural, HVAC, mechanical and plumbing
plans and specifications) and other documentation for or with respect to the
Office Projects or any part thereof; (ii) all construction drawings, structural
reviews, architectural drawings, soil tests, engineering and environmental
reports pertaining to the Office Projects; (iii) all available tenant lists and
data for the Office Projects, correspondence with past, present and prospective
tenants, vendors, suppliers, and utility companies with respect to the Office
Projects; (iv) all marketing materials (but not any proprietary materials or
market studies), brochures, booklets, manuals and promotional and advertising
materials directly pertaining to the Office Projects or any part thereof; (v)
any declarations, by-laws, minute books, bank accounts and financial statements
relating to any associations or similar organizations affecting the Office
Projects, together with all supporting documentation relating thereto, (vi) such
other existing books, records and documents (including those relating to ad
valorem taxes and leases) used in connection with the operation of the Office
Projects or any part thereof; and (vii) all development rights, if any, directly
attributable to
-5-
<PAGE>
the Office Projects, but excluding items owned by existing property managers as
set forth on Schedule 1.1(ee).
----------------
(ff) "Office Project" shall mean each individual office project which
is listed as an Asset Project on Schedule 1.1(a), collectively, the "Office
---------------
Projects".
(gg) "Personal Property" shall mean, collectively, the Hotel Personal
Property and the Office Personal Property.
(hh) "Property" shall mean, collectively, the Land, the Improvements,
the Personal Property, the Membership Interests, the Mortgage Loans and the
Management Interest. Reference to Property as it relates to each Contributor
shall mean only that portion of the Property owned by such Contributor;
reference to Property as it relates to all of the Contributors shall mean the
Property in its entirety.
(ii) "Property Owning Entity" shall mean each entity listed as a
Property Owning Entity on Schedule 1.1(ii).
----------------
(jj) "Property Owning Entity Asset" shall mean the hotels owned by
the Property Owning Entities.
(kk) "RAJ" shall mean RAJ Boston Associates Limited Partnership, a
Massachusetts limited partnership.
(ll) "REIT" shall mean an entity qualifying for taxation as a "real
estate investment trust" under Sections 856 through 859 of the Code.
(mm) "REIT Conversion" shall mean a series of transactions in which,
among other things, (i) HMC and its subsidiaries contribute substantially all of
the lodging business and assets of HMC and its subsidiaries to Operating
Partnership or its subsidiaries in exchange for a number of Units equal to the
number of shares of HMC Common Stock outstanding at the time of the REIT
Conversion and assumption of certain liabilities of HMC and its subsidiaries,
(ii) HMC and its subsidiaries contribute to SLSC or its subsidiaries all of
their business and assets not contributed to the Operating Partnership or to be
distributed to holders of HMC Common Stock as contemplated by clause (v) below,
(iii) Operating Partnership and certain of its subsidiaries enter into leases of
their respective hotels to subsidiaries of SLSC, (iv) HMC merges with Host REIT
or a subsidiary thereof pursuant to the REIT Conversion Merger, and (v) prior to
or concurrent with the REIT Conversion Merger, HMC or Host REIT distributes all
of the outstanding capital stock of SLSC, cash and, possibly, certain other
assets to the holders of outstanding shares of HMC Common Stock and the
Contributors if they elect to receive such shares pursuant to the REIT
Conversion Distribution, which actions are undertaken to enable Host REIT to
elect to qualify to be taxed as a REIT for federal income tax purposes as of the
first day of the first taxable year of Host REIT beginning on or after the date
on which the REIT Conversion is consummated. For purposes of this Agreement,
the REIT Conversion shall be deemed to be consummated at such time as the chief
executive officer of Host REIT executes and delivers to Blackstone a certificate
to the effect that Host REIT, the Operating Partnership and their respective
subsidiaries have completed such actions
-6-
<PAGE>
as will permit Host REIT, absent any change of applicable tax laws or
regulations thereafter, to elect to qualify to be taxed as a REIT for federal
income tax purposes as of the later of January 1, 1999 and the Closing Date,
including (a) receipt of the requisite approval of the stockholders of HMC to
the consummation of the REIT Conversion Merger, (b) declaration of the REIT
Conversion Distribution, and (c) consummation of the REIT Conversion Merger.
(nn) "REIT Conversion Distribution" means the distribution by HMC,
pro rata to the holders of HMC Common Stock, and possibly the Contributors
pursuant to Section 2.1(b), of all of the outstanding capital stock of SLSC,
--------------
cash and, possibly, certain other assets.
(oo) "REIT Conversion Merger" means the merger of HMC with Host REIT
or a wholly owned subsidiary thereof, and each outstanding share of HMC Common
Stock being converted into the right to receive one Host REIT Share.
(pp) "SLSC" shall mean a taxable corporation that would, among other
things, directly or indirectly (i) lease hotel properties from the Operating
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 Operating Partnership rent that will qualify as "rents
from real property" under Section 856(d) of the Code in the case of Host REIT,
and as "real property rent" under Section 7704(d) of the Code in the case of the
Operating Partnership.
1.2 Contributions. Subject to the terms and conditions set forth in this
-------------
Agreement, Contributors agree to Contribute to Operating Partnership (or its
permitted designee), and Operating Partnership agrees to acquire from
Contributors:
(a) Asset Project Contributions. As to the projects identified on
---------------------------
Schedule 1.1(a) as Asset Projects, all of Contributors' right, title and
- ---------------
interest in and to (i) the Land, (ii) the Improvements, (iii) the Personal
Property, (iv) all assignable permits and licenses (the "Permits") relating to
the Asset Projects, (v) the Equipment Leases relating to the Asset Projects,
(vi) the Space Leases related to the Asset Projects, (vii) the Existing
Management Agreements relating to the Asset Projects, (viii) the Contracts
relating to the Asset Projects, and (ix) the Intellectual Property relating to
the Asset Projects.
(b) Membership Interest Transfers. The membership or partnership
-----------------------------
interest of each Membership Interest Contributor in each Property Owning Entity.
(c) Mortgage Loan Contributions. All of Contributors' right, title
---------------------------
and interest in and to the Mortgage Loans.
(d) Management Interest Contribution. All of Management Interest
--------------------------------
Contributor's right, title and interest in and to the Management Interest. The
Management Interest Contributor shall agree to restrict the exercise of its
rights and remedies under the Amended and Restated Limited Liability Company
agreement dated as of August 1, 1997 (the "Company Agreement") for the
Management Company except
-7-
<PAGE>
upon the express written direction of HMC or the Operating Partnership, so long
as such direction (or lack thereof) does not result in any default by the
Management Interest Contributor under the terms of the Company Agreement or
subject such Contributor to any Losses.
1.3 Specified Liabilities. As additional consideration, the Operating
---------------------
Partnership shall take subject to, assume or pay certain specified liabilities
of Contributors and the Property Owning Entities as provided herein.
1.4 Burlingame. The Burlingame Loan shall be considered, as of the date
----------
hereof, to be a Third Party Loan under this Agreement and the Operating
Partnership shall be required to repay the Burlingame Loan in full at the
Closing. Notwithstanding the foregoing, at the election of HTKG, made at any
time on or before May 11, 1998, in its sole discretion, the Burlingame Loan
shall be converted to a Mortgage Loan for purposes of this Agreement from and
after the date of such election. In the event of such conversion of the
Burlingame Loan to a Mortgage Loan, at the Closing, the lenders of the
Burlingame Loan (who shall be treated as Contributors thereunder) shall
contribute the Burlingame Loan to the Operating Partnership in exchange for cash
and/or Units (as selected by such lenders in their sole discretion on or before
May 11, 1998). The portion of the Exchange Amount allocated to the Burlingame
Asset Project on Schedule 2.1(e) shall be apportioned between a value for the
---------------
Burlingame Loan equal to the sum of the principal amount of the Burlingame Loan
as of the Closing Date, plus accrued and unpaid interest thereon as of the
Closing Date, and all other amounts payable under the Burlingame Loan Documents
as of the Closing Date (collectively, the "Burlingame Purchase Price") and the
balance allocated to the Burlingame Asset Project.
1.5 Beverly Hills Note. With respect to Beverly Hills Loan, at the
------------------
Closing (a) if (i) the sum of (A) the outstanding principal amount of the
Beverly Hills Loan as of the Closing Date plus (B) all accrued and unpaid
interest thereon as of the Closing Date plus (C) all other amounts payable by
borrower to lender as of the Closing Date with respect to the Beverly Hills Loan
(collectively, the "Beverly Hills Loan Amount") exceeds (ii) the allocated
amount for the Four Seasons Beverly Hills set forth on Schedule 2.1(e), the
Exchange Amount (and such allocated amount) shall be increased by such excess,
and (b) if (i) the allocated amount for the Four Seasons Beverly Hills set forth
on Schedule 2.1(e) exceeds (ii) the Beverly Hills Loan Amount, the Exchange
Amount (and such allocated amount) shall be decreased by such excess.
1.6 Boston Ritz. The Operating Partnership shall cause the Membership
-----------
Interest in RAJ being contributed under this Agreement to be transferred to an
entity which qualifies as a permitted transferee under the partnership agreement
of RAJ.
ARTICLE II
Exchange Amount and Form of Consideration
-----------------------------------------
2.1 Exchange Amount.
---------------
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<PAGE>
(a) In accordance with the terms of this Agreement, Contributors shall
contribute and Operating Partnership shall acquire the Property, in the manner
set forth in Section 1.2, for consideration equal to One Billion Seven Hundred
-----------
Thirty-Five Million and No/100 Dollars ($1,735,000,000.00) adjusted to reflect
net prorations and other adjustments, including adjustments, if applicable, to
reflect a contribution of less than 100% of Membership Interests in any Property
(other than the Ritz Boston for which no such adjustment shall be made)
(collectively, the "Adjustments") pursuant to this Agreement (as adjusted, the
"Exchange Amount").
(b) The consideration will consist of --
(i) cash, in a minimum amount of $30,000,000.00 and in a
maximum amount of $150,000,000.00 (such maximum including funds for
repayment of the Burlingame Loan the event that the Burlingame Loan
is repaid pursuant to Section 1.4(the "Cash Amount"),
-----------
(ii) a number of Units, equal to
(A) an amount equal to the Exchange Amount less the sum
----
of (1) the Cash Amount and (2) the aggregate principal amount
outstanding as of the Closing Date of Third Party Loans that
are assumed, repaid or taken subject to (as set forth in
clause (iv) below) plus accrued and unpaid interest thereon
outstanding as of the Closing Date, divided by
-------
(B) $20.00 (the "Per Share Unit Price");
(iii) for each Unit issued, an amount of cash and other assets
(the "Non-SLSC Amount") and a number of shares of capital stock of
SLSC (the "SLSC Amount"), equal to the amount that a holder of one
share of HMC Common Stock receives pursuant to the REIT Conversion
Distribution (together, the "REIT Conversion Distribution
Equivalent"), unless Contributors elect, within seven (7) calendar
days after HMC delivers to the Contributors preliminary pro forma
financial statements for SLSC, to reduce, in whole or in part, the
Non-SLSC Amount or the SLSC Amount and accept a corresponding
increase in the number of Units issued pursuant to Section
-------
2.1(b)(ii) above equal to the sum of (x) the Cash Value (as defined
----------
below) of any Non-SLSC Amount that the Contributors elected not to
receive plus (y) the Cash Value of any SLSC Amount that the
Contributors elected not to receive divided by (z) the Value (as
defined in the Restated Operating Partnership Agreement) of a Host
REIT Share on the 91st day after the Closing; such "Cash Value" to
be equal to the sum of (A) the aggregate cash and announced fair
market value (determined in the same manner as the "Value" of Host
REIT Shares under the Restated Operating Partnership Agreement) of
any other assets included in the foregone Non-SLSC Amount, and (B)
the product of the aggregate number of shares of SLSC capital stock
included in the SLSC Amount that the Contributors elected not to
receive multiplied by the Value (as defined in the Restated
-9-
<PAGE>
Operating Partnership Agreement) of a share of such SLSC capital
stock on the 91st day after the Closing;
(iv) the assumption, taking subject to or repayment by the
Operating Partnership or its subsidiaries of all outstanding Third
Party Loans.
To the extent of any cash or SLSC stock received, Blackstone shall
decide, in its sole and absolute discretion, which Projects to which such
consideration shall be allocated.
(c) If HMC (or Host REIT, if applicable) changes (or establishes a
record date for changing after the Closing Date) the number of shares of HMC
Common Stock (or Host REIT Shares, if applicable) issued and outstanding prior
to the Closing Date by way of a stock split, stock dividend, recapitalization or
similar transaction, the Per Share Unit Price shall be proportionally adjusted
to reflect such transaction.
(d) (i) If, prior to the Closing Date, a Change of Control Event (as
defined below) occurs, then lawful provisions shall be made as part of the terms
of such Change of Control Event whereby each Contributor shall have the right,
in place of the right to receive Units, SLSC shares of capital stock and other
consideration pursuant to Section 2.1(b)(ii) and (iii), at its sole discretion
------------------
to receive at Closing, for each Unit such Contributor would have received had
the Closing occurred immediately prior to such Change of Control Event, the
greatest amount of cash, securities and other property receivable in such Change
of Control Event by a holder of the number of shares of HMC Common Stock (or
Host REIT Shares) into which such Unit could have been converted immediately
prior to such Change of Control Event (assuming, for such purposes, that no
restrictions on redemption applied to such Unit).
(ii) For purposes of this Section 2.1(d), a "Change of Control
--------------
Event" shall mean the occurrence of any of the following events: (A) a
Termination Transaction (as defined in the Restated Operating Partnership
Agreement); or (B) a tender or exchange offer is made in which two-thirds (2/3)
or more of the outstanding shares of HMC Common Stock are acquired.
(e) The Exchange Amount shall be allocated among the Property in the
manner set forth on Schedule 2.1(e), and within 30 days after the date hereof
--------------
the Exchange Amount allocated to each such Property shall be further allocated
to the interests in Land, Improvements, Personal Property, Mortgage Loans, and
Management Interest contributed by the applicable Contributor, to be set forth
on Schedule 2.1(e). Contributors and the Operating Partnership agree to file
--------------
federal, state and local tax returns consistent with such allocations. The Cash
Amount, Units and other consideration shall be allocated among the Contributors
as directed by the Contributors in their sole discretion (subject to the
allocation on Schedule 2.1(e)).
---------------
2.2 Distribution of Units. At the Closing, the Units and SLSC common
---------------------
stock (if any) will be distributed by each Contributor directly to the equity
owners of such Contributor to the extent required so that no person or entity
will own, directly or through attribution under the Code, more than 4.9% of the
Units (unless Blackstone satisfies the
-10-
<PAGE>
Operating Partnership that in no event would ownership of Units in excess of
that limit by a particular holder (when taken into account with all other
holders of units issued pursuant hereto) result in the Operating Partnership
being considered to derive rent from SLSC or a subsidiary of SLSC that does not
qualify as "real property rent" for purposes of Section 7704(d) of the Code by
reason of Section 856(d)(2)(B) of the Code (construed taking into account
Section 7704(d)(3)(B) of the Code) assuming no investor in the Operating
Partnership other than the REIT and a Blackstone entity own more than 4.9% of
the Units), provided that each such equity owner is an accredited investor as
such term is defined in Regulation D under the Securities Act of 1933, as
amended. In this regard, HMC will grant an exception that would permit one
single holder to exceed the 4.9% limit if the following conditions are met: the
holder must represent that it does not own, directly or by attribution, more
than 9.8% of the stock of SLSC; the holder must undertake not to enter into (or
permit any other person to enter into) transactions in which it acquired
additional stock of SLSC, directly or by attribution, if after giving effect to
the transaction it would own, directly or by attribution, more than 9.8% of the
stock of SLSC, and the holder must obtain undertakings from its owners (if any)
whose ownership of SLSC stock would be attributed to it for purposes of the
relevant rules they also would not acquire SLSC stock that would, by reason of
attribution to the holder, cause the holder to exceed the 9.8% limit. In
addition, HMC will grant an exception that would permit more than one single
holder to exceed the 4.9% limit if all of such holders together would not own,
directly or by attribution, more than 9.8% of the stock of SLSC and such holders
enter into undertakings and obtain undertakings from their owner of the type
described in the preceding paragraph. In accordance with this Section 2.2, HMC
-----------
and Operating Partnership agree to grant an exception to the ownership limit to
Blackstone pursuant to Section 12.3 of the Restated Operating Partnership
Agreement; and so long as Blackstone does not increase its ownership interest,
the other provisions of Article XII of the Restated Operating Partnership
Agreement shall not apply. Assuming Blackstone satisfies Operating Partnership
that its ownership in excess of the limit will not cause the Operating
Partnership to derive rent from SLSC that does not qualify as real property
rent, Article XII of the Restated Operating Partnership Agreement shall not
apply. At Closing, written instructions shall be provided to the Operating
Partnership by Contributors setting forth the name and address of, and the
number of Units (in whole Units only) to be received by Contributors, or
Contributors' equity owners.
2.3 Registration Rights. Holders of Units received by Contributors
-------------------
(including, without limitation, their equity owners to whom such Units are
distributed) that receive Host REIT Shares (or Host Common Stock) in connection
with the exercise of their redemption right or SLSC common stock in connection
with this Agreement (subject to applicable lock-up provisions stated in
Section 2.4) will have registration rights under a shelf registration
- -----------
statement, in accordance with a Registration Rights Agreement in substantially
the form of Exhibit B hereto (the "Registration Rights Agreement").
---------
2.4 Redemption Rights. In addition to the other rights and benefits
-----------------
provided to the Contributors, in their capacity as holders of Units, pursuant to
the Restated Operating Partnership Agreement, fifty percent (50%) of the Units
received by Contributors will be redeemable pursuant to Section 8.6 of the
Restated Operating Partnership Agreement, at the option of the holders thereof,
beginning July 1, 1999, an additional twenty-five percent (25%) beginning
October 1, 1999, and the balance beginning
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<PAGE>
January 1, 2000. In the event of any conflict between the terms of this
Section 2.4 and the terms of the Restated Operating Partnership Agreement, the
- -----------
terms of this Section 2.4 shall govern.
-----------
ARTICLE III
Contributors' Representations, Warranties and Covenants
--------------------------------------------------------
In order to induce Operating Partnership and HMC to enter into this
Agreement and to consummate the transactions contemplated hereby, each of the
Contributors severally represents and warrants to, and covenants with Operating
Partnership with respect to such Contributor and the portion of the Property
owned by such Contributor only, that:
3.1 Good Standing. Contributor and each Property Owning Entity is
-------------
duly organized, validly existing and in good standing under the laws of the
state in which it was organized, is authorized to conduct the business in which
it was now engaged, and, to the extent required by applicable law, is duly
qualified and in good standing in each of the states in which the Property or
Project Owning Entity Asset owned by such Contributor or Property Owning Entity
is located. The managing member or general partner of Contributor is duly
organized, validly existing and in good standing under the laws of the state in
which it was organized and, to the extent required by applicable law, is
authorized to conduct the business in which it is now engaged, in each of the
states in which the Improvements owned by such Contributor are located.
3.2 Title.
-----
(a) Asset Projects. Contributor and each Property Owning Entity
--------------
has good fee simple or leasehold title to the Land and the Improvements, which
shall be subject only to the Permitted Exceptions.
(b) Membership Interest and the Management Interest. Contributor
-----------------------------------------------
owns each Membership Interest or the Management Interest free and clear of all
security interests, liens, adverse claims, pledges, options, rights of first
refusal (other than a right of first refusal in the Existing Management
Agreement for the Hotel Project known as Ritz Carlton Amelia Island),
limitations on voting rights, charges and any other encumbrances of any nature
whatsoever (collectively, the "Interest Encumbrances") other than (i) the
Permitted Exceptions, (ii) any security interests, liens, claims, or pledges
which can and will be discharged by Contributor and released at Closing, (iii)
any restrictions or limitations imposed by law, any Interest Encumbrances set
forth in the partnership agreement, limited liability company agreement or the
operating agreement of the respective Property Owning Entity or Swissotel
Management (U.S.A.) L.L.C., as applicable, and (iv) all liens securing Third
Party Loans. Notwithstanding anything to the contrary contained in this
Agreement, the representations set forth in this Section 3.2(b) shall survive
--------------
Closing until June 30, 1999.
3.3 Due Authorization. The execution, delivery and performance of
-----------------
this Agreement have been duly and validly authorized by all requisite actions of
Contributor (including the consent of the requisite percentage of the members or
partners in
-12-
<PAGE>
Contributor), and its managing member or general partner (none of which actions
has been modified or rescinded, and all of which actions are in full force and
effect). This Agreement constitutes a valid and binding obligation of
Contributor, enforceable against Contributor in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditor's rights generally and by general equitable principles.
3.4 No Violations or Defaults. Contributor or, to Contributor's
-------------------------
knowledge, Property Owning Entity has not received written notice that
Contributor is in violation or default of any applicable law or ordinance, or
under any Existing Management Agreements or the Ground Lease, or under any
judgment, order, decree, rule or regulation of any court, arbitrator,
administrative agency or other governmental authority to which it may be
subject, which violation or default will, in any one case or in the aggregate,
materially adversely affect the ownership or operation of the Property or the
Property Owning Entity Assets, or Contributor's ability to consummate the
transactions contemplated hereby. To Contributor's knowledge, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not (a) violate any law or any order of
any court or governmental authority with proper jurisdiction; (b) result in a
breach or default under any Material Contract to which the Contributor is a
party, or any provision of the organizational documents of Contributor; or (c)
require any consent, approval or vote of any court or governmental authority
that, as of the Closing Date, has not been given or taken, and does not remain
effective, other than the HSR Approval, if applicable.
3.5 Litigation. Except as set forth on Schedule 3.5, to
---------- ------------
Contributor's knowledge, there are no actions, suits, arbitrations, governmental
investigations or other proceedings pending or threatened in writing against
Contributor or affecting the Property or the Property Owning Entity before any
court or governmental authority (collectively, "Litigation"), an adverse
determination of which would materially adversely affect (a) the financial
condition or operations of the Property or the Property Owning Entities, (b)
Contributor's ability to enter into or perform this Agreement or (c)
Contributor's title to the Property. To Contributor's knowledge, all Litigation
which is not covered by Contributor's insurance or which is reasonably expected
to exceed the coverage limitations of Contributor's insurance are set forth on
Schedule 3.5 hereto.
- ------------
3.6 Taxes. (a) Each Property Owning Entity has filed all material
-----
federal, state, county and local tax returns that it is required to have filed
("Tax Returns"), and all material taxes and impositions, including all
governmental charges and assessments, and all material taxes shown on the
returns as being due that are owed by the Property Owning Entity have been paid.
(b) To Contributor's knowledge, no taxing authority has audited any
material tax return of the Property Owning Entity. In the event any written
notice of audit of any Tax Return of the Property Owning Entity filed for any
year is initiated, Contributor shall promptly inform Operating Partnership. In
connection therewith, Contributor shall not enter into, or permit to be entered
into, any settlement or other consent decree to the extent such settlement or
consent decree would increase the basis for non-real estate assets or decrease
the basis of real estate assets, or would materially impact taxes owed by
-13-
<PAGE>
the Property Owning Entity after Closing, without obtaining Operating
Partnership's prior written consent and review, not to be unreasonably withheld.
There are no unexpired waivers by Contributor or the Property Owning Entity of
any statute of limitations with respect to any material taxes or Tax Returns
required to be paid or filed by the Property Owning Entity, and the Property
Owning Entity has not received written notice of any action or proceedings by
any governmental authority for the collection or assessment of any material
taxes. To Contributor's knowledge, neither Contributor nor the Property Owning
Entity has compromised any dispute involving the Property's tax liabilities in
such a material way as to burden Operating Partnership or the Property
adversely.
(c) Contributor agrees not to file, or permit to be filed, any
amendment, to the extent such amendment would increase the basis of non-real
estate assets or decrease the basis of real estate assets, or would impact the
material taxes owed by the Property Owning Entity after Closing, to a material
tax return of a Property Owning Entity, without obtaining Operating
Partnership's prior written consent and review, not to be unreasonably withheld.
(d) Contributor has delivered to Operating Partnership a true,
correct, and complete copy of each Property Owning Entity's federal income tax
return for tax year 1997, and in the event the Closing has not occurred prior to
March 15, 1999, for tax year 1998 (or, in the event the Property Owning Entity
was not in existence during 1997, the federal income tax return of the
predecessor entity if the Property Owning Entity succeeded to part or all of the
adjusted tax basis of such predecessor with respect to the Asset Project owned
by such Property Owning Entity). To Contributor's knowledge, other than with
respect to tax returns of BRE/Swiss L.L.C., the portions of such returns that
describe the classes of the assets of the Property Owning Entity for federal
income tax purposes and the adjusted bases of the assets within each such class
of assets are true and correct in all material respects.
(e) Each Property Owning Entity is classified as a "partnership" for
federal income tax purposes (and not as an "association" taxable as a
corporation).
3.7 Insurance. Contributor has not received written notice from
---------
any insurance company of any defects or inadequacies in the Asset Projects or
Property Owning Entity Assets that have not been remedied in accordance with all
applicable laws. To Contributor's knowledge, Schedule 3.7 lists all existing
------------
insurance policies covering the Asset Projects and the Property Owning Entity
Assets, all of which shall be maintained by Contributor or Property Owning
Entity in full force and effect through the Closing Date.
3.8 Condemnation Actions. There are no pending or, to
--------------------
Contributor's knowledge, threatened in writing condemnation actions of any
nature with respect to the Asset Projects or any part thereof.
3.9 Contracts. (a) All written or oral service, maintenance,
---------
purchase order, licensing, concession, leases of personal property (the
"Equipment Leases") and other contracts or agreements related to the
maintenance, ownership, use, possession or operation of the Asset Projects or
Property Owning Entity Assets (other than purchase contracts pursuant to which
any Contributor purchased the Property) or employment
-14-
<PAGE>
contracts entered into between the Existing Managers and their employees) (the
"Contracts"), and any warranties or guaranties related thereto, which are not
cancelable upon ninety (90) days notice or less without penalty or premium,
other than the Existing Management Agreements and the Space Leases, are listed
on Schedule 3.9(a) attached hereto or the cost thereof is incorporated in the
---------------
current annual budget for such Asset Project or Property Owning Entity;
provided, however, that for any such Contract which is not listed on Schedule
--------
3.9(a) but the cost of which is shown on the respective current annual budget
- ------
Contributors shall schedule any such Contracts within forty-five (45) days after
the date of this Agreement. To Contributor's knowledge, Contributor has provided
to Operating Partnership true and complete copies of all written Material
Contracts. Contributor has not received written notice of defaults by
Contributor or events that with notice or lapse of time or both would constitute
a default by Contributor or any of the Existing Managers under any Material
Contract which, if uncured, would reasonably be expected to adversely affect (i)
the financial condition or operations of the Assets Projects or Property Owning
Entity Assets, (ii) Contributor's ability to enter into or perform this
Agreement or (iii) Contributor's title to the Asset Projects. Neither
Contributor nor any Property Owning Entity is currently a party to any agreement
to lease, sell, mortgage or otherwise encumber or dispose of its interest in the
Asset Projects or Property Owning Entity Assets or any part thereof, except for
this Agreement, the Existing Management Agreements, the Contracts, the Material
Contracts, the Mortgage Loan Documents, the Third Party Loans, the Leases and
the Permitted Exceptions. As used herein, "Material Contracts" shall mean those
Contracts described on Schedule 3.9(a) as Material Contracts.
---------------
(b) There are no existing management contracts or franchise or hotel
licensing agreements relating to the Asset Projects or Property Owning Entity
Assets other than the agreements set forth on Schedule 3.9(b) (the "Existing
---------------
Management Agreements") by and between Contributor (or Property Owning Entity,
as applicable) and the managers set forth on Schedule 3.9(b) (the "Existing
---------------
Managers").
3.10 Space Leases. All written and oral leases of space, licenses,
------------
concessions and other occupancy agreements (together with any amendments or
modifications thereto) affecting the Asset Projects or the Property Owning
Entity Assets (collectively, the "Space Leases") are listed on Schedule 3.10
-------------
attached hereto. To Contributor's knowledge, Contributor has delivered to
Operating Partnership true and complete copies of all written Space Leases.
Contributor has not received notice in writing of defaults by Contributor or
events that, with notice or lapse of time or both, would constitute a default by
Contributor under the Space Leases which, if uncured, would reasonably be
expected to adversely affect (i) the financial condition or operation of the
respective Asset Projects or respective Property Owning Entity Assets, (ii)
Contributor's ability to enter into or perform this Agreement or (iii)
Contributor's title to the Asset Projects.
3.11 Employees. (a) No collective bargaining agreements exist with
---------
respect to the respective Asset Projects or respective Property Owning Entity
Assets that will subject Operating Partnership to a liability therefor, other
than the Swissotel, New York, Swissotel, Chicago, the Ritz Carlton, Boston and
the Hyatt Regency, Burlingame. To Contributor's knowledge, Contributor is not
now, and has not been in the past, an employer
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<PAGE>
of any person employed at, or in connection with, the Asset Projects or Property
Owning Entity Assets.
(b) Except as set forth on Schedule 3.11(b) attached hereto, to
----------------
Contributor's knowledge, there are no strikes, work stoppages or other labor
disputes relating to the operation on the Asset Project or Property Owning
Entity Assets by any union, nor to Contributor's knowledge, is there any written
application pending or threatened for certification of a collective bargaining
agent, in each case which would materially adversely affect the financial
condition or operation of the Asset Projects or Property Owning Entity Assets.
(c) Except as set forth on Schedule 3.11(c) attached hereto,
----------------
Contributor has not received written notice of any (i) unfair labor practice
charges or grievances pending or in process or threatened by or on behalf of any
employee now or previously employed in the operation of the Assets Projects or
Property Owning Entity Assets, (ii) complaints received by Contributors or the
Existing Managers or threatened in writing, or with respect to unresolved
complaints, on file with any applicable governmental agencies alleging
employment discrimination, (iii) workers' compensation claims pending, in
process or threatened in writing and alleged to have resulted from or be related
in any way to any incident at the Assets Projects or Property Owning Entity
Assets or to employment in connection with the Assets Projects or Property
Owning Entity Assets, (iv) violations of any federal, state or municipal laws
respecting employment and employment practices related in any way to any
employee now or previously employed in the operation of the Assets Projects or
Property Owning Entity Assets, or (v) arrearage in the payment of any wages,
benefits or payroll taxes related to any employee now or previously employed in
the operation of the Assets Projects or Property Owning Entity Assets, in each
case which would materially adversely affect the financial condition or
operation of the Asset Projects or Property Owning Entity Assets.
3.12 Pension and Benefit Plans. (a) For purposes of this Section
------------------------- -------
3.12, the term "Plan" shall mean any plan, program or arrangement, whether or
- ----
not written, that is or was an "employee benefit plan" as such term is defined
in Section 3(3) of ERISA and which covers persons employed at a Property and (i)
which was or is established or maintained by Contributor or an Existing Manager;
(ii) to which Contributor or an Existing Manager contributed or was obligated to
contribute or to fund or provide benefits; or (iii) which provides or promises
benefits to any person who performs or who has performed services for
Contributor or an Existing Manager and because of those services is or has been
(x) a participant therein or (y) entitled to benefits thereunder.
(b) Contributor (i) has not maintained and has never maintained
any Plan, (ii) is not and has never been a party to any Plan and (iii) has no
obligations under any Plan other than reimbursement obligations under the
Existing Management Agreements.
3.13 Commitments. To Contributor's knowledge, other than Permitted
-----------
Exceptions, Space Leases and Contracts, there are no written commitments to any
governmental or quasi-governmental authority, or any other entity, organization,
group or individual relating to the Property Owning Entity Assets which would
impose upon
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<PAGE>
Operating Partnership an obligation to construct, install or maintain any
improvements of a public or private nature on or off the Land.
3.14 Financial Information. Contributor has previously delivered
---------------------
to Operating Partnership its and the Management Company's and the Property
Owning Entities' financial information as set forth on Schedule 3.14. To
-------------
Contributor's knowledge, all audited statements have been prepared in accordance
with generally accepted accounting principles or tax accounting principles,
Uniform System of Accounts, or otherwise as described therein and are certified.
To Contributor's knowledge, such financial statements, (i) are true and correct
in all material respects as of the date therein specified and (ii) present
fairly the financial condition of the Contributor's and Management Company and
the Property Owning Entity as of such date. To the extent such statements were
not prepared in accordance with generally accepted accounting principles and the
rules and regulations of the SEC, Contributors shall cause their independent
public accountants and counsel to cooperate, as reasonably necessary, with
Operating Partnership, and its independent public accountants, at no cost or
expense to Contributor, in the Operating Partnership's process of preparing such
financial statements in accordance with generally accepted accounting principles
and the rules and regulations of the SEC. Contributor shall at no cost or
expense to Contributor provide to Operating Partnership all information about
itself and its business and operations Operating Partnership may reasonably
request in connection with the preparation of documents required pursuant to
applicable securities laws; provided that Contributors shall have the right to
review and reasonably approve disclosure in such documents relating to
Contributors, the Property, the Property Owning Entity Assets or the Mortgage
Loan Collateral within five (5) business days of receipt of drafts of such
disclosures.
3.15 Intellectual Property. To Contributor's knowledge, all
---------------------
trademarks, service marks, trade names, copyrights, patents and applications
therefor owned or licensed by or registered in the name of Contributor (the
"Intellectual Property") are listed on Schedule 3.15 attached hereto.
-------------
3.16 Disclosure. To Contributor's knowledge, the copies of the
----------
Material Contracts, the Space Leases, the Ground Lease and the Existing
Management Agreements, given by Contributor to Operating Partnership in or
pursuant to this Agreement are true and complete.
3.17 Securities Law and Related Matters.
----------------------------------
(a) Contributor acknowledges that Operating Partnership intends the
offer and issuance of the Units to be exempt from registration under the
Securities Act (as hereinafter defined) and applicable state securities laws by
virtue of (i) the status of Contributor and each member of Contributor which is
receiving Units hereunder (and others described in Section 3.17(b) as an
---------------
Accredited Investor (as defined below), and (ii) Regulation D promulgated under
Section 4(2) of the Securities Act ("Regulation D"), and that Operating
Partnership will rely in part upon the representations and warranties made by
Contributor in this Agreement in making the determination that the offer and
issuance of the Units qualifies for exemption under Rule 506 of Regulation D as
an offer and sale only to Accredited Investors (as defined below).
-17-
<PAGE>
(b) Contributor and, to Contributor's knowledge, each of
Contributor's members or partners directly or indirectly, or advisors which are
receiving Units hereunder (or have the right, whether or not exercised, to
approve any of the transactions contemplated hereby or any changes in any
agreement to facilitate any of the transactions contemplated hereby) are
"accredited investors" as defined in Regulation 501(a) under Regulation D
("Accredited Investors").
(c) Except as set forth in Section 2.2, Contributor and, to
-----------
Contributor's knowledge, each of Contributor's partners, members or advisors
which are receiving Units will acquire the Units for its own account and not
with a view to or for sale in connection with any "distribution" thereof within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
(d) Contributor and its managing member or general partner have
sufficient knowledge and experience in financial, tax and business matters to
enable them to evaluate the merits and risks of investment in the Units.
Contributor, its members and others receiving units hereunder have the ability
to bear the economic risk of acquiring the Units. Contributor acknowledges that
(i) the transactions contemplated by this Agreement involve complex tax
consequences for Contributor, its members and others receiving Units hereunder,
and Contributor, its members and others receiving Units hereunder are relying
solely on the advice of their own tax advisors in evaluating such consequences,
(ii) Operating Partnership has not made (nor shall it be deemed to have made)
any representations or warranties as to the tax consequences of any of the
transactions contemplated by this Agreement to Contributor, any of its members
or any others receiving Units hereunder, and (iii) references in this Agreement
to the intended tax effect of the acquisition of the Property and the other
matters described herein shall not be deemed to imply any representation by
Operating Partnership as to a particular tax effect that may be obtained by
Contributor or its members. Contributor and its members remain solely
responsible for all tax matters relating to Contributor and its members,
including, without limitation, all tax consequences to Contributors and their
members resulting from the transaction.
(e) Contributor has received and reviewed the materials containing
certain information regarding Operating Partnership and HMC listed on Schedule
--------
3.17(e) hereto prior to executing this Agreement. Contributor acknowledges that
- -------
it is satisfied with the information that it has received. Contributor has had
an opportunity to ask questions of and receive information and answers from
Operating Partnership and HMC concerning Operating Partnership, HMC, Host REIT,
SLSC, the Units and the common shares of Host REIT (or HMC, if the REIT
Conversion does not occur) into which the Units may be redeemed and to assess
and evaluate any information supplied to Contributor by Operating Partnership
and HMC, and all such questions have been answered and all such information has
been provided to the full satisfaction of Contributor.
(f) Contributor represents and warrants that (i) it and its
constituent members or partners, directly or indirectly, or advisors will be the
only recipients on the Closing Date of Units issued pursuant to Section 2.1
-----------
above, (ii) no amendment to the operating agreement of Contributor is required
to permit Units to be held by Contributor, and (iii) each Contributor and each
other person receiving Units hereunder is (or will be)
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<PAGE>
irrevocably bound to accept such Units prior to May 11, 1998 subject only to
conditions beyond their control.
(g) Contributor shall not distribute or transfer the Units except
in compliance with the Restated Operating Partnership Agreement or Special
Partnership Agreement and Section 2.4 of this Agreement, as the case may be.
-----------
3.18 Third Party Loans and Mortgage Loans.
------------------------------------
(a) The Asset Projects and Property Owning Entity Assets are
subject to mortgage loans held by the Lenders (the "Lenders") set forth on
Schedule 3.18 (the "Third Party Loans"), as of March 31, 1998. Schedule 3.18
- ------------- -------------
sets forth a true, correct and complete list of (i) the material documents
evidencing and securing the Mortgage Loans and (ii) all documents (including all
interest rate swap, cap or similar agreements) which may contain restrictions or
impose premiums on the prepayment of the Third Party Loans, Contributor has not
received notice in writing of any default that exists or is claimed in writing
to exist on the part of the lender under the Mortgage Loans.
(b) Except as set forth on Schedule 3.18, with respect to the
-------------
Mortgage Loans:
(i) Except as set forth in documentation provided to
Operating Partnership on or before the date hereof, the Mortgage Loans have not
been waived, modified, altered, satisfied, canceled, subordinated or rescinded,
and the Mortgage Loan Collateral has not been released from the lien of the
Mortgage Loans, in any manner that materially interferes with the security
intended to be provided by the Mortgage Loans;
(ii) No party other than the Contributors holds a
participation interest in the Mortgage Loans;
(c) Operating Partnership shall, not later than five (5) days prior
to the Closing Date under this Agreement, notify Contributors of its election to
assume all or any portion of the Third Party Loans;
(d) Operating Partnership shall be responsible for all actual costs
and expenses charged by Lenders in connection with the assumption or prepayment
of the Third Party Loans, including without limitation all expenses related to
terminating any interest rate swap or cap or similar arrangement; and
(e) Operating Partnership and its employees and representatives may
contact the Lenders and such other third parties as Operating Partnership shall
reasonably determine necessary in connection with the Consent and Assumption
Agreement and the Lender Estoppel, or, if applicable, the payoff of a Third
Party Loan. As used herein Mortgage Loan Collateral shall mean the real property
encumbered by the Boston Loan Document or the Beverly Hills Loan Documents.
3.19 Assignment to Creditors. No attachments, execution proceedings,
-----------------------
assignments for the benefit of creditors, insolvency, bankruptcy, reorganization
or other proceedings are pending or threatened in writing against Contributor or
Contributor's
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<PAGE>
managing member or general partner, nor are there any of such proceedings
contemplated by Contributor or Contributor's managing member or general partner.
3.20 Membership Interests. (a) (i) To Contributor's knowledge the only
--------------------
business conducted by the Property Owning Entity of which Contributor is a
member (or partner) at any time since its formation has been and remains the
ownership, operation, management, financing and development of the Property
Owning Entity Assets and (ii) the Property Owning Entity does not own, directly
or indirectly, any stock of a corporation or any ownership interest in an entity
that would be classified as an "association" taxable as a corporation for
federal income tax purposes other than BRE/Lafayette, Inc. BRE/Swiss L.L.C. owns
all of the equity interests in BRE/Lafayette, Inc. To Contributor's knowledge,
except for this Agreement and the terms of the partnership or limited liability
company agreement of the relevant Property Owning Entity, there are no options,
warrants, conversion or exchange rights, preemptive rights or other rights to
subscribe for, purchase or otherwise acquire any partnership interest or other
equity interest in the Property Owning Entity. To Contributor's knowledge, each
membership interest in a Property Owning Entity (other than the membership
interests of Nonparticipating Members) has been issued in compliance with all
applicable laws, including Federal and state securities laws. To Contributor's
knowledge, except for Nonparticipating Members, upon the transfer of the
Membership Interests at Closing, the Operating Partnership or its designee, if
applicable, will be the sole members in the Property Owning Entity.
(b) To Contributor's knowledge, the Property Owning Entity has no
liabilities or obligations of any kind or nature, whether absolute, contingent
or accrued, and whether due or to become due, except (i) the Permitted
Exceptions, the Third Party Loans, the Contracts, the Space Leases and the
Existing Management Agreements, (ii) those reflected or disclosed in financial
information provided to Operating Partnership pursuant to Section 3.14 above,
------------
(iii) those arising after the date of the financial information provided to
Operating Partnership pursuant to Section 3.14 above in the ordinary course of
------------
business and consistent with past practice and that, in the aggregate, would not
reasonably be expected to have a material adverse effect; (iv) those adjusted or
assumed pursuant to the terms of this Agreement; and (v) those set forth in the
organizational documents of the Property Owning Entity.
(c) To Contributor's knowledge, the only members and/or partners of
the Property Owning Entities are those individuals and entities listed on
Schedule 1.1(ii) hereto. Contributor has provided to Operating Partnership a
- ----------------
true, correct and complete copy of each Property Owning Entity's operating
agreement or partnership agreement.
3.21 No Corporate Stock. No portion of any Property to be acquired
------------------
by Operating Partnership consists, directly or indirectly, of any stock of a
corporation or any ownership interest in an entity that would be classified as
an "association" taxable as a corporation for federal income tax purposes.
3.22 Environmental Indemnities Contributor agrees to assign on a non-
-------------------------
exclusive basis the benefits of any environmental indemnity agreement from the
seller of the Hotel Project known as Swissotel New York in respect of certain
environmental hazards or remediation or, alternatively, if Contributor's rights
under such indemnity are
-20-
<PAGE>
not assignable, Contributor agrees, at the Operating Partnership's expense, to
attempt to enforce such rights for the benefit of the HMC Parties.
For purposes of Article 3, no Contributor shall be deemed to be making
---------
any representations or warranties pursuant to Sections 3.6, 3.9(a), 3.10 or 3.13
----------------------------------
with respect to RAJ Boston Associates Limited Partnership, the Mortgage Loan
Collateral for the Beverly Hills Loan and the Property Owning Entity Asset owned
by RAJ.
For purposes of this Agreement, "Contributor's knowledge" shall mean the
actual knowledge of Gary Sumers, Bill Stein, Thomas Saylak, Karen Sprogis and
Jon Gray.
ARTICLE IV
HMC's and Operating Partnership's Representations, Warranties and Covenants
- ---------------------------------------------------------------------------
In order to induce Contributors to enter into this Agreement and to
consummate the transactions contemplated hereby, each of Operating Partnership
and HMC jointly and severally represents and warrants to, and covenants with,
Contributors as follows:
4.1 Good Standing.
-------------
(a) Operating Partnership is a limited partnership duly formed,
validly existing and in good standing under the laws of the State of Delaware,
is authorized to conduct the business in which it is now engaged and is, or as
of the Closing Date shall be, to the extent required by applicable law,
qualified to do business in each of the states in which the Property is or any
assets to be transferred to Operating Partnership in connection with the REIT
Conversion are located, if legally required, except for any such qualification,
the absence of which will not have a material adverse effect on the properties,
assets, business, results of operation or financial condition of the Operating
Partnership and its subsidiaries, taken as a whole. Operating Partnership's
general partner is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, is authorized to conduct the
business in which it is now engaged and is, or as of the Closing Date shall be,
to the extent required by applicable law, qualified to do business in each of
the states in which the Property is or any assets to be transferred to Operating
Partnership in connection with the REIT Conversion are located, if legally
required, except for any such qualification, the absence of which will not have
a material adverse effect on the general partner of Operating Partnership.
(b) HMC is a corporation duly formed, validly existing and in good
standing under the laws of Delaware and is authorized to conduct the business in
which it is now engaged and is qualified to do business in each of the states in
which any of its properties is located, if legally required, except for any such
qualification, the absence of which will not have a material adverse effect on
the properties, business, results of operation or financial condition of HMC and
its subsidiaries, taken as a whole.
(c) If the REIT Conversion occurs, then as of the Closing Date (i)
Host REIT shall have been duly formed as a Maryland real estate investment trust
and shall be validly existing and in good standing under the laws of the State
of Maryland, authorized to conduct the business in which it has been formed to
conduct and qualified to do business
-21-
<PAGE>
in each of the states in which any of its property is located, if legally
required, except for any such qualification, the absence of which will not have
a material adverse effect on the properties, assets, business, results of
operation or financial condition of Host REIT and its subsidiaries, taken as a
whole, and (ii) SLSC has been or shall have been duly formed as a Delaware
corporation and shall be validly existing and in good standing under the laws of
Delaware, authorized to conduct the business in which it has been formed to
conduct and qualified to do business in each of the states in which any of its
property is located, if legally required, except for any such qualification, the
absence of which will not have a material adverse effect on the properties,
business, results of operation or financial condition of SLSC and its
subsidiaries, taken as a whole.
(d) If the Contributors are to receive Units in the Special
Partnership, as of the Closing Date the Special Partnership shall have been duly
formed as a Delaware limited partnership pursuant to the Special Partnership
Agreement and shall be validly existing and in good standing under the laws of
the State of Delaware, authorized to conduct the business in which it has been
formed to conduct and qualified to do business in each of the states in which
any of its property is located, if legally required, except for any such
qualification, the absence of which will not have a material adverse effect on
the properties, business, results of operation or financial condition of Special
Partnership and its subsidiaries, taken as a whole.
4.2 Due Authorization.
-----------------
(a) The execution, delivery and performance of this Agreement
have been duly and validly authorized by all requisite actions of Operating
Partnership and its partners (none of which actions has been modified or
rescinded, and all of which actions are in full force and effect). This
Agreement constitutes a valid and binding obligation of Operating Partnership,
enforceable against Operating Partnership in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditor's rights generally and by general equitable principles.
(b) The execution, delivery and performance of this Agreement
have been duly and validly authorized by all requisite actions of HMC (none of
which actions has been modified or rescinded, and all of which actions are in
full force and effect). This Agreement constitutes a valid and binding
obligation of HMC, enforceable against HMC in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditor's rights generally and by general equitable principles.
4.3 No Violations or Defaults. To Operating Partnership's and
-------------------------
HMC's knowledge, the execution, delivery and performance of this Agreement by
Operating Partnership, HMC and their respective subsidiaries will not (a)
violate any law or any order of any court or governmental authority with proper
jurisdiction; (b) result in a breach or default under any material contract of
Operating Partnership, HMC or any of their respective subsidiaries or any
provision of the organizational documents of Operating Partnership or HMC, or
any of their respective subsidiaries or (c) require any consent or
-22-
<PAGE>
approval or vote that has not been taken or given, or at the time of the
transaction involved, shall not have been taken or given.
4.4 Financial Statements. The financial statements of HMC included
--------------------
in the documents filed with the Securities and Exchange Commission ("SEC") and
listed on Schedule 3.17(e) hereto, (i) have been prepared in accordance with
----------------
generally accepted accounting principles (except, in the case of unaudited
statements, as permitted by the applicable rules and regulations of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), (ii) were true and correct in all material
respects as of the dates therein specified and (iii) fairly presented, in all
material respects, in accordance with the applicable requirements of generally
accepted accounting principles and the applicable rules and regulations of the
SEC, the consolidated financial position of HMC and its subsidiaries, as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
4.5 Limitation on Disposition of Property and Maintenance of Debt.
-------------------------------------------------------------
At the Closing, Contributors and the Operating Partnership (or Special
Partnership, as applicable) will enter into that certain Agreement to Hold
Certain Properties and to Maintain Certain Indebtedness in substantially the
form attached hereto as Exhibit C.
---------
4.6 Board Representation. (a) Within sixty (60) days after the
--------------------
execution of this Agreement, HMC will cause (i) the size of its board of
directors to be increased by one or more directors and (ii) a person selected by
Blackstone Real Estate Acquisitions L.L.C. ("Blackstone") and reasonably
acceptable to the board of directors of HMC (provided that John G. Schreiber
shall be acceptable by the board of directors of HMC, or Host REIT if the REIT
Conversion is consummated) (the "Blackstone Board Designee") to be appointed to
serve as a director of HMC (or Host REIT if the REIT Conversion is consummated)
for a term expiring at the 1999 meeting of stockholders of HMC or Host REIT, as
the case may be. In the event that the REIT Conversion shall have been
consummated and Closing hereunder shall have occurred, the Blackstone Board
Designee will become a trustee (or director, as applicable) of Host REIT, and
Host REIT will cause the Blackstone Board Designee to be included in the slate
of trustees (or directors, if applicable) nominated by the board of trustees (or
directors, if applicable) for election by the shareholders of Host REIT upon the
expiration of each term of the Blackstone Board Designee as a trustee thereafter
for so long as Blackstone and its Affiliates (as defined in Section 13.13)
-------------
collectively own at least five percent (5%) of the outstanding Units. In the
event that the REIT Conversion is not consummated and the Closing hereunder
nevertheless shall have occurred, HMC will cause the Blackstone Board Designee
to be included in the slate of directors nominated by the board of directors of
HMC for election at the 1999 stockholders meeting and upon the expiration of
each term of the Blackstone Board Designee as a director thereafter for so long
as Blackstone and its Affiliates collectively own units of the Special
Partnership that if redeemed for shares of HMC Common Stock would represent at
least five percent (5%) of the outstanding HMC Common Stock. If the closing has
not then occurred, the Blackstone Board Designee will resign immediately upon
any termination of this Agreement. The Blackstone Board Designee shall have the
right to be appointed to each committee of the board of HMC, or Host REIT upon
the REIT Conversion, as he so
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<PAGE>
desires. For purposes hereof, "Host REIT" includes any successor General Partner
Entity (as defined in the Restated Operating Partnership Agreement).
(b) So long as Blackstone and its Affiliates collectively own at least
5% of the common stock of SLSC, at all times and for so long as the board of
directors of SLSC shall have more than two members who are also members of the
board of directors of Host REIT, Blackstone shall be entitled to designate an
individual to serve on SLSC's board of directors (who shall be reasonably
acceptable to HMC and Host REIT), with SLSC, Blackstone and such individual
having rights substantially similar to those of HMC, Host REIT, Blackstone and
the Blackstone Board Designee under subsection (a) above.
(c) HMC and Host REIT (and SLSC, if applicable) shall provide the same
type of support for the election of the Blackstone Board Designees as such
Person, its affiliates and its management provides to other persons standing for
election as directors or trustees of such Person as part of the management
slate. HMC and Host REIT (and SLSC, if applicable) shall furnish to each
Blackstone Board Designee who serves as a director or trustee of such Person the
same information that is provided to the other members of the Board of Directors
(in their capacity as directors) or Trustees of HMC or Host REIT (as applicable)
(and SLSC, if applicable) subject to the terms of any conflicts of interest,
confidentiality or corporate opportunity policies applicable to all Board
members. In the event of the death, resignation or other removal of a
Blackstone Board Designee (other than due to Blackstone no longer being entitled
to designate a Blackstone Board Designee), Blackstone will be entitled to
appoint another person as the Blackstone Board Designee (who must be reasonably
acceptable to the board of directors of HMC or Host REIT and SLSC, as
applicable) and such person shall be appointed as a director (in the case of
death, resignation or other removal during such person's term as a director) or
included on the slate of directors or trustees nominated for election by the
Board of Directors or Trustees.
(d) The parties hereto agree that any breach of this Section 4.6 would
-----------
cause irreparable injury to the Contributors and that money damages will be an
inadequate remedy for any breach or threatened breach of the agreements
described in this Section 4.6. In the event of a breach or a threatened breach
-----------
of the agreements described in this Section 4.6, the Contributors shall, in
-----------
addition to other rights and remedies existing in their favor, be entitled to
specific performance and/or injunctive relief in order to enforce, or prevent
any violations of, the provisions of this Section 4.6 (without the posting of a
-----------
bond or other security).
4.7 Capitalization. (a) As of date hereof, the authorized capital
--------------
stock of HMC consists of 600,000,000 shares of HMC Common Stock. As of April
14, 1998, (i) 204,210,369 shares of HMC Common Stock were issued and
outstanding, all of which are validly issued, fully paid and nonassessable, no
shares of HMC Common Stock are held in treasury, (ii) 11,594,804 shares of HMC
Common Stock are reserved for future issuance pursuant to HMC's stock option and
stock purchase plans ("HMC Stock Plans"), and (iii) an adequate number of shares
of HMC Common Stock are reserved for future issuance pursuant to HMC's
outstanding QUIPs. Except pursuant to the HMC Stock Plans and the QUIPs, there
are no options, warrants or other rights, agreements, arrangements or
commitments of any character relating to the issued or unissued capital stock of
HMC
-24-
<PAGE>
obligating HMC to issue or sell any shares of its capital stock. Prior to the
Closing Date, an adequate number of shares of HMC common stock will have been
duly reserved for issuance upon the conversion of the Units issued to
Contributors hereunder and such shares have been duly and validly authorized
and, if and when issued, will be validly issued, fully paid and nonassessable
and will not be subject to any preemptive rights.
(b) The Units to be issued by the Operating Partnership to the
Contributors have been duly and validly authorized and, upon issuance, will be
validly issued, fully paid and nonassessable and will not be subject to any
preemptive rights.
(c) If the REIT Conversion occurs, all capital stock of Host REIT
issued upon the Closing will be validly issued, fully paid and nonassessable and
will not be subject to any preemptive rights. Prior to the Closing Date, an
adequate number of Host REIT Shares will have been duly reserved for issuance
upon the redemption of the Units by Contributors and all Host REIT Shares issued
upon redemption of Units by Contributors will be duly and validly authorized and
will be validly issued, fully paid and nonassessable and will not be subject to
any preemptive rights.
(d) If the REIT Conversion occurs, all capital stock of SLSC issued
upon the Closing (including the shares of capital stock to be issued to the
Contributors pursuant to the terms of this Agreement) will be duly and validly
authorized and will be validly issued, fully paid and nonassessable and will not
be subject to any preemptive rights.
(e) If the Contributors receive Units in the Special Partnership, the
Units to be issued by the Special Partnership to the Contributors shall be duly
and validly authorized and, upon issuance, will be validly issued, fully paid
and nonassessable and will not be subject to any preemptive rights. Except for
the Units to be issued to the Contributors and the partnership interests held by
HMH, there will be no other partnership interests of Special Partnership issued,
and there will be no options, warrants or other rights, agreements, arrangements
or commitments of any kind relating to the issued or unissued partnership
interests of Special Partnership obligating it to issue or sell any such
additional partnership interests.
4.8 SEC Filings; Material Adverse Change. (a) Since January 1, 1995,
------------------------------------
HMC and each of its subsidiaries have filed, and will timely file, all reports,
registration statements proxy statements and other materials, together with any
amendments required to t be made with respect thereto, that were or will be
required to be filed, at any time prior to the Closing, with the Securities and
Exchange Commission under the Securities Act of 1933 or the Securities Exchange
Act of 1934 or with the New York Stock Exchange, including any S-4 registration
statement prepared in connection with the REIT Conversion Merger or any other
registration statement prepared in connection with the REIT Conversion
Distribution (all such reports and statements are collectively referred to
herein as the "HMC SEC Reports"). Since January 1, 1995, as of their respective
dates, the HMC SEC Reports, including the financial statements contained
therein, complied (and will comply) in all material respects with all of the
statutes and published rules and regulations enforced or promulgated by the
regulatory authority or exchange with which they were (or will be) filed and did
not (and will not) contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
-25-
<PAGE>
therein, in light of the circumstances under which they were (or will be) made,
not misleading.
(b) Except as disclosed on Schedule 4.8, since December 31, 1997
------------
through the date of this Agreement, there has not been any material adverse
change in the business, results of operations or financial condition of HMC and
its subsidiaries taken as a whole.
4.9 REIT Conversion; Related Provisions. (a) HMC will use its
-----------------------------------
commercially reasonable efforts to cause the REIT Conversion to occur by March
31, 1999. HMC agrees that the REIT Conversion shall be consummated on terms and
conditions that are not inconsistent with this Agreement.
(b) Except as provided in and pursuant to this Agreement, HMC and the
Operating Partnership agree that they will not (and HMC will cause Host REIT and
SLSC not to) adopt any organizational document or enter into any contractual
arrangement (other than with the affected party's consent) bound that would, or
issue any securities the effect of which would, except with respect to ownership
limitations to be set forth in the Restated Operating Partnership Agreement, the
Special Partnership Agreement, the Declaration of Trust of Host REIT and the
Articles of Incorporation of SLSC substantially as described on Schedule 4.9(b),
---------------
other agreements or plans of HMC in existence on the date hereof that have been
made available to the Contributors (and any substantially similar agreements and
plans subsequently entered into by any HMC Party) and the provisions and other
mechanisms contemplated by the materials delivered by HMC to Contributors (sets
1 and 3), (i) limit Contributors' or their equity holders' ability to redeem
Units or Class A Units of the Special Partnership; (ii) limit Contributor's
percentage ownership of Shares, shares of HMC Common Stock or shares of SLSC
Stock; (iii) limit Contributors' or their equity holders' ability to transfer
Shares, shares of HMC Common Stock or shares of SLSC stock; or (iv) limit
Contributor's or their equity holders' ability to vote Shares, shares of HMC
Common Stock or shares of SLSC Stock received by it upon redemption of its
Units, HMC Shares received on redemption of Special Partnership Units or SLSC
Stock, due to Contributors' percentage of beneficial or record ownership of
shares of such HMC Party (on a pro forma basis, assuming the Closing shall occur
hereunder and all Units issued hereby shall be dully redeemed for Shares).
(c) HMC shall cause each of Host REIT, SLSC and/or the Special
Partnership (as applicable) to execute and deliver to the Contributors a
counterpart of this Agreement, promptly upon such HMC Party's formation, in
which such HMC Party agrees to be fully bound by all of the terms and conditions
contained herein as if such HMC Party were an original signatory hereto.
(d) HMC will use commercially reasonable efforts to cause the chief
executive officer of Host REIT to deliver the certificate contemplated by
Section 1.1(mm) of this Agreement upon or promptly following the occurrence of
- ---------------
the events constituting the REIT Conversion.
4.10 Absence of Litigation. Except as disclosed on Schedule 4.10, to
--------------------- -------------
HMC's and Operating Partnership's knowledge, there are no actions, suits,
arbitrations,
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<PAGE>
governmental investigations or other proceedings pending or threatened in
writing against any HMC Party before any court or governmental authority, an
adverse determination of which would materially adversely affect (a) the
financial condition or operations of such entity, or (b) Operating Partnership's
or HMC's ability to enter into or perform this Agreement.
4.11 Third Party Loans. Both parties shall use reasonable efforts to
-----------------
obtain from each of the lenders under the Third Party Loans, a release, in form
satisfactory to the Contributors, of all of Contributors' (and their
affiliates') liabilities and obligations under the documents evidencing,
securing, guaranteeing or otherwise relating to the Third Party Loans, including
any environmental indemnitees and non-recourse guarantees relating to liability
from and after the Closing Date. In the event such a release is not obtainable
with respect to any Third Party Loan, the Operating Partnership will cause such
Third Party Loan to be repaid in full at Closing.
4.12 Business of Host REIT. In the event that Host REIT is the general
---------------------
partner of the Operating Partnership, the business and assets of Host REIT will
be restricted by the provisions of Section 7.5.A of the Restated Operating
Partnership Agreement. In the event that Host REIT is not the general partner
of the Operating Partnership, the business and assets of Host REIT shall be
limited to ownership, directly or through wholly owned subsidiaries, of 100
percent of the equity interests in the general partner of the Operating
Partnership and Qualified REIT Subsidiaries (as defined in the Restated
Operating Partnership Agreement).
ARTICLE V
Closing
-------
5.1 Closing.
-------
(a) The consummation of the purchase and sale of the Property as
contemplated by this Agreement (the "Closing") shall take place at 10:00 a.m. on
the date selected by the Operating Partnership, which date shall not be earlier
than November 1, 1998 or later than the earlier to occur of (i) the REIT
Conversion or (ii) March 31, 1999 (subject to the satisfaction or waiver of all
of the conditions precedent in Article VII on or before such date) (the "Closing
-----------
Date"), at the offices of Hogan & Hartson L.L.P., in Washington, D.C. or at such
other location as may be mutually agreed upon by Contributors and Operating
Partnership. Operating Partnership shall select the Closing Date by giving
written notice thereof to the Contributors no later than ten (10) business days
prior thereto. All of Contributors' deliveries and the Units, shares of SLSC
and other deliveries of the Operating Partnership and HMC shall be delivered in
escrow to an escrow agent mutually agreeable to the parties.
(b) In the event that HMC desires to consummate the REIT Conversion
prior to December 31, 1998, the Closing will occur simultaneously with the REIT
Conversion, and the Exchange Amount with respect to the Property contributed by
each Contributor will be increased by the estimated amount of the Contributor's
share of the Available Cash Flow (as defined below) from such Property for the
period from the Closing
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<PAGE>
to and including December 31, 1998 (the "Determination Period"). Such estimate
shall be made in good faith jointly by the Operating Partnership and
Contributors. Promptly after financial statements for the year ended December
31, 1998 become available, the Operating Partnership and each Contributor will
determine the Contributor's share of the actual Available Cash Flow for such
period and, promptly after such determination, if such actual amount is less
than the estimated amount actually paid to such Contributor pursuant to this
Section 5.1(b), such Contributor will promptly pay the difference to the
- --------------
Operating Partnership in cash or, if such actual amount is greater than the
estimated amount actually paid to such Contributor pursuant to this Section
-------
5.1(b), the Operating Partnership will promptly pay the excess to the
- ------
Contributor in cash . As used herein, the "Available Cash Flow" of an Asset
Project or Membership Interest with respect to any period shall mean the funds
from operations (determined pursuant to the NAREIT definition thereof) of the
Asset Project or Property Owning Entity Asset for such period less, to the
----
extent not otherwise deducted in determining funds from operations, all interest
expense and contributions to FF&E reserves with respect to the Property for such
period. During the Determination Period, the Operating Partnership shall
operate (or cause the operation of) the Asset Project or Property Owning Entity
Asset in the ordinary course, consistent with the manner in which the Asset
Project or Property Owning Entity Asset was operated prior to Closing and
strictly in accordance with the current 1998 budgets for such Asset Project or
Property Owning Entity Asset as of the date hereof. As used herein, the term
"Available Cash Flow" with respect to the Boston Loan shall be determined for
the Determination Period in the same manner as if it were an Asset Project, and
with respect to the Beverly Hills Loan, shall mean accrued interest for the
Determination Period. As used herein, the term "Available Cash Flow" with
respect to the Management Interest shall mean the actual cash distributions of
the Management Company for such period.
(c) Contributors will be entitled to terminate this Agreement (i) if
the REIT Conversion shall not have been consummated on or before March 31, 1999
or (ii) HMC publicly announces that it is no longer seeking to complete the REIT
Conversion (the earlier of such events, the "Trigger Date"). In the event that
Contributors have not terminated this Agreement within 30 days after the Trigger
Date, the Proposed Transaction will close on the later of January 31, 1999 or
the 90th day (or such other date agreed by the parties) after the Trigger Date
(so long as all of the other conditions precedent in Article VII are satisfied
-----------
or waived) and the following provisions shall apply:
(i) HMH Properties, Inc. ("HMH") will organize a Delaware limited
partnership (the "Special Partnership") in which HMH (or a wholly owned
subsidiary thereof) will be the general partner and hold Class A Units.
(ii) The partnership agreement of the Special Partnership (the
"Special Partnership Agreement") will be in substantially the form to be
agreed upon in good faith by HMC and Contributors and attached as Exhibit D
---------
hereto within forty-five (45) days from the date hereof.
(iii) The Contributors will contribute the Property to the
Special Partnership in exchange for a number of Class A Units of the
Special Partnership equal to the number of Units it would have received
under Section 2.1(b)(i) if the
-----------------
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<PAGE>
Contribution had closed on such date. The Class A Units will be structured
to the extent feasible to be the economic equivalent of shares of HMC
Common Stock.
(iv) The Class A Units will be exchangeable on a one-for-one basis
into shares of HMC common stock (with anti-dilution adjustments as provided
in the Special Partnership Agreement), subject to the lockup provisions
described in Section 2.4 above, and the Contributors would have the
-----------
registration rights with respect to the HMC common stock issuable in
exchange for the Class A Units substantially similar to those described in
Section 2.3 pursuant to a Registration Rights Agreement in the form
-----------
attached as Exhibit B. In the event the contribution of the Property is to
---------
be made to the Special Partnership pursuant to the terms of this paragraph
(c), each of the representations, warranties and covenants of the Operating
Partnership under this Agreement shall be deemed representations,
warranties and covenants of the Special Partnership.
(d) In the event that shareholder approval of the issuance of Units or
Class B Units to the Contributors is required under the regulations of the New
York Stock Exchange because of the number of securities being issued, HMC will,
at its option, either seek stockholder approval for the issuance of the Units
that exceed the applicable limit set forth in such regulations or will cause the
Operating Partnership or the Special Partnership to issue to each Contributor,
with respect to its ratable portion of the excess number of securities, a
separate class of security with identical rights except that such securities
would not be redeemable for stock of HMC or Host REIT, as the case may be, but
instead would be redeemable by the holder only for an amount of cash equal to
the market value of such stock at the time of redemption.
5.2 Fees and Expenses. Each party will pay its own legal and due
-----------------
diligence expenses incurred in connection with the Contribution. The Operating
Partnership will pay any fees, charges or other amounts due with respect to the
assumption or repayment of the Third Party Loans, including, without limitation,
any breakage costs under any interest rate swap, cap or similar agreements. The
Operating Partnership will be responsible for costs of any title insurance
requested by the Operating Partnership. Real estate transfer and recordation
taxes and personal property sales and use taxes will be split equally between
the applicable Contributors and the Operating Partnership. The Operating
Partnership will pay those expenses for which it is responsible out of the funds
available to it upon consummation of the REIT Conversion (or HMC shall pay such
expenses at or prior to Closing in the event the REIT Conversion does not occur
prior to the Closing).
ARTICLE VI
Actions Pending Closing
-----------------------
6.1 Conduct of Business; Maintenance and Operation of Property.
----------------------------------------------------------
Contributors and Operating Partnership agree that Contributor shall operate the
Asset Projects, and cause the Property Owning Entities to operate the Property
Owning Entity Assets between the Contract Date and the Closing Date in
accordance with the parameters set forth on Schedule 6.1 attached hereto.
------------
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<PAGE>
6.2 Title Insurance. Operating Partnership may at its expense
---------------
obtain a binding commitments for owners' policies of title insurance, to be
issued by a nationally recognized, financially sound title insurance company
acceptable to Operating Partnership (the "Title Company"), to Operating
Partnership (the "Title Commitment"), committing to insure (i) as to the Asset
Projects, the Operating Partnership's good fee simple or leasehold title to the
Land and Improvements, and (ii) as to the Mortgage Loans valid first priority
liens. The title policies to be issued pursuant to the Title Commitment (the
"Title Policies") shall be on American Land Title Association Form and in an
amount at least equal to the portion of the Exchange Amount allocable to the
value of the Land and the Improvements, or the Mortgage Loans as shown on
Schedule 2.1(e).
- ---------------
6.3 Survey. Operating Partnership may at its expense obtain as-
------
built surveys of the Land and Improvements and the real property encumbered by
the Mortgage Loan Documents, prepared in conformity with current American Land
Title Association/American Congress on Surveying and Mapping standards for
"Class-A" surveys and certified to Operating Partnership, Operating
Partnership's lender and the Title Company by a duly licensed land surveyor or
professional engineer in form and substance satisfactory to Operating
Partnership for, among other things, deletion of the standard survey exception
from the Title Policy (the "Updated Surveys").
6.4 HSR Compliance. Promptly following the Contract Date,
--------------
Contributors and Operating Partnership shall file any and all necessary
applications for approval of the Contribution and the receipt of the Units, Host
REIT Shares, Class A Units of the Special Partnership and/or HMC Common Stock
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Approval") and thereafter shall use their reasonable efforts to obtain HSR
Approval from the Federal Trade Commission and any other necessary governmental
agencies. The filing fees associated with such application shall be split
equally between Operating Partnership and Contributors.
6.5 Cooperation. Contributors shall reasonably cooperate with
-----------
Operating Partnership, at the Operating Partnership's expense, in securing the
transfer or issuance of any Permits, including, without limitation, a liquor
license (with respect to each Hotel Project), necessary to permit the lawful,
continuous operation of the Property by Operating Partnership immediately
following the Closing Date, but Contributors shall not incur any liability in
such cooperation.
6.6 Inspection. Operating Partnership shall have the right, upon
----------
reasonable notice to Contributors, at its own risk, cost and expense and at any
reasonable date or dates prior to Closing, at reasonable times, to enter, or
cause its agents or representatives to enter, upon the Asset Projects and
Property Owning Entity Assets for the purpose of making surveys or other non-
invasive tests, inspections, investigations and studies of the Asset Projects
and Property Owning Entity Assets. In addition, Operating Partnership may
conduct such architectural, environmental, economic and other studies of the
Property as Operating Partnership may, in its sole discretion, deem desirable.
Operating Partnership shall not make any physical alterations to the Asset
Projects and Property Owning Entity Assets, such entry shall not interfere with
the guests or management of the Property, and Operating Partnership shall
indemnify and hold Contributors harmless from
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<PAGE>
any cost, claim or expense in connection therewith, except that Operating
Partnership's obligations and HMC's as set forth in this sentence shall not
extend to previously existing conditions that are discovered by Operating
Partnership to be present on, under or about the Asset Projects and Property
Owning Entity Assets if not caused by the Operating Partnership. To the extent
permitted under the Existing Management Agreements and otherwise in
Contributors' control, Operating Partnership shall have complete, unfettered
access to all documentation, agreements and other written information in the
possession of Contributors or Contributors' agents (excluding any internal
analyses or documents covered by attorney-client privilege), and the Existing
Managers, related to the Asset Projects and Property Owning Entity Assets and
shall have the right to make copies of same.
6.7 Capitalization of Property Owning Entity. Except as expressly
----------------------------------------
permitted pursuant to the terms of this Agreement from and after the date
hereof, no Contributor will permit the Property Owning Entity to (i) terminate
or modify in any respect the Property Owning Entity operating agreement or
limited liability company agreement, as the case may be, unless the Operating
Partnership shall receive 100% of the membership or partnership interests of the
Property Owning Entity, (ii) issue, sell, pledge, dispose of, grant or otherwise
create any equity interest in Property Owning Entity or any debt securities
convertible into or exchangeable for any equity interest in the Property Owning
Entity, (iii) purchase, redeem or otherwise acquire or retire, or offer to
purchase, redeem or otherwise, acquire or retire any equity interest (including
any options with respect to any equity interests in any security convertible or
exchange into any equity interest) in the Property Owning Entity, (iv) incur or
become contingently liable with respect to any loans other than the Third Party
Loans or guarantee any loans other than the Third Party Loans or issue any debt
securities, (v) acquire or agree to acquire by merging or consolidating with or
by purchasing a substantial equity interest in or a substantial portion of the
assets of or by any other manner any business or any corporation, partnership,
limited liability company, association or any other business entity, or (vi)
acquire, directly or indirectly, any stock of a corporation or any ownership
interest in an entity that would be classified as an "association" taxable as a
corporation for federal income tax purposes.
6.8. Conduct of Business of HMC. During the period from the date of this
--------------------------
Agreement to the Closing Date, HMC shall not (and it shall cause each other HMC
Party not to) declare, set aside or pay any dividends on, or make any other
distributions in respect of (including, without limitation, making any rights
offering), its common stock (or comparable equity interest) having a record date
for determining the stockholders of such HMC Party entitled to receive such
dividend or distribution on or prior to the Closing Date, except the declaration
and payment of the REIT Conversion Distribution.
6.9. Non-Solicitation. HMC hereby agrees that from the date hereof and
----------------
for a period of twenty-four (24) months hereafter, HMC, Operating Partnership,
SLSC and their respective subsidiaries shall not, on their own or on behalf of
any person, firm or company, directly or indirectly, solicit or offer employment
to any person who is or has been employed by any of the Contributors at an
annual salary in excess of $100,000 per year at any time during the twelve (12)
months immediately preceding such solicitation. Contributors hereby agree that
from the date hereof and for a period of twenty-four (24)
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<PAGE>
months hereafter, Contributors shall not, on their own or on behalf of any
person, firm or company, directly or indirectly, solicit or offer employment to
any person who is or has been employed by any of HMC or Operating Partnership at
an annual salary in excess of $100,000 per year at any time during the twelve
(12) months immediately preceding such solicitation.
6.10. New York Stock Exchange Listing. Each of HMC, Host REIT and
-------------------------------
SLSC shall, if permitted by the rules of the New York Stock Exchange (the
"NYSE") or such other national securities exchange as any of its stock may be
listed (including, without limitation, the NASDAQ Stock Market) , use reasonable
efforts to list and keep listed on the NYSE or such other national securities
exchange as any of its equity securities may be listed all equity securities
which have been issued to the Contributors or their equity members in accordance
with this Agreement or in the conversion of any Units issued to the Contributors
or their equity members, for so long as its common stock remains so listed.
6.11 SEC Filings. Following the date hereof, HMC will prepare and file
-----------
with the SEC a proxy/prospectus to be distributed to HMC's stockholders in
connection with their approval of the REIT Conversion, including any amendments
or supplements thereto (the "HMC Proxy/Prospectus"). HMC agrees to provide the
Contributors and their respective counsel with any written comments HMC or its
counsel may receive from the SEC with respect to the HMC Proxy/Prospectus after
the receipt of such comments.
6.12 Reasonable Efforts. Contributors and HMC shall use commercially
------------------
reasonable efforts to satisfy all conditions precedent to the obligations of the
Operating Partnership hereunder, including without limitation obtaining all
necessary Third Party Consents (as hereinafter defined).
ARTICLE VII
Conditions Precedent to Closing
-------------------------------
7.1 Conditions to Obligations of Operating Partnership. It shall be an
--------------------------------------------------
express precondition to Operating Partnership's obligation to purchase the
Property that each and every one of the following conditions shall have been
satisfied as of the Closing Date (or waived by Operating Partnership).
(a) Representations and Warranties. Subject to Section 9.3, each of
------------------------------ -----------
Contributors' representations and warranties that is qualified as to materiality
shall be true and correct in all respects as if made on and as of the Closing
Date, and each of such representations and warranties that is not so qualified
shall be true and correct in all material respects as if made on and as of the
Closing Date, and the Operating Partnership shall have received a certificate
from each of the Contributors to such effect; provided, however, that
Contributors shall have no liability thereunder and such certification shall not
survive the Closing.
(b) Covenants of Contributors. Subject to Section 9.3, Contributors
------------------------- -----------
shall have performed or complied with all agreements and covenants required to
be performed by them under this Agreement at or prior to the Closing Date that
are qualified as to
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<PAGE>
materiality and shall have performed or complied in all material respects with
all other agreements and covenants required to be performed by them under this
Agreement at or prior to the Closing Date that are not so qualified as to
materiality.
(c) Title and Survey. A Title Company shall be ready and willing
----------------
(conditioned only on payment in full of all premiums) to issue the Title Policy
with respect to each Asset Project and Mortgage Loan, subject only to the
Permitted Exceptions and the Title Policy shall show no liens, mortgages, deeds
of trust, security interests, pledges, charges, options, encroachments,
easements, covenants, leases, reservations or restrictions of any kind other
than the encumbrances set forth on Schedule 7.1(c) attached hereto (the
---------------
"Permitted Exceptions"). No easement or encroachment shown on the survey
obtained in connection with such Asset Project or Mortgage Loan, other than
Permitted Exceptions, shall materially adversely impair the use or operation of
the Property.
(d) Estoppel Certificates. Subject to Section 8.1(i), Operating
--------------------- --------------
Partnership shall have received an estoppel certificate, substantially in the
form of Exhibit F hereto, from each of the Existing Managers, other than the
---------
Existing Manager at the Ritz Carlton Amelia Island and Ritz Carlton Boston
hotels.
(e) Approvals. If this transaction, or any part or parts thereof, or
---------
the consummation of any of the transactions herein contemplated, shall require
authorization or approval of any governmental agency having jurisdiction, all
such authorizations and approvals shall have been obtained and shall be in full
force and effect on and as of the Closing Date, except where failure to obtain
any such approval shall not (i) have a material adverse effect on the financial
condition or operations of the Property or (ii) result in any criminal liability
or the imposition of any material fine or penalty.
(f) Third Party Consents. The consents set forth on Schedule 7.1(f)
-------------------- ---------------
shall have been obtained (the "Third Party Consents").
(g) HSR Filing. If required by the HSR Act, all applicable waiting
----------
periods for the HSR Approval with respect to HMC and the Operating Partnership
shall have expired or otherwise been terminated.
(h) Cross-Collateralized Third Party Loans. To the extent that any
--------------------------------------
Third Party Loans are cross-collateralized with other indebtedness which is not
a Third Party Loan, Contributors shall obtain a release of such Third Party Loan
from the cross-collateralization which release may be effective upon payment in
full of one or more Third Party Loans and pay any incremental fees arising
solely due to the collateralization upon prepayment or assumption of the Third
Party Loan.
(i) Membership Interest Transfer. The Operating Partnership shall
----------------------------
have ordered and received written results of Uniform Commercial Code Financing
Statements, judgment, litigation (including bankruptcy) and tax liens searches
dated not earlier than the date which is forty-five (45) days prior to the
Closing Date for each Membership Interest Contributor in the state and county of
such Membership Interest Contributor's principal place of business or residence
if such Membership Interest Contributor is an individual showing no liens,
claims, charges, security interests, encumbrances or other
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<PAGE>
matters which relate in any way to such Membership Interest Contributor's
membership interest in each Property Owning Entity which will not be paid and
released at or prior to Closing, other than liens securing a Third Party Loan to
the Property Owning Entity.
(j) Bulk Transfers. With respect to each Asset Project, Contributors
--------------
shall be in compliance with any of the requirements of the bulk transfer
provisions of the Uniform Commercial Code in effect in any of the states in
which the Asset Project is located, or if not in compliance, Contributors shall
agree to indemnify the Operating Partnership for any losses resulting from a
failure to comply with such bulk transfer provisions.
(k) Special Management Agreement Provision. (i) In the event any
--------------------------------------
Existing Manager withholds an estoppel certificate under an Existing Management
Agreement then (1) the Operating Partnership shall not be relieved of any of its
obligations under this Agreement, all of which shall remain in full force and
effect and (2) such estoppel certificate from such Existing Manager shall not be
a condition to the Operating Partnership's obligations under this Agreement.
(ii) HMC and the Operating Partnership acknowledge that, the
terms of the Swissotel Management Agreements and the limited liability agreement
of BRE/Swiss L.C.C., require that Swissotel Holding, Inc. be granted up to a one
percent (1%) equity interest in the purchasing entity as a condition to the
transfer of the Swissotel Hotel Projects as more particularly described therein.
Notwithstanding anything to the contrary contained in this Agreement, the
Operating Partnership shall be solely responsible for satisfying such condition
at or prior to Closing and the failure of such conditions to be satisfied shall
not, directly or indirectly, relieve the Operating Partnership of its
obligations under this Agreement.
(iii) With respect to the Ritz-Carlton, Amelia Island, in the
event of an exercise of its right of first refusal by Ritz-Carlton as Existing
Manager under the Existing Management Agreement for such Hotel Project, such
Hotel Project shall be excluded from the Contribution hereunder and the Exchange
Amount shall be reduced by the allocable amount for such Hotel Project as set
forth on Schedule 2.1(e) hereto.
---------------
(l) Deliveries. Operating Partnership shall have received each of the
----------
deliveries to it required pursuant to Article VIII of this Agreement.
------------
7.2 Conditions to Obligations of Contributors. The obligations of
-----------------------------------------
Contributors to effect the Contribution are subject to the satisfaction of, or
waiver by Contributors, on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of HMC and Operating Partnership set forth in this Agreement that is
qualified as to materiality shall have been true and correct on the date of this
Agreement, and each of the representations and warranties of HMC and Operating
Partnership that is not so qualified shall have been true and correct in all
material respects on the date of this Agreement and Contributors shall have
received a certificate of HMC and the general partner of Operating Partnership
to such effect.
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<PAGE>
(b) Performance of Obligations of Operating Partnership. Each of HMC
---------------------------------------------------
and Operating Partnership shall have performed or complied with all agreements
and covenants required to be performed by it under this Agreement at or prior to
the Closing Date that are qualified as to materiality and shall have performed
or complied in all material respects with all agreements and covenants required
to be performed by it under this Agreement at or prior to the Closing Date that
are not so qualified as to materiality, and Contributors shall have received a
certificate of HMC and the general partner of Operating Partnership to such
effect.
(c) Consummation of REIT Conversion. The REIT Conversion shall have
-------------------------------
been consummated on the terms that are not inconsistent with this Agreement and
the Host REIT shall qualify as a REIT as of the later of the Closing Date and
January 1, 1999.
(d) Third Party Consents. Consent of those parties set forth on
--------------------
Schedule 7.2(d) attached hereto shall have been obtained.
- ---------------
(e) Approvals. If this transaction, or any part or parts thereof, or
---------
the consummation of any of the transactions herein contemplated, shall require
authorization or approval of any governmental agency having jurisdiction, all
such authorizations and approvals shall have been obtained and shall be in full
force and effect on and as of the Closing Date, except where failure to obtain
any such approval shall not (i) have a material adverse effect on the financial
condition or operation of the Property or (ii) result in any criminal liability
or the imposition of any material fine or penalty.
(f) HSR Filing. If required by the HSR Act, all applicable waiting
----------
periods for the HSR Approval with respect to the Contributors shall have expired
or otherwise been terminated.
(g) Deliveries. The Contributors shall have received each of the
----------
deliveries required pursuant to Article VIII of this Agreement.
------------
(h) Lender Releases. The Contributors shall have received releases
---------------
for the period from and after the Closing Date from the Lenders with respect to
any recourse or guaranty obligations of the Contributors of their members,
partners or affiliates under the Third Party Loans, including, without
limitation, nonrecourse carveout exceptions guarantees and environmental
indemnities; provided, that, in lieu of obtaining such releases, Operating
Partnership at its sole option can provide an indemnification of Contributors
with respect to such obligations.
7.3 Exclusion of Assets. (a) If, with respect to any Property, a
-------------------
consent set forth on Schedule 7.1(f) is not obtained on or before Closing, the
---------------
Operating Partnership shall have the right upon 10 days notice to the
Contributors, to exclude such Property from the transactions contemplated hereby
and the Exchange Amount shall be reduced by the portion of the Exchange Amount
allocated to such Property set forth on Schedule 2.1(e). Upon any such
---------------
exclusion, all representations, warranties, covenants and agreements with
respect to such Property shall be deemed deleted from this Agreement. In the
event the Operating Partnership elects to waive the requirement for any such
consent which has not be obtained, the Operating Partnership shall indemnify,
defend and hold harmless each
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Contributor, its agents, employees, partners, members, officers, directors and
shareholders from and against any and all Losses arising out of or relating to
the acquisition of such Property without such consent having been obtained.
(b) The Operating Partnership acknowledges that the contribution by
Contributor of the Beverly Hills Loan pursuant to the terms of this Agreement
has not, as of the date of this Agreement, been authorized by the requisite
membership approval of BRE/Burton Way L.L.C. Such approval may not be obtained,
and certain members in BRE/Burton Way L.L.C. may elect to transfer their
interests therein and not authorize a sale of the Mortgage Loan. In the event
the contribution of the Beverly Hills Loan has not been authorized by the
requisite member approval of BRE/Burton Way L.L.C. by May 11, 1998, the Beverly
Hills Mortgage Loan will be excluded from the transactions contemplated hereby
and the Exchange Amount shall be reduced by the portion of the Exchange Amount
allocated to such Property set forth on Schedule 2.1(e). Upon such exclusion,
---------------
all representations, warranties, covenants and agreements with respect to such
Property shall be deemed deleted from this Agreement.
ARTICLE VIII
Deliveries
----------
8.1 General Closing Deliveries. The parties shall deliver the
--------------------------
following documents at Closing:
(a) Opinion of Contributors' Counsel. Each Contributor shall
--------------------------------
deliver a legal opinion substantially in the form of Exhibit G to be attached
---------
hereto within forty-five (45) days of the date hereof or otherwise reasonably
satisfactory to Operating Partnership.
(b) Opinion of HMC's and Operating Partnership's Counsel. HMC and
----------------------------------------------------
Operating Partnership shall deliver a legal opinion substantially in the form of
Exhibit H to be attached hereto within forty-five (45) days of the date hereof
- ---------
or otherwise reasonably satisfactory to Contributors.
(c) FIRPTA Certificate. Each Contributor shall deliver a certificate,
------------------
dated as of the Closing Date, to establish that such Contributor is not a
foreign person for the purposes of the Foreign Investors in Real Property Tax
Act.
(d) Representation Certificates. Each Contributor, HMC and Operating
---------------------------
Partnership shall each deliver the certificates regarding representations,
warranties and covenants set forth in Sections 7.1(a), 7.2(a) and 7.2(b).
----------------------------------
(e) Closing Statement. Each Contributor and Operating Partnership
-----------------
shall each deliver fully executed counterparts of the Closing Statement.
(f) Restated Operating Partnership Agreement, Registration Rights
-------------------------------------------------------------
Agreement and Tax Protection Agreement. Each Contributor and Operating
- --------------------------------------
Partnership shall each deliver fully executed counterparts to the Restated
Operating Partnership
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Agreement, the Agreement to Hold Certain Properties and to Maintain Certain
Indebtedness and the Registration Rights Agreement.
(g) Title Affidavits. Each Contributor shall deliver the title
----------------
affidavits required by the Title Company to issue the Title Policies in
substantially the form to be agreed upon by HMC and Contributors within forty-
five 45) days hereafter.
(h) Transfer Tax Forms and Other Local Affidavits. Each Contributor
---------------------------------------------
and Operating Partnership shall deliver any transfer tax forms or other transfer
tax affidavits required in each of the jurisdictions in which the Asset Projects
are located.
(i) Estoppel Certificates. Each Contributor shall deliver fully
---------------------
executed originals of the Existing Management Agreement estoppel certificates
required under this Agreement if not previously delivered to Operating
Partnership, or Contributor, at its option, shall provide an estoppel
certificate substantially in the form of Exhibit J hereto for each Existing
---------
Management Agreement for which no estoppel was obtained. Liability of
Contributor under such estoppel certificates shall not be limited by the
provisions of Section 9.3 hereof.
-----------
(j) Notification Letters. Each Contributor shall deliver notification
--------------------
letters to all persons who are named tenants or lessees under a Space Lease of
the Asset Projects, dated as of the Closing Date, notifying such tenant or
lessee that (i) the Asset Project has been transferred to Operating Partnership
(or that the ownership interest in the Property Owning Entity has been
transferred, as applicable), (ii) all of Contributor's right, title and interest
in and to such leases (and any deposits made thereunder) have been assigned to
Operating Partnership and (iii) commencing immediately, all rent and other
payments and any notices under such leases are to be paid and sent to Operating
Partnership or as Operating Partnership may direct.
(k) Authority. Contributors and Operating Partnership shall each
---------
deliver copies of the following: (i) any consent required for the authorization
of the Contribution, certified as true and correct by the managing member of
Contributors and the general partner of Operating Partnership, (ii) a
certificate of good standing or existence, as applicable issued by its state of
organization, (iii) a certificate of incumbency, and (iv) any other documents
reasonably required by Contributors, Operating Partnership or the Title Company
to evidence either party's authority to consummate the Contribution.
(l) Other Documents. Contributors and Operating Partnership shall
---------------
each deliver such other documents and instruments as may be reasonably requested
by the other party or the Title Company to effectuate the transactions
contemplated by this Agreement.
(m) Cash Amount and Units. Operating Partnership shall deliver the
---------------------
Cash Amount, Units, SLSC capital stock and cash as required by Section 2.1 of
-----------
this Agreement or Class A Units pursuant to Section 5.1(c) of this Agreement
--------------
(other than cash payable following the post-closing adjustments pursuant to
Section 5.1(b) or Article XII of the Agreement and Units and other consideration
- -------------- -----------
delivered under Section 2.1(b)(iii)).
-------------------
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<PAGE>
8.2 Asset Project Closing Deliveries. In addition to the General
--------------------------------
Closing Deliveries, for Asset Project contributions, the parties shall deliver
the following documents at Closing:
(a) Deed. Contributors shall deliver bargain and sale without
----
covenants against grantor's acts (or with covenants against grantor's acts if
necessary to obtain the title insurance required in accordance with this
Agreement at standard rates or less) or the legal equivalent in each
jurisdiction, in recordable form conveying Contributors' title to the Asset
Projects, dated as of the Closing Date, conveying to Operating Partnership, or
another HMC Party or a subsidiary of an HMC Party title, to such Asset Projects
as required hereunder.
(b) Bill of Sale. Contributors shall deliver a bill of sale, dated as
------------
of the Closing Date, conveying to Operating Partnership, or another HMC Party or
a subsidiary of an HMC Party, the Personal Property free of all encumbrances
other than the Permitted Exceptions, and with respect to any vehicles, all such
instruments and forms as are necessary or appropriate to transfer registration
of ownership.
(c) Assignment of Permits. Contributors shall deliver an assignment
---------------------
of all applicable Permits related to the Asset Projects if and to the extent
assignable to Operating Partnership (or another HMC Party or a subsidiary of an
HMC Party).
(d) Assignment and Assumption of Contracts. Contributors and the
--------------------------------------
Operating Partnership shall deliver an assignment and assumption of all
Contracts for the Asset Projects (except the Existing Management Agreements for
the Office Projects, which will be terminated as of the Closing Date).
(e) Assignment of Warranties. Contributors shall deliver to Operating
------------------------
Partnership (or another HMC Party or a subsidiary of an HMC Party) an
assignment of any assignable warranties (including any warranties with respect
to FF&E), payment and performance bonds and other assignable obligations of any
contractor, architect, engineer, designer, supplier or other party involved in
the development or supplying of the Property to Operating Partnership (or
another HMC Party or a subsidiary of an HMC Party).
(f) Assignment and Assumption of Space Leases. Contributors and the
-----------------------------------------
Operating Partnership shall deliver an assignment and assumption of the Space
Leases for the Asset Projects to Operating Partnership (or another HMC Party or
a subsidiary of an HMC Party).
8.4 Membership Interest Transfers In addition to the General
-----------------------------
Closing Deliveries, for Membership Interest transfers, the parties shall deliver
the following documents at Closing:
(a) Assignment and Assumption of Membership Interest. Each Membership
------------------------------------------------
Interest Contributor, Contributor and the Operating Partnership shall deliver an
assignment and assumption of membership interests (each an "Assignment of
Membership Interest") transferring and conveying to the Operating Partnership or
its designee (and assumed by the Operating Partnership) all right, title and
interest in and to
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<PAGE>
its respective membership interests in the Property Owning Entity as required by
this Agreement.
(b) Bank Accounts. Each Membership Interest Contributor shall deliver
-------------
to Operating Partnership evidence reasonably satisfactory to Operating
Partnership that all parties affiliated with the Membership Interest
Contributors shall have been removed as authorized signatories from all Property
Owning Entity bank accounts and security deposit accounts.
8.5 Mortgage Loans Contribution. In addition to the General
---------------------------
Closing Deliveries, as to the Mortgage Loans, the parties shall deliver the
following documents at Closing:
(a) Each Contributor shall deliver to the Operating Partnership
the originals of the notes, endorsed to the order of Operating Partnership, or
lost note affidavits.
(b) Each Contributor shall deliver to the Operating Partnership
the originals (to the extent in Contributor's possession or control) or copies
of the Loan Documents.
(c) Each Contributor and Operating Partnership shall deliver
executed counterparts of an Assignment and Assumption of Loan Documents in a
form reasonably acceptable to Operating Partnership and the Contributors
pursuant to which Contributor shall convey to Operating Partnership title to the
Loan Documents and the Operating Partnership shall assume all obligations
thereunder from and after the Closing Date.
8.6 Management Interest Contribution. In addition to the General
--------------------------------
Closing Deliveries, as to the Management Interest Contribution, the Management
Interest Contributor and the Operating Partnership shall deliver an assignment
and assumption of the Management Interest transferring and conveying to the
Operating Partnership all of the Management Interest Contributor's right, title
and interest in and to the Management Interest as reasonably required by this
Agreement, together with all other documents and agreements required to transfer
such Management Interest.
8.7 Assignments. All assignments, endorsements, bills of sale and
-----------
other transfer documents delivered under this Agreement shall be made without
representation or recourse of any kind whatsoever except as expressly set forth
in this Agreement.
ARTICLE IX
Termination and Default
-----------------------
9.1 Termination.
-----------
This Purchase Agreement may be terminated under any one or more
of the following circumstances:
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<PAGE>
(a) at any time before the Closing Date, by the mutual consent
of the parties hereto;
(b) subject to Section 9.3, by Operating Partnership, by
-----------
written notice of termination delivered to Contributors, if any of the
conditions set forth in Section 7.1 have not been satisfied by March 31, 1999;
-----------
(c) by Contributors by written notice of termination delivered
to Operating Partnership, if any of the conditions set forth in Section 7.2 have
-----------
not been satisfied by March 31, 1999; or
(d) by Contributors, if (i) the REIT Conversion shall not have
been consummated on or before March 31, 1999 or (ii) HMC publicly announces that
it is no longer seeking to complete the REIT Conversion.
Notwithstanding anything else contained in this Agreement, the right
to terminate this Agreement under Sections 9.1(b) or (c) shall not be available
----------------------
to any party whose failure to fulfill its obligations or to comply with its
covenants under this Agreement has been the cause of, or resulted in, the
failure to satisfy any condition to the obligations of either party hereunder.
9.2 Operating Partnership's or HMC's Default. If Operating
----------------------------------------
Partnership or HMC is in material breach of its representations, warranties,
covenants or agreements under this Agreement or has failed, refused or is unable
to consummate the Contribution by the Closing Date, when obligated to do so,
Contributors, at their option, may (i) terminate their obligations under this
Agreement by giving Operating Partnership written notice thereof in accordance
with Section 9.1 and sue for damages which shall, (x) in any event, include all
-----------
actual out-of-pocket fees or expenses incurred by Contributors in connection
with this Agreement, the inspections of the Property or the transactions
contemplated by this Agreement, and (y) be limited to actual damages, (ii)
specifically enforce the terms and conditions of this Agreement, (iii) avail
themselves of any other rights and remedies available at law or in equity as a
result of such default by Operating Partnership, including specific performance
(except to the extent limited by (y)) or (iv) avail themselves of any
combination of the foregoing.
9.3 Pre-Closing Contributor Defaults. (a) If at or prior to the
--------------------------------
Closing (except with respect to a claim under Section 3.2(b), which may be made
--------------
prior to, at, or after Closing):
(i) one or more representations or warranties made by the
Contributors under Article III shall prove not to be true and correct
-----------
as of the date made or deemed made and Contributors shall have failed
or been unable to promptly cure the same;
(ii) Contributors shall fail to perform in any respect any
obligations required to be performed by Contributors under this
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<PAGE>
Agreement prior to or at the Closing, including, without limitation,
conveying title to the Land and Improvements in the conditions
required under Section 7.1(c);
--------------
and as a result of the occurrence of any such events (each, a "Pre-Closing
Contributor Default"):
(A) a Level I Defect arises, then HMC and the Operating
Partnership as its sole remedy arising out of such Pre-Closing Contributor
Defaults shall receive a credit against the Exchange Amount in an amount equal
to the difference between (x) the amount of Loss arising out of such Pre-Closing
Contributor Defaults and (y) $5,000,000;
(B) a Level II Defect arises, then HMC and the Operating
Partnership as its sole remedy arising out of such Pre-Closing Contributor
Defaults shall receive credit against the Exchange Amount in an amount equal to
$20,000,000; and
(C) a Level III Defect arises, then HMC and the Operating
Partnership will have the right to give the Contributors notice (a "Termination
Notice") that it intends to terminate this Agreement in accordance with Section
-------
9.4. If, within ten (10) Business Days of receipt of a Termination Notice, the
- ---
Contributors give HMC and the Operating Partnership a notice (the "Nullification
Notice") that they will provide the Operating Partnership with a credit against
the Exchange Amount equal to the sum of (1) $20,000,000 plus (2) the difference
between (x) the Loss arising out of such Pre-Closing Contributors Defaults and
(y) $40,000,000, then such Termination Notice shall be nullified and HMC and the
Operating Partnership as its sole remedy arising out of such Pre-Closing
Contributor Default shall receive such credit against the Exchange Amount. If
the Nullification Notice is not given within such ten (10) Business Day period,
this Agreement shall terminate, in which event the parties hereto shall have no
further obligations under this Agreement except with respect to any obligations
specifically provided in this Agreement to survive termination, unless HMC and
the Operating Partnership elect, within an additional ten (10) Business Days, to
treat such Default as a Level II Defect.
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<PAGE>
For purposes of this Section 9.3:
-----------
A "Level I Defect" shall arise upon the occurrence of one or more
Pre-Closing Contributor Defaults which, in the aggregate, result in a Loss
in an amount in excess of $5,000,000 but less than $25,000,000.
A "Level II Defect" shall arise upon the occurrence of one or
more Pre-Closing Contributor Defaults which, in the aggregate, result in a
Loss in an amount in equal to or in excess of $25,000,000 but less than
$40,000,000.
A "Level III Defect" shall arise upon the occurrence of one or
more Pre-Closing Contributor Defaults which, in the aggregate, result in a
Loss in an amount equal to or in excess of $40,000,000.
"Defect" shall mean a Level I Defect, a Level II Defect or a
Level III Defect.
"Loss" shall mean any loss, liability, cost, damage or expense
(including, without limitation, reasonable attorneys' fees) incurred by HMC, the
Operating Partnership or any other HMC Party or any other respective
subsidiaries arising out of a Pre-Closing Contributor Default.
(b) Except as otherwise provided in Sections 9.3(d) and (e) of this
-----------------------
Agreement, if a Pre-Closing Contributor Default occurs which does not give rise
to a Defect, then HMC and the Operating Partnership shall not be entitled to,
and Contributors shall not be obligated to, provide any reduction in or credit
against the Exchange Amount and HMC and the Operating Partnerships hereby
expressly waives, relinquishes and releases any right or remedy at law or at
equity (but not under this Agreement) to make any claim arising out of such Pre-
Closing Contributor Default.
(c) If one or more Pre-Closing Contributor Defaults occur which,
individually or in the aggregate, give rise to a Defect, then upon HMC and the
Operating Partnership receiving a credit against the Exchange Amount, as
provided in paragraph (a) above, such Pre-Closing Contributor Default shall be
deemed cured and HMC and the Operating Partnership shall not be entitled to, and
the Contributors shall not be obligated to, provide any further reduction in or
credit against the Exchange Amount or other remedy under this Agreement or
otherwise and each of HMC and the Operating Partnership hereby expressly waives,
relinquishes and releases any right or remedy at law, at equity or under this
Agreement or otherwise to make any claim arising out of such Pre-Closing
Contributor Default.
(d) With respect to any Pre-Closing Contributor Default arising
solely out of either Contributors willful failure to comply in any respect with
the Operating Standards attached hereto as Schedule 6.1, or to comply fully with
------------
any of its monetary obligations under the Operating Standards which is not cured
by the Contributors at or prior to Closing, then HMC and the Operating
Partnership as its sole remedy arising out of such Pre-Closing Contributor
Default shall receive a credit against the Exchange Amount in an amount equal to
the amount of Loss arising out of such Pre-Closing Contributor Default without
regard to the limitations set forth in Section 9.3(a) hereof. Any Loss for
--------------
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<PAGE>
which a credit is provided under this subsection (d) shall not be included as a
Loss for purposes of determining the remedies for Defects under Section 9.3(a).
--------------
(e) With respect to any Pre-Closing Contributor Default arising
solely out Contributor's breach of the representations and warranties set forth
at Section 3.2(a) hereof as of the date made or deemed made, HMC and the
--------------
Operating Partnership shall be entitled to receive a credit against the Exchange
Amount in the amount of the Loss therefrom up to $20,000,000, and any Loss in
excess of $20,000,000 shall be deemed a Loss subject to the limits set forth in
Section 9.3(a) above and giving rise to the rights and obligations set forth in
- --------------
such Section 9.3(a).
--------------
(f) In the event that any claim of a Loss is disputed in writing by
Contributors within five (5) days of notice thereof from HMC and the Operating
Partnership, the amount of the claimed credit against the Exchange Amount (not
to exceed $20,000,000.00) shall be deposited in escrow pending resolution of
such dispute with a third-party escrow agent to be selected by the parties
hereto, and pursuant to escrow instructions to be agreed upon by the parties
hereto, within forty-five (45) days of the date of this Agreement.
9.4 Contributors' Default. In addition to HMC's and the
---------------------
Operating Partnership's rights and remedies under Sections 9.1 and 9.3, if
--------------------
Contributors are in material breach of their covenants or agreements under this
Agreement or have failed, refused or are unable to consummate the Contribution
by the Closing Date, when obligated to do so, HMC or Operating Partnership may
specifically enforce the terms and conditions of this Agreement, without proving
irreparable harm or posting a bond or other similar requirements.
ARTICLE X
[Reserved]
ARTICLE XI
Casualty and Condemnation
-------------------------
11.1 Casualty and Condemnation. If, prior to Closing, (a)
-------------------------
condemnation proceedings are commenced against any portion of the Asset
Projects, or (b) any portion of the Asset Projects is damaged by fire or other
casualty, at the Closing, the Exchange Amount shall be reduced by the sum of (i)
the amount of the insurance proceeds or condemnation award received by the
Contributors prior to the Closing Date with respect to such casualty or
condemnation (except to the extent such proceeds or awards are applied to
restore or repair the Property with the approval of HMC or as required by the
Existing Management Agreement or applicable loan documents), (ii) the amount of
any deductible under applicable insurance policies and, (iii) to the extent that
there is any damage for which the cost of repair exceeds the coverage
limitations of the applicable insurance policies, the amount of such excess
shall be deemed a "Loss" for purposes of Section 9.3 and shall be subject to the
-----------
limitations, rights and obligations set forth therein. In addition, at the
Closing, the Contributors shall assign all unpaid
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<PAGE>
insurance proceeds and casualty awards to the Operating Partnership. All
insurance and condemnation settlements shall be subject to the prior written
approval of Operating Partnership, which shall be entitled to participate in all
negotiations with third parties in respect of such settlements.
11.2 Risk of Loss. Subject to the provisions of this Article XI,
------------ ----------
the risk of loss or damage to the Asset Projects, Property Owning Entity Assets
or Mortgage Loan Collateral shall be with the Operating Partnership from and
after the date of this Agreement. Except as provided in Section 9.3, the
-----------
Operating Partnership shall be required to fully perform under this Agreement
notwithstanding any casualty or condemnation to any Asset Projects, Property
Owning Entity Assets or Mortgage Loan Collateral.
ARTICLE XII
Apportionments
--------------
12.1 Hotel Project and Membership Interest Apportionments. With
----------------------------------------------------
respect to the Hotel Projects and Property Owning Entities, the following
apportionments shall be made:
(a) Current Assets and Liabilities. The parties shall determine
------------------------------
the amount of "Current Assets" and "Current Liabilities" (as those terms and
defined under generally accepted accounting principles, in accordance with
GAAP), separately with respect to each Hotel Project or Property Owning Entity
Asset. Without limitation of the foregoing, Current Assets will include
Inventories as defined in Hotel Personal Property and Current Liabilities shall
mean all liabilities due and payable within twelve (12) months of the date of
Closing. With respect to each Hotel Project or Property Owning Entity Asset
(excluding the Four Seasons Beverly Hills), if the sum of $400,000 plus Current
Liabilities for such Hotel Project or Property Owning Entity Asset exceeds
Current Assets, Operating Partnership shall receive a credit against the
Exchange Amount equal to such excess. With respect to each Hotel Project or
Property Owning Entity Asset, if Current Assets exceed the sum of $400,000 plus
Current Liabilities for such Hotel Project or Property Owning Entity Asset, the
Exchange Amount shall be increased by the amount of such excess. With respect to
the Hotel Project known as the Swisshotel Chicago, the real property tax portion
of "Current Liabilities" shall be deemed to include solely that portion of the
pro rata portion of the real property taxes payable during the calendar year in
which the Closing occurs.
(b) FF&E Reserves. Operating Partnership shall be entitled to retain
-------------
the amount of all FF&E Reserves at Closing without any adjustment to the
Exchange Amount.
(c) Other Capital Expenditures. If, after the date hereof, the
--------------------------
Contributor funds any capital reserves or makes any capital expenditures in
excess of the base FF&E reserves under the Existing Management Agreements with
the written approval of HMC in accordance with the Operating Standards,
Contributors shall be entitled to an increase in the Exchange Amount in the
amount of such excess. With respect to the Four Seasons Atlanta, if after the
date of this Agreement the Third-Party Loan held by Four Seasons Hotels Limited
is increased by one or more additional fundings thereunder to finance the cost
of capital expenditures and related items, the Exchange Amount shall be
increased by
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<PAGE>
the aggregate increase in the principal amount of such Third Party Loan. Any
expenditures of funds from, or increase in the funds in, the special reserve
account for the four Swissotel Hotel Projects, which has a base balance of
approximately $5.5 million, or the special reserve account for the Hyatt
Burlingame Hotel Project, which has a balance of approximately $5.0 million,
shall not result in any change in the Exchange Amount under this paragraph.
12.2 Office Apportionments. With respect to the Office Projects,
---------------------
the following apportionments shall be made:
(a) General. The following apportionments shall be made with
-------
respect to the Office Projects as of the Closing Date: (i) real estate taxes,
personal property taxes, special assessments and vault charges, if any, on the
basis of the fiscal period for which assessed; (ii) amounts which have been paid
or are payable under the Existing Management Agreements, the Contracts, the
Equipment Leases, the Space Leases and the Permits relating to Office Projects;
(iii) prepaid advertising expenses; (iv) commissions of credit and referral
organizations; and (v) all other charges and fees customarily prorated and
adjusted in similar transactions.
(b) Utilities. Water, sewer, electric, fuel oil and other
---------
utility charges shall be prorated as of the Closing Date unless such utilities
are billed to and paid directly by a tenant currently in possession of a portion
of the premises under a Lease, in which event no proration shall be made except
to the extent any such charges have been paid by Contributor. If consumption of
any of the foregoing is measured by meter, Contributor shall, prior to the
Closing Date, obtain a reading of each such meter and a final bill as of the
Closing Date. If there is no such meter or if the bill for any of the foregoing
has not been issued as of the Closing Date, then the charges therefor shall be
adjusted at the Closing Date on the basis of the charges of the prior period for
which such bills were issued and shall be further adjusted between the parties
when the bills for the correct period are issued. Contributor and Operating
Partnership shall cooperate to cause the transfer of utility accounts from
Contributor to Operating Partnership to the extent not held directly by tenants.
Any utility security deposits to be refunded shall be the property of
Contributor, and Contributor shall be credited at Closing with the amount of any
such deposits assigned to Operating Partnership.
(c) Operating Pass-Throughs. Any operating cost pass-throughs or
-----------------------
other sums paid by the tenants under the Space Leases relating to the Office
Projects to Contributor shall be apportioned as follows: (i) all amounts paid
prior to the Closing Date for periods prior to the Closing Date shall be
retained by Contributor; (ii) any amounts payable by the tenants under the Space
Leases relating to the Office Projects but not yet billed or collected on the
Closing Date which reimburse Contributor for charges accruing prior to the
Closing Date shall be paid by Operating Partnership to Contributor immediately
upon collection of such amounts (and Operating Partnership hereby expressly
agrees to use commercially reasonable efforts to collect such amounts on behalf
of Contributor); and (iii) all amounts payable by tenants to reimburse for
charges accruing for the period beginning on, and continuing after the Closing
Date, shall be retained by Operating Partnership when collected. Any
reimbursement amounts paid by tenants under the Space Leases which are not
specifically attributable to a specified period shall be
-45-
<PAGE>
applied first to any amounts payable to Operating Partnership pursuant to clause
(iii) above and then to any amounts payable to Contributors pursuant to clause
(ii) above. If, as of the Closing Date, the tenants under the Space Leases
relating to the Office Projects have been billed and have paid estimated
reimbursements for charges accruing on or after the Closing Date, such collected
amounts shall be prorated as of the Closing Date, and, when such estimates are
reviewed to compare with actual expenses, Operating Partnership shall notify
Contributor and Contributor shall return any amounts received in excess of
actual expenses and, provided that such amounts were actually collected,
Operating Partnership shall pay Contributor amounts charged to the tenants for
shortfalls in the estimate. Contributor shall not be liable for any refunds of
operating cost pass-throughs unless Operating Partnership has given notice of
such refunds to Contributor not later than the first (1st) anniversary of the
Closing Date and has given Contributor the opportunity to participate in the
determination of any such refund.
(d) Rent or Income. All amounts received as rent or other income
--------------
accruing for or arising from operation of the Office Projects prior to the
Closing Date, which rent or income is attributable to the period prior to the
Closing Date, shall be retained by Contributor. If such amounts are received by
Operating Partnership, or by Contributor or the Existing Managers, after the
Closing Date which accrued during periods prior to the Closing Date, Operating
Partnership shall remit or direct Existing Managers to remit such amounts
promptly to Contributor, provided that amounts received which were not
specifically designated as applicable to the period prior to the Closing Date
shall first be applied to pay current rents due after the Closing Date and
thereafter amounts received shall be applied to delinquent rent accrued prior to
the Closing Date. If such amounts are received by Contributor after the Closing
Date, Contributor shall remit such amounts promptly to Operating Partnership
unless such amounts are payable to the Contributors pursuant to this subsection
(d). Operating Partnership shall use commercially reasonable efforts to collect
on behalf of Contributor any rents and other income accruing or arising from
operation of the Property prior to the Closing Date. Percentage rents due for
periods including the Closing Date shall be prorated between Contributor and
Operating Partnership on a per diem basis.
(e) Security Deposits. An amount equal to the sum of all cash
-----------------
security deposits held by Contributor under the terms of the Space Leases be
credited to Operating Partnership at Closing provided that Operating Partnership
assumes by written instrument delivered on the Closing Date the obligation for
proper disposition of the security deposits as provided in the Space Leases.
(f) Leasing Commissions. Operating Partnership shall receive a credit
-------------------
equal to all leasing commissions due to leasing or other agents for the current
remaining term of each Space Lease relating to the Office Projects (determined
without regard to any unexercised termination or cancellation right). Operating
Partnership shall assume, in writing, the obligation to pay any such leasing
commissions due thereunder after the Closing Date up to the amount of such
credit. Operating Partnership shall promptly return to Contributor any such
commission that, due to later events, does not become due and payable. At
Closing, Operating Partnership shall assume leasing commissions which may become
due as a result of the renewal or expansion of any Lease as a result of the
exercise of such right after the date of this Agreement.
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<PAGE>
(g) Tenant Improvements and Allowances. Tenant improvement expenses
----------------------------------
(including all hard and soft construction costs, whether payable to the
contractor or the tenant), tenant allowances, rent abatement, moving expenses
and other out-of-pocket costs which are the obligation of the landlord under the
Space Leases relating to the Office Projects shall be allocated as follows:
(i) Existing TI Obligations. As to any tenant improvement obligation
-----------------------
arising under any Space Leases relating to the Office Projects other than with
respect to renewal or expansion rights under such Space Leases relating to the
Office Projects properly exercised after the date of this Agreement
(collectively, "Existing TI Obligations"), which has not been completed and paid
in full as of the Closing Date, such costs as reasonably agreed by Operating
Partnership and Contributor shall be withheld from the Exchange Amount at
Closing, placed in an escrow with the Title Company, and Operating Partnership
shall be responsible for completing and paying such Existing TI Obligations. Any
funds held in the escrow shall be released to Operating Partnership without any
requirement for the consent of Contributor and shall be used by Operating
Partnership to pay the landlord's share of such tenant improvements and
allowances.
(ii) New TI Obligations. As to any tenant improvement obligation
------------------
arising under any Space Leases relating to the Office Projects or amendments
entered into during the pendency of this Agreement and approved by Operating
Partnership pursuant to Schedule 6.1, or renewals or expansion rights properly
------------
exercised after the date of this Agreement (collectively, "New TI Obligations"),
Operating Partnership shall reimburse Contributor for the cost for New TI
Obligations properly performed and paid for by Contributor to the extent such
obligations were expressly approved in writing by Operating Partnership, and
Operating Partnership shall assume the obligation to perform and pay for such
New TI Obligations.
(iii) Change Orders. Contributor shall not agree to any change orders
-------------
or additions to tenant improvements or changes in the scope of work or
specifications with respect to Existing TI Obligations or New TI Obligations
without Operating Partnership's prior written approval.
(iv) Assignment of Construction-Related Contracts. If Operating
--------------------------------------------
Partnership is responsible for completing tenant improvements pursuant to the
foregoing provisions, Contributor shall assign to Operating Partnership at
Closing all contracts (including, without limitation, contracts with
contractors, architects or consultants) related to such construction, pursuant
to an assignment instrument in form and substance acceptable to Operating
Partnership, and Contributor further shall cause to be delivered to Operating
Partnership at Closing written consents and acknowledgments of such other
parties to such contracts consenting to such assignment and otherwise in form
and substance acceptable to Operating Partnership.
12.3 Boston Loan Apportionments. Apportionments with respect
--------------------------
the Property Owning Entity Asset known as the Ritz Carlton Boston shall be
made in accordance with Section 12.1 as if 100% of the Ritz Carlton Boston is
being transferred to
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<PAGE>
the Operating Partnership hereunder. There shall be no separate apportionments
or adjustments to the Exchange Amount with respect to the Boston Loan.
12.4 Management Interest Apportionments. With respect to the Management
----------------------------------
Interest, distributions under the operating agreement of Swissotel Management
(US) L.L.C. allocable to the Management Interest shall be estimated and
apportioned as of the Apportionment Date.
12.5 Reduction of Assessments. If, subsequent to the Closing Date, any
------------------------
proceeding shall result in any reduction of assessment for the fiscal year in
which the Closing Date occurs (or, with respect to the Hotel Project located in
Illinois, the immediately prior Fiscal year), then the amount of tax saving or
refund for such fiscal tax year, less the reasonable expenses (including fees
and disbursements payable to attorneys or consultants) incurred in connection
with such proceedings, shall be apportioned between Contributor and Operating
Partnership as of the date real estate taxes are apportioned under this
Agreement. Neither Contributor nor Operating Partnership shall withdraw, settle
or compromise any tax reduction proceeding affecting the Property and pending on
the date of the execution and delivery of this Agreement by each party without
the prior written consent of the other except that the consent of Contributor
shall not be required for fiscal periods occurring subsequent to the Closing
Date. Contributor and Operating Partnership each agree that their respective
consents shall not be unreasonably withheld or delayed.
12.6 Accounting.
----------
(a) Adjustments. At least three (3) business days prior to the
-----------
Closing Date, Contributors shall make a good faith estimate of the Adjustments
to be deducted from or added to the Exchange Amount pursuant to Section 2.1
-----------
above to reflect the proration items set forth in this Article XII. The
-----------
computation of the adjustments shall be jointly prepared by Contributors and
Operating Partnership and, upon the request of either Operating Partnership or
Contributors, shall be reviewed by a mutually acceptable accounting firm jointly
selected by Contributors and the Operating Partnership (the "Accountants") and
reviewed by representatives of both Operating Partnership and Contributors. To
the extent that the exact amount of an Adjustment cannot be precisely determined
as of the Closing Date, the Accountants shall estimate the amount thereof, for
purposes of computing the Adjustment and shall determine the exact amount in
connection with the Post-Closing Adjustment pursuant to Section 12.6(b) below.
---------------
(b) Post-Closing Adjustment. Within one hundred and eighty (180) days
-----------------------
after the Closing Date, Operating Partnership shall deliver to Contributors in
writing and in reasonable detail a good faith final determination of the
Adjustments as of the Closing Date, which amount shall include a final
calculation of Current Assets and Current Liabilities (collectively, the Post-
Closing Adjustment). Contributors shall assist Operating Partnership in making
such determination, and Operating Partnership shall provide Contributors with
reasonable access to the Property, for the purpose of determining the Post-
Closing Adjustment. The computation of the Post-Closing Adjustment shall be
jointly prepared by Contributors and Operating Partnership and, upon
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<PAGE>
the request of either Operating Partnership or Contributors, shall be reviewed
by the Accountants.
(c) Payment of Post-Closing Adjustment. If the Post-Closing
----------------------------------
Adjustment is such that the Adjustments as of the Apportionment Date resulted in
an underpayment to Contributors, then Operating Partnership shall pay such
amount to Contributors in cash within two (2) business days following the final
determination of the Post-Closing Adjustment. If the Post-Closing Adjustment is
such that the Adjustments as of the Apportionment Date resulted in an
overpayment to Contributors, then Contributors shall pay such amount to
Operating Partnership in cash within two (2) business days following the final
determination of the Post-Closing Adjustment.
(d) Determination Final. The determination by the Accountants shall
-------------------
be binding on both Contributor and Operating Partnership. The fees and expenses
of the Accountants shall be borne one-half each by Contributor and Operating
Partnership.
ARTICLE XIII
Miscellaneous
-------------
13.1 Survival. Except as specifically set forth in Section 3.2(b), the
-------- --------------
representations and warranties contained in this Agreement and covenants to the
extent to be performed prior to or at Closing shall not survive after the
Closing. All other covenants, indemnities and provisions of this Agreement shall
survive the Closing unless otherwise expressly provided herein.
13.2 Assignment. (a) Operating Partnership may (i) assign this Agreement,
----------
without the consent of Contributors, to HMC or to a wholly owned subsidiary of
the Operating Partnership or (ii) designate title to all or a portion of the
Property to be transferred directly to one or more subsidiaries of the Operating
Partnership. Except as otherwise provided in Section 2.2, the Contributors may,
without the consent of the Operating Partnership or HMC, designate one or more
of the partners or members (directly or indirectly) or advisors to take title to
all of the Units or SLSC stock to be delivered under this Agreement. Otherwise,
no party shall assign or transfer or permit the assignment or transfer of its
rights or obligations under this Agreement without the prior written consent of
the other, any such assignment or transfer without such prior consent being
hereby declared to be null and void.
(b) In the event either party consents to an assignment of this
Agreement by the other for which consent is required, no further assignment
shall be made without another written consent from the consenting party, unless
the assignment may otherwise be made without consent under this Agreement. An
assignment by either Contributors or Operating Partnership or HMC of its
interest in this Agreement shall not relieve Contributors or Operating
Partnership or HMC, as the case may be, from its obligations, but this Agreement
shall then inure to the benefit of, and be binding on, the assignee's
successors, heirs, legal representatives and assigns.
13.3 Consents. If, under this Agreement, the consent of a party is
--------
required, the consent shall be in writing and shall be executed by a duly
authorized officer or agent.
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<PAGE>
13.4 Applicable Law. This Agreement shall be governed by the laws of the
--------------
State of New York, without resort to the choice of law rules thereof.
13.5 Headings; Schedules. The headings of articles and sections of this
-------------------
Agreement are inserted only for convenience; they are not to be
construed as a limitation of the scope of the particular provision to which they
refer. All schedules attached or to be attached to this Agreement are
incorporated herein by this reference.
13.6 Notices. Notices and other communications required by this Agreement
-------
shall be in writing and delivered by hand against receipt or sent by recognized
overnight delivery service or by certified or registered mail, postage prepaid,
with return receipt requested or by facsimile transmission. All notices shall be
addressed as follows:
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<PAGE>
If to any Contributor:
Blackstone Real Estate Acquisitions L.L.C.
345 Park Avenue, 31st Floor
New York, New York 10154
Attention: Thomas J. Saylak
Senior Managing Director
Telephone: (212) 836-9895
Fax: (212) 754-8726
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Gregory J. Ressa
Telephone: (212) 455-7430
Fax: (212) 455-2502
If to HMC or Operating Partnership:
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Attention: Christopher J. Nassetta
Executive Vice President and
Chief Operating Officer
and
Christopher G. Townsend
Senior Vice President and
General Counsel
Telephone: (301) 380-9000
Fax: (301) 380-6338
with a copy to:
Hogan & Hartson L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Attention: J. Warren Gorrell, Jr.
Telephone: (202) 637-8618
Fax: (202) 637-5910
or to such other address as may be designated by a proper notice. Notices shall
be deemed to be effective upon receipt (or refusal thereof).
13.7 Waiver. The failure of either party to insist on strict
------
performance of any of the provisions of this Agreement or to exercise any right
granted to it shall not be construed as a relinquishment or future waiver;
rather, the provision or right shall
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<PAGE>
continue in full force. No waiver of any provision or right shall be valid
unless it is in writing and signed by the party giving it.
13.8 Partial Invalidity. If any part of this Agreement is declared
------------------
invalid by a court of competent jurisdiction, this Agreement shall be construed
as if such portion had never existed, unless this construction would operate as
an undue hardship on Contributors or Operating Partnership or would constitute a
substantial deviation from the general intent of the parties as reflected in
this Agreement.
13.9 Entire Agreement. This Agreement, together with the other
----------------
writings signed by the parties and incorporated by reference and together with
any instruments to be executed and delivered under this Agreement, constitutes
the entire agreement between the parties with respect to the purchase and sale
of the Property and supersedes all prior oral and written understandings,
including that certain letter agreement by and between HMC and Blackstone Real
Estate Acquisitions L.L.C. dated April 6, 1998 and that certain Confidentiality
Agreement by and between HMC and Blackstone Real Estate Acquisitions L.L.C.
dated April 6, 1998. Amendments to this Agreement shall not be effective unless
in writing and signed by the parties hereto.
13.10 Waiver of Jury Trial. Contributors and Operating Partnership each
--------------------
hereby waive any right to jury trial in the event any party files an action
relating to this Agreement or to the transactions or obligations contemplated
hereunder.
13.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts which, when taken together, shall constitute a single, binding
instrument.
13.12 Publicity. The parties agree that no public disclosure, release
---------
or announcement of the proposed Contribution will be made without the prior
consent of the other party except as may be permitted pursuant to Section
-------
13.13(b)(iii) below.
- -------------
13.13 Confidentiality, Standstill and Exclusivity.
-------------------------------------------
(a) Definitions: For purposes of this Section 13.13, the
----------- -------------
following terms shall have the following meanings (all terms defined in this
Section 13.13(a) in the singular shall have the same meanings when used in the
- ----------------
plural and vice versa):
"affiliate" shall mean any corporation, partnership,
limited liability company or other person directly, or indirectly through one or
more intermediaries, controlling, controlled by or under common control with HMC
or Contributors, as the case may be. For purposes of the preceding sentence,
"control" (including the terms "controlling," "controlled by" or "under common
control with") means possession, directly or indirectly, of the power to direct
or cause direction of management and policies of a person through ownership of
voting securities, by contract, pursuant to a voting trust or otherwise. The
parties acknowledge that Marriott International, Inc. and its subsidiaries are
not "affiliates" of HMC for purposes of this Section 13.13.
-------------
-52-
<PAGE>
"beneficial owner" or "beneficially owned" or "beneficial
ownership" shall have the meaning assigned to such term in Rule 13d-3 under the
Exchange Act, as in effect on the date hereof.
"Disclosing Company" or "Receiving Company" shall mean any
of HMC, on the one hand, or Contributors, on the other hand, as the case may be.
"Disclosing Party" shall mean any of HMC, on the one hand,
or Contributors, on the other hand, as the case may be, or any director,
partner, lender, prospective partner, officer, employee, representative, advisor
or agent of HMC or Contributors, as the case may be.
"Evaluation Material" shall mean all data, reports,
interpretations, forecasts and records and other documents and information,
whether written or oral, that any Disclosing Party furnishes or otherwise
discloses to the Receiving Company or any of its Representatives, whether
furnished or otherwise disclosed before or after the date of this Agreement and
regardless of the manner in which it is furnished, together with all analyses,
compilations, studies or documents, records or data prepared by the Receiving
Company or any of its Representatives to the extent they contain or otherwise
reflect or are generated from such information and documents. The term
"Evaluation Material" does not include any information which:
(i) at the time of disclosure is or thereafter
becomes generally available to the public (other than a result of a disclosure
directly or indirectly by the Receiving Company or any of its Representatives in
violation of this Section 13.13 or any other duty or obligation),
-------------
(ii) was available to the Receiving Company or any of
its Representatives from a source other than the Disclosing Company, provided
that such source is not and was not known by the Receiving Company or such
Representative to be prohibited from transmitting the information to the
Receiving Company by a contractual, legal or fiduciary obligation to the
Disclosing Company, or
(iii) has been independently developed by the Receiving
Company or its Representatives without violation of any obligation under this
Section 13.13 or is known to Receiving Company or its Representatives prior to
- -------------
disclosure hereunder.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
"Exclusivity Period" shall have the meaning specified in
Section 13.13(d)(1) hereof.
- -------------------
"person" shall mean any association, corporation, company,
limited liability company, trust, group or partnership or other entity or
individual.
"Representatives" shall have the meaning specified in
Section 13.13(b)(i) hereof.
- -------------------
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<PAGE>
"13D Group" shall mean any group of persons acquiring,
holding, voting or disposing of Voting Securities which would be required under
Section 13(d) of the Exchange Act and the rules and regulations thereunder (as
in effect, and based on legal interpretations thereof existing, on the date
hereof) to file a statement on Schedule 13D with the Securities and Exchange
Commission as a "person" within the meaning of Section 13(d)(3) of the Exchange
Act if such group beneficially owned Voting Securities representing more than 5%
of any class of Voting Securities then outstanding.
"Voting Securities" shall mean and include at any time the
Units, units in the Special Partnership or shares of any class of capital stock
or other equity securities of any HMC Party which are then entitled to vote
generally in the election of directors or trustees or for the removal of a
general partner or limited liability company member.
(b) Agreements Concerning Use of Evaluation Material. Prior to
------------------------------------------------
the Closing Date:
(i) Use and Confidentiality of Evaluation Material.
----------------------------------------------
Each of HMC and Contributors has requested or will request that the other party
furnish Evaluation Material for the sole purpose of evaluating the Contribution,
and each party shall use (and cause its Representatives to use) the Evaluation
Material solely for such purpose. Requests for Evaluation Material and other
contacts shall be limited to contact directly with (a) Christopher Townsend,
Christopher Nassetta, Edward Walter or James Risoleo or such other persons
specifically designated by any of them or by any of HMC, with respect to HMC,
and (b) Thomas J. Saylak or William Stein or such other persons specifically
designated by any of them, with respect to Contributors. Until the Closing Date
all the Evaluation Material will be kept confidential by the Receiving Party and
not disclosed to any person except as provided herein or as otherwise required
by law in accordance with Section 13.13(b)(vi); the Receiving Company may
--------------------
disclose the Evaluation Material or portions thereof to its affiliates,
partners, lenders, prospective partners, directors, trustees, officers,
employees, representatives, advisors and agents who need to know such
information for the purpose of evaluating the Contribution (the persons to whom
such disclosure is permissible being hereinafter collectively called the
"Representatives"), it being understood that the Receiving Company will cause
each such Representative to be informed of the confidential nature of the
Evaluation Material and to be directed to treat such information confidentially
in accordance with the terms of this Section 13.13. The Receiving Company will
-------------
be responsible for any noncompliance with the applicable provisions of this
Section 13.13 by its Representatives. Contributors will not disclose the
- -------------
Evaluation Material or portions thereof to any of its equity owners that are not
affiliates of Contributors, other than Evaluation Materials consisting solely of
an information memorandum generally describing the terms of the Contribution
that shall have been reviewed and approved by HMC.
(ii) Return or Destruction of Materials. If this
----------------------------------
Agreement is terminated, the Receiving Company, upon the written request of the
Disclosing Company, shall return promptly to the Disclosing Company all copies
of the Evaluation Material then in the Receiving Company's possession or in the
possession of any of its Representatives, without retaining any copy thereof,
except that the Receiving Company shall destroy
-54-
<PAGE>
promptly all copies of any analyses, compilations, studies or other documents,
records or data prepared by the Receiving Company or its Representatives to the
extent they contain or otherwise reflect the Evaluation Material, and the fact
that such destruction has been accomplished shall be certified to by an
authorized officer supervising such destruction upon the written request of the
Disclosing Company.
(iii) Legally Required Disclosures. In the event that
----------------------------
the Receiving Company or any of its Representatives is required (by deposition,
interrogatory, request for information or documents, subpoena, civil
investigative demand or similar process) to disclose any of the Evaluation
Material, the Receiving Company shall provide the Disclosing Company with prompt
prior written notice of such requirement, and shall cooperate with the
Disclosing Company so that the Disclosing Company may seek a protective order or
other appropriate remedy ("Protective Action") or, if appropriate, waive
compliance with the terms of this Section 13.13. In the event that the
-------------
Disclosing Company fails to seek Protective Action or such Protective Action is
not obtained, or the Disclosing Company waives compliance with the provisions
hereof, the Receiving Company or such Representative, as the case may be, may
disclose only that portion of the Evaluation Material that the Receiving Company
is advised by its counsel is so required to be disclosed, and shall cooperate
with any efforts the Disclosing Company wishes to make to obtain assurance that
confidential treatment will be accorded such Evaluation Material.
(c) Standstill Agreement. (i) Except pursuant to this
Agreement, the Restated Operating Partnership Agreement or the Special
Partnership Agreement or a transaction that has previously been authorized by
any HMC Party, each Contributor agrees that, at any time prior to the earlier of
(A) the fifth anniversary of the Closing Date and (B) the date on which the
Contributors no longer own, in the aggregate, more than 5% of the aggregate
number of outstanding Units and Host REIT Shares (or Special Partnership Units
and HMC Common Stock), such Contributor shall not, and shall use its best
efforts to cause its respective affiliates to not, directly or indirectly: (A)
in any manner acquire or offer to acquire or agree to acquire, directly or
indirectly, by purchase or otherwise, beneficial ownership of any securities or
partnership interests of any HMC Party if, after giving effect to such
acquisition or consummation of such agreement, such person and its affiliates
(together with any 13D Group of which such person or any affiliate is a part)
would (i) directly or indirectly beneficially own more than 9.8% of any class of
Voting Securities of such HMC Party, more than 19.9% of the aggregate Value (as
defined in the Restated Operating Partnership Agreement) of all outstanding Host
REIT Voting Securities and Operating Partnership Units or more than 19.9% of the
aggregate Value of all outstanding HMC Voting Securities and Special Partnership
Units, in each case other than as a result of the distribution of any securities
by an HMC Party to its security holders or any reduction in the number of
outstanding Host REIT Voting Securities, Operating Partnership Units, HMC Voting
Securities or Special Partnership Units (provided that this provision shall not
be deemed to be violated by reason of acquisitions of up to a cumulative total
(for all Contributors) of 500,000 Voting Securities of all HMC Parties in excess
of the preceding limits), or (ii) violate any provisions of the certificate of
incorporation, declaration of trust, partnership agreement or other
organizational document of such HMC Party restricting the ownership or transfer
of such Voting Securities or Units (to the extent such restrictions are
identified on Schedule 4.9(a)); (B) sell, transfer, pledge or otherwise dispose
---------------
of any Units or any Voting Securities in
-55-
<PAGE>
violation of any provisions of the certificate of incorporation, declaration of
trust, partnership agreement or other organizational document of such HMC Party;
restricting the ownership or transfer of such Voting Securities or Units (to the
extent such restrictions are identified on Schedule 4.9(a)); (C) "solicit," or
---------------
participate in the "solicitation" of, "proxies" (as such terms are defined or
used in Rule 14a-1 under the Exchange Act in opposition to the recommendation of
the Board of Directors of any HMC Party or any general partner of any HMC Party
or become a participant in an election contest with respect to the election of
directors or other similar elected persons of any HMC Party; (D) propose to
enter into, directly or indirectly, any merger, tender or exchange offer,
restructuring or business combination involving any HMC Party or to acquire,
directly or indirectly, a material portion of the assets of any HMC Party; (E)
form, join or participate in a partnership, limited partnership, syndicate or
other group or otherwise act in concert with any other person for the purpose of
acquiring, holding, voting or disposing of securities or partnership interests
of any HMC Party; (F) seek to appoint, elect or remove any member of the Board
of Directors of any HMC Party or make any public statements proposing or
suggesting any change in the Board of Directors or management of any HMC Party;
(G) initiate or propose to the holders of securities or partnership interests of
any HMC Party, or otherwise solicit their approval of, any proposal to be voted
on by the holders of securities or partnership interests of any HMC Party; (H)
disclose any intention, plan or arrangement to take any of the actions
enumerated in clauses (A) through (G) above or participate in, aid or abet or
otherwise induce or attempt to induce any person to take any of the actions
enumerated in clauses (A) through (G) above; or (I) request any HMC Party to
waive any of the provisions of this Section 13.13(c)(i). The Contributors shall
----------------
cause Blackstone to execute and deliver an agreement to the same effect as this
Section 13.13(c)(i) on or prior to the Closing Date.
- -------------------
(ii) Except pursuant to this Agreement or with respect to a
transaction explicitly consented to by Contributors in writing, HMC agrees that,
until the Closing Date, neither HMC nor any of its affiliates shall, directly or
indirectly, by purchase or otherwise, in any manner acquire or agree to acquire,
directly or indirectly, any interest (whether debt or equity) in any of the
Property.
-56-
<PAGE>
(d) Exclusivity. HMC and Contributors agree that,
-----------
during the period (the "Exclusivity Period") commencing on the date hereof and
ending on the Closing Date (provided that this Agreement has not been terminated
prior to the Closing Date, in which case the Exclusivity Period would terminate
on the date of such termination), neither Contributors nor any of its affiliates
will, directly or indirectly, solicit any offers, engage in any negotiations or
make any agreements or enter into any other understandings or arrangements with
respect to (a) any sale or other disposition of any Property (or any interest
therein or note secured thereby), (b) any business combination, exchange, merger
or consolidation that would include Contributors or any of its affiliates that
own any interest in any Property (or any note secured thereby), (c) any purchase
or issuance of any equity or debt securities (including any securities
convertible into equity or debt securities) of any Contributor's affiliate that
owns any interest in any Property (or any note secured thereby), or (d) any
other extraordinary transaction directly or indirectly involving any Property
(or any interest therein or note secured thereby), nor will Contributors or any
of its Representatives encourage any third party to initiate action with respect
to any of the foregoing.
13.14 Brokers. Except for Merrill Lynch & Co., the fees and expenses of
-------
which will be the responsibility of HMC and Operating Partnership, and Bear
Stearns Incorporated, the fees and expenses of which will be the responsibility
of the Contributors, neither party hereto has engaged or had any dealings with
any broker, agent, consultant or finder to whom or to which a commission or fee
is payable in connection with the proposed Contribution and each party agrees to
indemnify and hold harmless the other from any against any claims, damages,
losses or liabilities arising out of the breach of this Section 13.14.
-------------
13.15 Operating Partnership's Lender. Contributors acknowledge that
------------------------------
Operating Partnership may obtain or attempt to obtain mortgage financing for the
transaction outlined in this Agreement, and Contributors agree to cooperate
reasonably, at no cost or liability to any Contributor, with Operating
Partnership and any such lender to enable such financing to occur as a part of
the Closing.
13.16 Time for Performance. If the date for the performance of any
--------------------
obligation, or the giving of any notice, by Contributors or Operating
Partnership hereunder falls upon a Saturday, Sunday or legal holiday recognized
by the United States government, then the time for such performance or notice
shall be extended until the next business day.
13.17 Definitions. An index to the capitalized terms used in this
-----------
Agreement is attached hereto as Schedule 13.17.
--------------
[SIGNATURES APPEAR ON FOLLOWING PAGE]
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<PAGE>
IN WITNESS WHEREOF, HMC, Blackstone, Contributors and
Operating Partnership have caused this Agreement to be executed as of the date
indicated below.
OPERATING PARTNERSHIP
---------------------
HOST MARRIOTT, L.P.
By: HMC Real Estate Corporation
Its: General Partner
By:
-------------------------------
Christopher J. Nassetta
Vice President
HOST MARRIOTT CORPORATION
By:
-------------------------------
Christopher J. Nassetta
Executive Vice President
CONTRIBUTORS
------------
BRE/SWISS L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/LAFAYETTE INC.
By:
-------------------------------
Jonathan Gray
Vice President
<PAGE>
BRE/SWISS MANAGEMENT L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/BURTON WAY L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/HT L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/CAMBRIDGE L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/RESTON L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
<PAGE>
HTKG DEVELOPMENT ASSOCIATES
LIMITED PARTNERSHIP
By: BRE/Burlingame II, L.L.C.
By:
------------------------
Jonathan Gray
Vice President
BRE/GRAND L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
BRE/AMELIA PARTNERS L.P.
By: BRE/Amelia L.L.C.
By:
------------------------
Jonathan Gray
Vice President
BRE/AMELIA L.L.C.
By:
-------------------------------
Jonathan Gray
Vice President
OLS HOTEL PARTNERS L.P.
By: BRE/Logan Hotel Space Inc.
By:
------------------------
Jonathan Gray
Vice President
RTZ MANAGEMENT CORP.
By:
-------------------------------
By:
------------------------
Jonathan Gray
Vice President
BRE/RITZ BOSTON, LLC
By:
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Jonathan Gray
Vice President
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Exhibit B
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of ________________, 199__ by and among (i) Host Marriott
Corporation ("HMC"), a Delaware corporation (separately, and together with its
successors and assigns, including Host REIT, the "Company"), and (ii) those
entities specified on Schedule 1 to that certain Contribution Agreement dated as
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of April 16, 1998 (the "Contribution Agreement"), including their permitted
successors, assigns and transferees (each such entity and its permitted
successors, assigns and transferees, separately, a "Contributor" and
collectively, the "Contributors"). Unless otherwise defined, capitalized terms
used herein shall have the respective meanings ascribed to them in the
Contribution Agreement.
WHEREAS, pursuant to the Contribution Agreement, each of the
Contributors will transfer (by means of contribution) certain of its assets (the
"Contribution") to the Operating Partnership in exchange for certain
consideration, including, but not limited to, Class A units of limited
partnership interest in the Operating Partnership (or possibly Class B units as
provided in the Contribution Agreement), or, in the event the REIT Conversion
has not been or will not be consummated and Contributors have not terminated the
Contribution in accordance with the Contribution Agreement, in exchange for
Class A units of limited partnership in a special limited partnership (as
defined in the Contribution Agreement, "the Special Partnership") (such Class A
units of limited partnership interest in the Operating Partnership or the
Special Partnership, as the case may be, shall hereinafter be referred to as
"Units");
WHEREAS, the Company proposes to convert its business operations into
an umbrella limited partnership real estate investment trust (a "REIT") in the
REIT Conversion by effecting a series of transactions as described in the
Contribution Agreement, including, among other things, contributing interests in
hotel properties to a newly formed limited partnership (the "Operating
Partnership") in exchange for Class A units of limited partnership interest in
the Operating Partnership, converting from a Delaware corporation into a
Maryland real estate investment trust, and distributing to the shareholders of
HMC shares of stock in Senior Living Communities Company, a Delaware corporation
("SLCC"), that would, among other things, lease hotel properties from the
Operating Partnership;
WHEREAS, if the REIT Conversion has been consummated, then, pursuant
to the terms of Section 8.6 of the Restated Operating Partnership Agreement and
Section 2.4 of the Contribution Agreement, 50% of the Units received by the
Contributors will be redeemable for cash or, at the option of the Company,
common shares of beneficial interest in the Company (each, a "Common Share")
beginning July 1, 1999, an additional 25% of the Units will be redeemable for
cash or, at the option of the Company, Common Shares beginning October 1, 1999
and the remaining 25% will be redeemable for cash or, at the option of the
Company, Common Shares beginning January 1, 2000;
WHEREAS, if the REIT Conversion has not been or will not be
consummated and the Contribution Agreement has not been terminated by
Contributors, then, pursuant to the terms of the Special Partnership Agreement
and Section 2.4 of the Contribution Agreement, 50% of the Units received by the
Contributors will be redeemable for cash or, at
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the option of the Company, shares of the Company's common stock (each, a share
of "Common Stock") beginning July 1, 1999, an additional 25% of the Units will
be redeemable for cash or, at the option of the Company, Common Stock beginning
October 1, 1999 and the remaining 25% will be redeemable for cash or, at the
option of the Company, Common Stock beginning January 1, 2000;
WHEREAS, in connection with the Contribution, the Company has agreed
to grant to Contributors the Registration Rights (as defined in Section 1
hereof) with respect to the Registrable Shares (as defined in Section 1 hereof);
NOW, THEREFORE, the parties hereto, in consideration of the
foregoing, the mutual covenants and agreements hereinafter set forth, and other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, hereby agree as follows:
Section 1. Registration Rights
Subject to the lock-up restrictions set forth in Section 2.4 of the
Contribution Agreement and the terms and conditions of the Restated Operating
Partnership Agreement or the Special Partnership Agreement, as the case may be,
if a Contributor receives Common Shares or shares of Common Stock upon
redemption of Units (any and all such Common Shares or shares of Common Stock,
as the case may be, received upon redemption of Units, the "Registrable
Shares"), such Contributor shall be entitled to offer the Registrable Shares for
sale pursuant to a shelf registration statement or, in certain other
circumstances, as provided by Section 1.3 hereof, subject to the terms and
conditions set forth herein (the "Registration Rights"). Common Shares or
shares of Common Stock, as the case may be, shall cease to be Registrable Shares
at such time as they have been sold pursuant to an offering registered under the
Securities Act (as defined below) or pursuant to Rule 144 under the Securities
Act.
1.1 Shelf Registration Rights.
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(a) Shelf Registration Statement. No later than April 30,
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1999, the Company shall file with the Securities and Exchange Commission ("SEC")
a registration statement for an offering to be made on a continuous basis
pursuant to Rule 415 under the Securities Act of 1933, as amended (the
"Securities Act"), covering all of the Registrable Shares (the "Registration
Statement"; and the related prospectus (including any preliminary prospectus) is
referred to as the "Prospectus"). The Registration Statement shall be on the
appropriate form, and shall otherwise comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations
promulgated thereunder, permitting registration of such Registrable Shares for
resale by Contributors in the manner or manners designated by them (including,
without limitation, one or more underwritten public offerings). The Company will
use its commercially reasonable efforts to cause the Registration Statement to
be declared effective by the SEC as promptly as practicable (and in any event by
no later than July 1, 1999) and will notify each Contributor when such
Registration Statement has become effective. The Company agrees (subject to
Section 1.2 hereof) to use its commercially reasonable efforts to keep the
Registration Statement effective (including the preparation and filing of any
amendments and supplements necessary for that purpose) until the earlier of (i)
the date on which the
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Contributors shall have sold all of the Registrable Shares, or (ii) the date on
which all of the Registrable Shares are eligible for sale pursuant to Rule
144(k) (or any successor provision) or in a single transaction pursuant to Rule
144(e) (or any successor provision) under the Securities Act (such period, the
"Effective Period"). Each Contributor seeking to offer and sell its Registrable
Shares upon exercise of a Registration Right agrees to provide in a timely
manner information regarding the proposed distribution by such Contributor of
the Registrable Shares and such other information reasonably requested by the
Company in connection with the preparation of and for inclusion in the
Registration Statement. The Company agrees to provide to each such Contributor a
reasonable number of copies of the final Prospectus and any amendments or
supplements thereto. If the Registration Statement ceases to be effective for
any reason at any time during the Effective Period (other than because of the
sale of all of the securities registered thereunder or as permitted by Section
1.3 hereof), the Company shall use its commercially reasonable efforts to obtain
the prompt withdrawal of any order suspending the effectiveness thereof.
(b) Offerings and Sales. At any time and from time to time
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after the date that any Units become redeemable for Registrable Shares, subject
to Sections 1.1(c) (in the case of any underwritten public offering) and Section
1.2 (in the case of all offerings hereunder), each Contributor may exercise its
Registration Rights hereunder with respect to the Registrable Shares issued or
issuable upon redemption of such Contributor's Units. If any Contributor desires
to offer and sell such Registrable Shares pursuant to an underwritten public
offering, such Contributor (the "Initiating Contributor") shall deliver to the
Company a written notice (an "Underwritten Registration Notice"), which notice
shall be given at least forty-five (45) days prior to the date on which such
Initiating Contributor desires to consummate the sale of such Registrable Shares
(it being agreed and understood that such Underwritten Registration Notice may
be given to the Company together with, or in advance of, such Initiating
Contributor's notice of redemption delivered to the Operating Partnership or the
Special Partnership, as the case may be, pursuant to the Restated Operating
Partnership or the Special Partnership Agreement, as the case may be). Any such
Underwritten Registration Notice shall in any event be subject to revocation by
such Initiating Contributor by delivery of a subsequent written notice delivered
to the Company by no later than the tenth day prior to the contemplated
offering, provided, however, that a revoked Underwritten Registration Notice
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shall be treated the same as an Underwritten Registration Notice that is not
revoked for purposes of Section 1.1(c) hereof.
Upon receipt of an Underwritten Registration Notice, the
Company shall, within ten (10) days of receipt thereof, inform the Initiating
Contributor whether the Company intends to assume the redemption obligation of
the Operating Partnership pursuant to Section 8.6 of the Restated Operating
Partnership Agreement or pursuant to the comparable provision of the Special
Partnership Agreement, if applicable, and issue Common Shares or Common Stock,
as the case may be, in redemption of the Initiating Contributor's Units, which
election shall be irrevocable with respect to such Units. The Company also
shall, within thirty (30) days of receipt of the Underwritten Registration
Notice, give written notice to the other Contributors and any other persons
possessing similar registration rights (a "Company Notice") of the Company's
receipt of the Underwritten Registration Notice. Within fifteen (15) days of
receipt of such a Company Notice, any other Contributor desiring to offer and
sell any of its Registrable Shares in such an offering of the type described in
the Underwritten Registration Notice (each, a "Participating Contributor") shall
give written notice to each of the Company, the Initiating
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Contributor, and the lead managing underwriter, if any, that has been selected,
of such a desire, specifying the number of Registrable Shares which such
Participating Contributor desires to offer and sell. Subject to the provisions
of Section 1.2 hereof, the Company shall not be permitted to participate in the
offering made pursuant to an Underwritten Registration Notice without the
written consent of the Initiating Contributor (which consent shall not be
unreasonably withheld).
(c) Limitations on Registration Rights for Underwritten
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Offerings. Each exercise of a Registration Right pursuant to an Underwritten
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Registration Notice shall be with respect to an underwritten public offering of
Registrable Shares, the minimum aggregate total gross proceeds of which to the
Initiating Contributor and all other Participating Contributors shall be (x)
equal to or greater than One Hundred Fifty Million Dollars ($150,000,000.00),
and (y) equal to or less than Four Hundred Million Dollars ($400,000,000.00).
The Contributors shall not be permitted to deliver, individually or
collectively, more than one Underwritten Registration Notice in any six-month
period; provided, however, that any Underwritten Registration Notice relating to
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an underwritten public offering which is suspended by the Company pursuant to
Section 1.2 hereof, shall not be counted as an Underwritten Registration Notice
for purposes of this sentence unless such underwritten public offering is
concluded following the termination of such suspension. All offers and sales by
each Contributor under the Registration Statement referred to in this Section
1.1 shall be completed within the Effective Period, and upon expiration of such
period no Contributor will offer or sell any Registrable Shares under the
Registration Statement and no Contributor shall be entitled to deliver an
Underwritten Registration Notice hereunder. If directed by the Company, each
Contributor will return all undistributed copies of the Prospectus in its
possession upon the expiration of such period.
1.2 Suspension of Offering. At any time during the Effective
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Period, the Company may determine, in the good faith judgment of its Board of
Trustees (or Directors, if applicable), with the advice of counsel, that offers
and sales by the Contributors under the Registration Statement shall be
suspended if (i) a negotiation or consummation of a transaction by the Company
or its subsidiaries is pending or an event has occurred, which negotiation,
consummation or event would require additional disclosure by the Company in the
Registration Statement of material information which the Company has a bona fide
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business purpose for keeping confidential and the nondisclosure of which in the
Registration Statement would reasonably be expected to cause the Registration
Statement to fail to comply with applicable disclosure requirements, or (ii) in
the case of any underwritten public offering of Registrable Shares pursuant to
an Underwritten Registration Notice, the offering of such Registrable Shares
would adversely affect a pending or proposed public offering of the Company's
Common Shares or Common Stock, as the case may be. Immediately upon making such
a determination, the Company shall give written notice to all Contributors (a
"Materiality Notice"), upon receipt of which each Contributor agrees that it
will immediately discontinue offers and sales of the Registrable Shares under
the Registration Statement until (x) in the case of a Materiality Notice
delivered pursuant to clause (i) above, such Contributor receives copies of a
supplemented or amended Prospectus that corrects the misstatement(s) or
omission(s) referred to above and receives notice that any post-effective
amendment has become effective or (y) in the case of a Materiality Notice
delivered pursuant to clause (ii) above, such Contributor receives a subsequent
notice from the Company that revokes or otherwise withdraws such
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Materiality Notice; provided, that the Company may delay, suspend or withdraw
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the Registration Statement for such reason for no more than fifteen (15) days
after the abandonment or consummation of any of the foregoing negotiations,
transactions, events or offerings or, in any event, for no more than ninety (90)
days after delivery of the Materiality Notice at any one time (and the Company
shall not be entitled to deliver a Materiality Notice at any time within 180
days of the termination of any suspension of an offering pursuant to a prior
Materiality Notice). If so directed by the Company, each Contributor will
deliver to the Company all copies of the Prospectus covering the Registrable
Shares current at the time of receipt of a Materiality Notice. In the event a
Materiality Notice is given pursuant to clause (ii) above, the Company agrees to
permit the Initiating and Participating Contributors to complete an underwritten
public offering substantially similar to the type which was suspended pursuant
to clause (ii) within ninety (90) days of the closing of the Company's public
offering or its decision not to undertake a public offering, as the case may be.
1.3 Piggyback Registration.
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(a) If, at any time during the Effective Period, the Company
proposes to register any of its Common Shares or Common Stock, as the case may
be, for sale under the Securities Act, except as otherwise described in Section
1.1 hereof, whether or not for sale for the Company's own account, on a form and
in a manner that would also permit registration of Registrable Shares for sale
under the Securities Act, the Company shall give written notice to each
Contributor of the Company's intention to effect such registration at least
thirty (30) days prior to the anticipated filing of such registration statement.
If, within twenty (20) days after the giving of such notice by the Company, any
Contributor shall deliver to the Company a written request specifying the number
of Registrable Shares such Contributor desires to offer and sell, and the
intended disposition thereof, the Company shall use its commercially reasonable
efforts to effect the registration of all such Registrable Shares that the
Company has been requested to register, provided:
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(i) if, at any time after giving written notice of its
intention to register any securities and prior to the effectiveness
of the registration statement filed in connection therewith, the
Company shall determine for any reason not to register any such
securities, the Company may, at its election, give written notice of
such determination to each Contributor who made a request as provided
in this Section 1.3, and thereupon the Company shall be relieved of
its obligation to register any Registrable Shares in connection with
such registration (but not from its obligations under Section 1.4
hereunder), without prejudice, however, to the Registration Rights of
Contributors generally under this Section 1; and
(ii) subject to the provisions of Section 1.6 hereof, if
such registration involves an underwritten public offering, all
Contributors requesting to be included in the Company's registration
must sell their Registrable Shares to the underwriters selected by
the Company on the same terms and conditions as are applicable to the
Company.
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(b) The Company shall not be obligated to effect any
registration of Registrable Shares under this Section 1.3 as a result of the
registration of any of its securities in connection with mergers, acquisitions,
exchange offers, dividend reinvestment plans or option or other employee benefit
plans.
1.4 Expenses. The Company shall pay all expenses incident to the
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performance by it of its registration obligations under this Section 1,
including (i) all stock exchange, SEC registration, listing and filing fees,
(ii) all expenses incurred in connection with the preparation, printing and
distribution of the Registration Statement and Prospectus and any other document
or amendment thereto and the mailing and delivery of copies thereof to the
underwriter and dealers, (iii) fees and disbursements of counsel for the Company
and of the independent public accountants and other experts of the Company; (iv)
the cost of printing or producing any agreement(s) among underwriters,
underwriting agreement(s) and blue sky or legal investment memoranda, any
selling agreements and any other documents in connection with the offering, sale
or delivery of Registrable Shares to be disposed of; (v) all expenses in
connection with the qualification of Registrable Shares to be disposed of for
offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters in connection with such
qualification and in connection with any blue sky and legal investment surveys
(but not for any other fees or disbursements of counsel for the underwriters);
(vi) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of Registrable
Shares to be disposed of; and (vii) fees and expenses incurred in connection
with the listing of Registrable Shares on each securities exchange or quotation
system on which the Common Shares are then listed. Any Contributor offering and
selling Registrable Shares hereby shall be responsible for the payment of any
brokerage and sales commissions, fees and disbursements of such Contributor's
counsel, and any transfer taxes relating to the sale or disposition of the
Registrable Shares.
1.5 Selection of Underwriters. If Registrable Shares are being
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offered and sold pursuant to an Underwritten Registration Notice, the Initiating
Contributor delivering such notice shall have the right to select the lead
managing underwriter of the offering, which shall be an investment banking firm
of nationally recognized standing reasonably satisfactory to the Company.
1.6 Registration Procedures.
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(a) If and whenever the Company is required to effect the
registration under the Securities Act of Registrable Shares as provided in this
Agreement, the Company will, as expeditiously as possible:
(i) use its commercially reasonable efforts to register
or qualify the Registrable Shares by the time the applicable
Registration Statement is declared effective by the SEC under all
applicable state securities or "blue sky" laws of such jurisdictions
as the Contributors shall reasonably request in writing, to keep each
such registration or qualification effective during the Effective
Period, and to do any and all other acts and things which may be
reasonably necessary or advisable to enable each Contributor to
consummate the disposition in each such jurisdiction of the
Registrable Shares owned by such Contributor; provided, however, that
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the
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Company shall not be required to (x) qualify generally to do business
in any jurisdiction or to register as a broker or dealer in such
jurisdiction where it would not otherwise be required to qualify but
for this Section 1.1, (y) subject itself to taxation in any such
jurisdiction, or (z) submit to the general service of process in any
such jurisdiction;
(ii) prepare and file with the SEC such amendments and
supplements to the Registration Statement and the Prospectus as may
be necessary to keep the Registration Statement effective and to
comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Shares until such time as all
Registrable Shares have been disposed of in accordance with the
intended methods of disposition by the Contributors set forth in the
Registration Statement;
(iii) furnish to the Contributors and to any underwriter
of such Registrable Shares such number of conformed copies of the
Registration Statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the Prospectus included in the Registration Statement (including
each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, such
documents incorporated by reference in the Registration Statement or
Prospectus, and such other documents as the Contributors or such
underwriter may reasonably request;
(iv) cause the Registrable Shares to be listed on each
national securities exchange or quotation system on which the Common
Shares (or Common Stock, as applicable) are then listed, if the
listing of such securities is then permitted under the rules of such
exchange;
(v) enter into such customary agreements (including, in
the case of an underwritten public offering, an underwriting
agreement), and the Contributors, on whose behalf Registrable Shares
are to be distributed by such underwriters, shall also be parties to
any such underwriting agreement;
(vi) obtain a "cold comfort" letter or letters from the
Company's independent public accountants and furnish a signed
counterpart of a customary opinion of counsel of the Company, in each
case, addressed to the Contributors (and the underwriters, if any),
in customary form and substance, dated the effective date of the
Registration Statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement);
(vii) notify the Contributors immediately upon the
happening of any event as a result of which a Prospectus included in
a Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading, and, subject to the provisions of Section 1.2
hereof, at the request of the Contributors
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prepare and furnish to the Contributors as many copies of a
supplement to or an amendment of such Prospectus as the Contributors
reasonably request so that, as thereafter delivered to the purchasers
of such Registrable Shares, such Prospectus shall not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading; and
(viii) make available for reasonable inspection by, or
give reasonable access to, any Contributor, by any underwriter
participating in any disposition to be effected pursuant to the
Registration Statement and by any attorney, accountant or other agent
retained by any Contributor, all pertinent financial and other
records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply
all information reasonably requested by any such Contributor,
underwriter or other person in connection with the offering
thereunder.
(b) In connection with any underwritten public offering of
Registrable Shares, management of the Company shall participate in customary
road show meetings reasonably requested (and reasonable in scope in light of the
size of the offering) upon reasonable prior notice by the lead managing
underwriter of such offering.
(c) The Company may require each Contributor selling
Registrable Shares as to which any registration is being effected to furnish the
Company with such information regarding such Contributor and the distribution of
such securities as required to be included in the Registration Statement as the
Company may from time to time reasonably request in writing.
(d) If a registration pursuant to this Section 1 involves an
underwritten public offering and the lead managing underwriter of such offering
advises the Company (and the Initiating Contributor, if applicable) that, in its
judgment, the number of Common Shares or shares of Common Stock proposed to be
included in such underwritten public offering by the Company (or the Initiating
Contributor, if applicable) and the Contributors should be limited due to market
conditions, then the Company will promptly so advise each other Contributor
which has requested to offer and sell Registrable Shares in the offering, and
the Company (and the Initiating Contributor, if applicable) and such
Contributors will include in such offering the number of shares which, in the
opinion of the lead managing underwriter can be sold (the "Maximum Offering
Amount"). The Maximum Offering Amount shall be allocated (i) in an offering
initiated by the Company as described in Section 1.3 hereof, first, to the full
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extent of Common Shares or Common Stock the Company desires to sell, and second,
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if any shares remain under the Maximum Offering Amount, to each Contributor and
to any other persons possessing similar registration rights to the Registration
Rights, pro rata in accordance with each request for inclusion made by each such
Contributor and each such other person, or (ii) in an offering initiated by an
Initiating Contributor as described in Section 1.1(b) hereof, first, to the
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Initiating Contributor, to the full extent of Common Shares or Common Stock the
Initiating Contributor desires to sell, and second, if any shares remain under
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the Maximum Offering Amount, to each other Contributor, pro rata in accordance
with each request for inclusion
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made by each such other Contributor, and third, if any shares remain under the
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Maximum Offering Amount, to any other persons possessing similar registration
rights to the Registration Rights, pro rata in accordance with each request for
inclusion made by each such other person. In the event that the underwriting
agreement executed in connection with such offering provides for an
overallotment option to be granted to the underwriters, and if such option is
exercised by the underwriters, the allocation priority established by clause (i)
or clause (ii) above, whichever is applicable, shall govern the allocation with
respect to the sale of any Common Shares or Common Stock, as the case may be,
and Registrable Shares pursuant to such exercise by the underwriters.
(e) In the event that a Contributor exercises its
Registration Rights to offer and sell Registrable Shares in an underwritten
public offering initiated by any other person or persons possessing registration
rights similar to those conveyed upon the Contributors by this Agreement (each
such other person initiating such an underwritten public offering, an "Other
Initiating Person"), the Contributors agree that the allocation priority for
such offering shall be comparable to the allocation priority established by
clause (ii) of Section 1.6(d), except that the Contributors shall participate in
such offering with the lowest level of priority described in clause (ii) of
Section 1.6(d), pro rata in accordance with each request for inclusion made by
each such Contributor.
Section 2. Indemnification
2.1 Indemnification by the Company. The Company agrees to
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indemnify and hold harmless each Contributor who participates in any offering or
sale of Registrable Shares, each person (if any) who participates as an
underwriter in any offering and sale of Registrable Shares, and each person, if
any, who controls any Contributor or such underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and their respective directors, trustees,
officers, partners, agents, employees and affiliates as follows:
(a) against any and all loss, liability, claim, damage and
expense (joint or several) and action or proceeding (whether
commenced or threatened) whatsoever ("Losses"), as incurred, arising
out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement (or any
amendment thereto) pursuant to which the Registrable Shares were
registered under the Securities Act, including all documents
incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or arising
out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prospectus (or any amendment or
supplement thereto), including all documents incorporated therein by
reference, or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(b) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or investigation or
proceeding by any
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governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Company (which consent will
not be unreasonably withheld); and
(c) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any Losses
or any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, in each case whether or not
a party, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (a) or
(b) above;
provided, however, that the indemnity provided pursuant to this Section 2.1 does
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not apply to any indemnified party with respect to any Loss or expense to the
extent arising out of (i) any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by such indemnified party expressly for use
in the Registration Statement (or any amendment thereto) or the Prospectus (or
any amendment or supplement thereto), or (ii) such indemnified party's failure
to deliver an amended or supplemental Prospectus if such Loss or expense would
not have arisen had such delivery occurred.
2.2 Indemnification by Contributor. Each Contributor who
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participates in an offering or sale of Registrable Shares (and each permitted
assignee of such a Contributor, on a several basis) agrees to indemnify and hold
harmless the Company, each person (if any) who participates as an underwriter in
any offering and sale of Registrable Shares and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and their respective directors, trustees,
officers, partners, agents, employees and affiliates, as follows:
(a) against any and all Loss and expense whatsoever, as
incurred, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment thereto) pursuant to which
the Registrable Shares were registered under the Securities Act,
including all documents incorporated therein by reference, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto), including all
documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(b) against any and all Loss and expense whatsoever, as
incurred, to the extent of the aggregate amount paid in settlement of
any litigation, or
10
<PAGE>
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue
statement or omission, if such settlement is effected with the
written consent of each such Contributor (which consent will not be
unreasonably withheld); and
(c) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any Loss or
any litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, in each case whether or not
a party, or any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (a) or
(b) above;
provided, however, that the indemnity provided pursuant to this Section 2.1
- -------- -------
shall only apply with respect to any Loss or expense to the extent arising out
of (i) any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished to
the Company by each such Contributor expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto), or (ii) each such Contributor's failure to deliver an
amended or supplemental Prospectus if such Loss or expense would not have arisen
had such delivery occurred. Notwithstanding the provisions of this Section 2.2,
no Contributor or any permitted assignee shall be required to indemnify the
Company, its indemnified persons hereunder with respect to any amount in excess
of the amount of the total proceeds to each such Contributor or such permitted
assignee, as the case may be, from sales of the Registrable Shares of such
Contributor under the Registration Statement with respect to such offering, and
no Contributor shall be liable under this Section 2.2 for any statements or
omissions of any other Contributor.
2.3 Conduct of Indemnification Proceedings. The indemnified party
--------------------------------------
shall give reasonably prompt notice to the indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify the indemnifying party shall not relieve it
from any liability which it may have under the indemnity agreement provided in
Section 2.1 or 2.2 above, unless and to the extent it did not otherwise learn of
such action and the lack of notice by the indemnified party results in the
forfeiture by the indemnifying party of substantial rights and defenses. If the
indemnifying party so elects within a reasonable time after receipt of such
notice, the indemnifying party may assume the defense of such action or
proceeding at such indemnifying party's own expense with counsel chosen by the
indemnifying party and approved by the indemnified party, which approval shall
not be unreasonably withheld; provided, however, that the indemnifying party
-------- -------
will not settle any such action or proceeding without the written consent of the
indemnified party unless, as a condition to such settlement, the indemnifying
party secures the unconditional release of the indemnified party; and provided
--------
further, that if the indemnified party reasonably determines that a conflict of
- -------
interest exists where it is advisable for the indemnified party to be
represented by separate counsel or that, upon advice of counsel, there may be
legal defenses available to it which are different from or in addition to those
available to the indemnifying party, then the indemnifying party shall not be
entitled to assume such
11
<PAGE>
defense and the indemnified party shall be entitled to separate counsel at the
indemnifying party's expense. If the indemnifying party is not entitled to
assume the defense of such action or proceeding as a result of the proviso to
the preceding sentence, the indemnifying party's counsel shall be entitled to
conduct the indemnifying party's defense and counsel for the indemnified party
shall be entitled to conduct the defense of the indemnified party, it being
understood that both such counsel will cooperate with each other to conduct the
defense of such action or proceeding as efficiently as possible. If the
indemnifying party is not so entitled to assume the defense of such action or
does not assume such defense, after having received the notice referred to in
the first sentence of this paragraph, the indemnifying party will pay the
reasonable fees and expenses of counsel for the indemnified party. In such
event, however, the indemnifying party will not be liable for any settlement
effected without the written consent of the indemnifying party (which consent
will not be unreasonably withheld). Except as expressly stated herein, if an
indemnifying party is entitled to assume, and assumes, the defense of such
action or proceeding in accordance with this paragraph, the indemnifying party
shall not be liable for any fees and expenses of counsel for the indemnified
party incurred thereafter in connection with such action or proceeding.
2.4 Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for in
this Section 2 is unavailable to an indemnified party, the indemnifying party
shall contribute to the aggregate Losses and expenses of the nature contemplated
by such indemnity agreement incurred by any indemnified party, (i) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified parties on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative fault of but also the relative benefits to the
Company on the one hand and each such Contributor on the other, in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits to the indemnifying party and the indemnified party shall
be determined by reference to, among other things, the total proceeds received
by the indemnifying party and the indemnified party in connection with the
offering to which such losses, claims, damages, liabilities or expenses relate.
The relative fault of the indemnifying party and indemnified party shall be
determined by reference to, among other things, whether the action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, the indemnifying party or the indemnified party, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action.
The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 2.4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 2.4, no Contributor shall be
required to contribute any amount in excess of the amount of the total proceeds
to such Contributor from sales of the Registrable Shares of such Contributor
under the Registration Statement.
12
<PAGE>
Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 2.4, each person, if
any, who controls an indemnified party within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such indemnified
party, and each director of the Company, each officer of the Company who signed
a Registration Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act shall have the same
rights to contribution as the Company.
The indemnity agreements contained in this Section 2 shall be in
addition to any other rights (to indemnification, contribution or otherwise)
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless of any investigation
made or omitted by or on behalf of any indemnified party and shall survive the
transfer of any Registrable Shares by any Contributor.
Section 3. Rule 144 Compliance
The Company covenants that it will use its best efforts to timely
file the reports required to be filed by the Company under the Securities Act
and the Securities Exchange Act of 1934, as amended, so as to enable each
Contributor to sell Registrable Shares pursuant to Rule 144 under the Securities
Act. In connection with any sale, transfer or other disposition by Contributor
of any Registrable Shares pursuant to Rule 144 under the Securities Act, the
Company shall cooperate with each Contributor to facilitate the timely
preparation and delivery of certificates representing Registrable Shares to be
sold and not bearing any Securities Act legend, and enable certificates for such
Registrable Shares to be for such number of shares and registered in such names
as such Contributor may reasonably request at least ten (10) business days prior
to any sale of Registrable Shares hereunder.
13
<PAGE>
Section 4. Miscellaneous
4.1 Integration; Amendment; SLCC Agreement. This Agreement,
--------------------------------------
together with the Contribution Agreement and either the Restated Operating
Partnership Agreement or the Special Partnership Agreement, as the case may be,
constitutes the entire agreement among the parties hereto with respect to the
matters set forth herein and supersedes and renders of no force and effect all
prior oral or written agreements, commitments and understandings among the
parties with respect to the matters set forth herein. Except as otherwise
expressly provided in this Agreement, no amendment, modification or discharge of
this Agreement shall be valid or binding unless set forth in writing and duly
executed by the Company and the Contributors. In the event that the REIT
Conversion occurs, the Company shall cause SLCC to enter into a separate and
distinct registration rights agreement with the Contributors, substantially in
the form of this Agreement (with such modifications thereto to which the Company
and the Contributors shall agree), which shall provide the Contributors with
comparable registration rights under the Securities Act with respect to any and
all shares of common stock of SLCC issued to the Contributors in connection with
the REIT Conversion.
4.2 Waivers. No waiver by a party hereto shall be effective unless
-------
made in a written instrument duly executed by the party against whom such waiver
is sought to be enforced, and only to the extent set forth in such instrument.
Neither the waiver by any of the parties hereto of a breach or a default under
any of the provisions of this Agreement, nor the failure of any of the parties,
on one or more occasions, to enforce any of the provisions of this Agreement or
to exercise any right or privilege hereunder shall thereafter be construed as a
waiver of any subsequent breach or default of a similar nature, or as a waiver
of any such provisions, rights or privileges hereunder.
4.3 Assignment; Successors and Assigns. This Agreement and the
----------------------------------
rights granted hereunder may not be assigned by a Contributor without the
written consent of the Company; provided, however, that such Contributor may
-------- -------
assign its rights and obligations hereunder, following at least ten (10) days
prior written notice to the Company, (i) to such Contributor's partners or
beneficiaries in connection a distribution of the Units to its partners or
beneficiaries, (ii) to a permitted transferee in connection with a transfer of
the Units in accordance with the terms of the Restated Operating Partnership
Agreement or the Special Partnership Agreement, as the case may be, and (iii) to
a third party in connection with a transfer of Units as security for or in
satisfaction of obligations of any partner of Contributor, if in the case of
(i), (ii) and (iii) above, such persons or such third party agree in writing to
be bound by all of the provisions hereof. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
executors, personal and legal representatives, successors and, subject to this
Section 4.3, assigns.
4.4 Benefits of Registration Rights. Each Contributor and its
-------------------------------
permitted transferees of Registrable Shares may severally or jointly exercise
the Registration Rights hereunder in such proportion as they shall agree among
themselves. No consent of any Contributor shall be required for permitted
transferees to exercise Registration Rights under this Agreement or otherwise to
be entitled to the benefits of this Agreement as applicable to all Contributors.
14
<PAGE>
4.5 Notices. All notices called for under this Agreement shall be
-------
in writing and shall be deemed given upon receipt if delivered personally or by
facsimile transmission and followed promptly by mail, or mailed by registered or
certified mail (return receipt requested), postage prepaid, to the parties, with
appropriate copies to counsel, at the addresses set forth opposite their names
in the Contribution Agreement, or to any other address or addressee as any party
entitled to receive notice under this Agreement shall designate, from time to
time, to others in the manner provided in this Section 4.5 for the service of
notices; provided, however, that notices of a change of address shall be
-------- -------
effective only upon receipt thereof. Any notice delivered to the party hereto
to whom it is addressed shall be deemed to have been given and received on the
day it was received; provided, however, that if such day is not a business day
-------- -------
then the notice shall be deemed to have been given and received on the business
day next following such day. Any notice sent by facsimile transmission shall be
deemed to have been given and received on the business day next following the
transmission.
4.6 Specific Performance. The parties hereto acknowledge that the
--------------------
obligations undertaken by them hereunder are unique and that there would be no
adequate remedy at law if any party fails to perform any of its obligations
hereunder, and accordingly agree that each party, in addition to any other
remedy to which it may be entitled at law or in equity, shall be entitled to (i)
compel specific performance of the obligations, covenants and agreements of any
other party under this Agreement in accordance with the terms and conditions of
this Agreement and (ii) obtain preliminary injunctive relief to secure specific
performance and to prevent a breach or contemplated breach of this Agreement in
any court of the United States or any State thereof having jurisdiction.
4.7 Governing Law. This Agreement, the rights and obligations of
-------------
the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of the State of Maryland
but not including the choice of law rules thereof.
4.8 Headings. Section and subsection headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
4.9 Pronouns. All pronouns and any variations thereof shall be
--------
deemed to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the person or entity may require.
4.10 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required. It shall
not be necessary that the signature of or on behalf of each party appears on
each counterpart, but it shall be sufficient that the signature of or on behalf
of each party appears on one or more of the counterparts. All counterparts
shall collectively constitute a single agreement. It shall not be necessary in
any proof of this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of or on behalf of all of the
parties.
4.11 Severability. If fulfillment of any provision of this
------------
Agreement, at the time such fulfillment shall be due, shall transcend the limit
of validity prescribed by law, then the obligation to be fulfilled shall be
reduced to the limit of such validity; and if any clause or provision contained
in this Agreement operates or would operate to invalidate this Agreement, in
whole or in part, then such clause or provision only shall be held ineffective,
as though not herein contained, and the remainder of this Agreement shall remain
operative and in full force and effect.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first hereinabove set
forth.
COMPANY:
HOST MARRIOTT CORPORATION
By:
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
CONTRIBUTORS:
By:
-------------------------------
Name:
-------------------------------
Title: Attorney-in-Fact
16
<PAGE>
Exhibit 10.19
FIRST AMENDMENT TO CONTRIBUTION AGREEMENT
FIRST AMENDMENT TO CONTRIBUTION AGREEMENT dated as of May
8,1998 among HOST MARRIOTT CORPORATION, a Delaware corporation ("HMC"), HOST
MARRIOTT, L.P., a Delaware limited partnership ("Operating Partnership"), HTKG
DEVELOPMENT ASSOCIATES, a California limited partnership ("HTKG"), BRE/BURTON
WAY L.L.C., a Delaware limited partnership ("Burton Way"), and the other
Contributors (as defined below).
Background
----------
HMC, Operating Partnership, HTKG, Burton Way, and the other
contributors named therein (HTKG, Burton Way and such other contributors,
collectively, the "Contributors") are parties to that certain Contribution
Agreement dated as of April 16, 1998 (the "Contribution Agreement"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to such terms in the Contribution Agreement.
HMC, Operating Partnership, HTKG, Burton Way and the other
Contributors have agreed to amend the terms of the Contribution Agreement as
provided herein.
Agreement
---------
1. Section 1.4 of the Contribution Agreement is hereby
amended by deleting the date "May 11, 1998" wherever it appears therein, and
substituting the date "May 18,1998" therefor.
2. The parties hereto acknowledge and agree that contribution
of the Beverly Hills Loan has been authorized by all of the members of
BRE/Burton Way L.L.C. (the Contributor of the Beverly Hills Loan), and that the
Beverly Hills Loan will not be excluded from the transactions contemplated by
the Contribution Agreement under Section 7.3(b) thereof.
3. The Contribution Agreement, as amended hereby, is and
shall remain in full force and effect and is ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have executed this
First Amendment as of the date written above.
HOST MARRIOTT CORPORATION
By: /s/ CHRISTOPHER J. NASSETTA
----------------------------------
Name: Christopher J. Nassetta
Title: Executive Vice President
and Chief Operating Officer
<PAGE>
HOST MARRIOTT, L.P.
By: HMC Real Estate Corporation, its
general partner
By: /s/ CHRISTOPHER J. NASSETTA
-------------------------------
Name: Christopher J. Nassetta
Title: Vice President
HTKG DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP
By: BRE/Burlingame II, L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/BURTON WAY L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/SWISS L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/LAFAYETTE INC.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/SWISS MANAGEMENT L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
2
<PAGE>
BRE/HT L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/CAMBRIDGE L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/RESTON L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/GRAND L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/AMELIA PARTNERS L.P.
By: BRE/Amelia L.L.C., general partner
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/AMELIA L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
OLS HOTEL PARTNERS L.P.
By: BRE/Logan Hotel Space Inc.
By: /s/ JONATHAN GRAY
-------------------------
Jonathan Gray
Vice President
RTZ MANAGEMENT CORP.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
BRE/RITZ BOSTON, L.L.C.
By: /s/ JONATHAN GRAY
-------------------------------
Jonathan Gray
Vice President
3
<PAGE>
Exhibit 10.20
SECOND AMENDMENT TO CONTRIBUTION AGREEMENT
SECOND AMENDMENT TO CONTRIBUTION AGREEMENT dated as of May 18,
1998 among HOST MARRIOTT CORPORATION, a Delaware corporation ("HMC"), HOST
MARRIOTT, L.P., a Delaware limited partnership ("Operating Partnership") and the
other Contributors (as defined below).
Background
----------
A. HMC, Operating Partnership, and the contributors named
therein (collectively, the "Contributors") are parties to that certain
Contribution Agreement dated as of April 16, 1998, as amended by that certain
First Amendment to Contribution Agreement dated May 8, 1998 (as amended, the
"Contribution Agreement"). All capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to such terms in the
Contribution Agreement.
B. HMC, Operating Partnership, and the Contributors have
agreed to amend the terms of the Contribution Agreement as provided herein.
Agreement
---------
1. Burlingame. (a) Pursuant to Section 1.4 of the
----------
Contribution Agreement, HTKG elects to treat the Burlingame Loan as a Mortgage
Loan under the Contribution Agreement. At Closing, Blackstone Real Estate
Holdings L.P., a Delaware limited partnership, Blackstone Real Estate Partners I
L.P., a Delaware limited partnership, Blackstone Real Estate Partners Two L.P.,
a Delaware limited partnership, Blackstone Real Estate Partners III L.P., a
Delaware limited partnership, Blackstone Real Estate Partners IV L.P., a
Delaware limited partnership, Blackstone RE Capital Partners L.P., a Delaware
limited partnership, Blackstone RE Capital Partners II L.P., a Delaware limited
partnership, Blackstone RE Offshore Capital Partners L.P., a Delaware limited
partnership (collectively, the "BREP I Partnerships"), which are the holders of
the Burlingame Loan, shall contribute the Burlingame Loan to the Operating
Partnership in exchange for Units. Notwithstanding anything to the contrary
contained in the Contribution Agreement, HTKG shall be deemed a Property Owning
Entity. Schedule 1 shall be amended to delete HTKG as a Contributor and to add
the BREP I Partnerships, BRE/Burlingame II L.L.C., a Delaware limited liability
company ("BRE/Burlingame II"), and HT-Burlingame Limited Partnership, a
California limited partnership ("HT-Burlingame") as Contributors in its place.
BRE/Burlingame II and HT-Burlingame shall be deemed Membership Interest
Contributors for purposes of the Contribution Agreement. Schedule 1.1(ii) shall
be amended to list HTKG as a
<PAGE>
Property Owning Entity and to list BRE/Burlingame II and HT-Burlingame as the
partners in HTKG. The BREP I Partnerships, BRE/Burlingame II and HT-Burlingame
have executed this Second Amendment to evidence their agreement to be bound by
the terms of the Contribution Agreement with respect to the contribution of
their respective Mortgage Loan or partnership interests in HTKG to the Operating
Partnership. Schedule 1.1(a) of the Contribution Agreement is amended to delete
Hyatt Regency Hotel - Burlingame (San Francisco), California, from the list of
Asset Projects. Notwithstanding the provisions of Section 1.4 of the
Contribution Agreement, the portion of the Exchange Amount allocated to the
Burlingame Asset Project on Schedule 2.1(e) shall be apportioned between a value
for the Burlingame Loan equal to the Burlingame Purchase Price (as defined in
Section 1.4) and the balance allocated to the transfer of the partnership
interests of BRE/Burlingame II and HT-Burlingame in HTKG.
(b) The partnership interests in HTKG being contributed by
BRE/Burlingame II and HT-Burlingame shall be conveyed to the Operating
Partnership and one or more designees of the Operating Partnership so that HTKG
shall have no less than two partners upon consummation of the Closing. Exhibit C
to the Contribution Agreement is amended by deleting it in its entirety and
substituting therefor Exhibit C attached to this Second Amendment.
2. Swissotel. (a) Notwithstanding anything to the contrary
---------
contained in the Contribution Agreement, the parties to the Contribution
Agreement hereby agree that BRE/Swiss L.L.C., may, with the consent of HMC,
which consent will not be unreasonably withheld, elect to convert (the
"Swissotel Conversion Election") Swissotel - Atlanta, Georgia, Swissotel -
Boston, Massachusetts, Swissotel - Chicago, Illinois and Swissotel New York, New
York (collectively, the "Swissotel Projects") from Asset Projects to transfers
of Membership Interests (which term for purposes of the Contribution Agreement
shall be deemed to include transfers of partnership interests or membership
interests), provided that BRE/Swiss L.L.C. has obtained consent from Swissotel
Holdings, Inc. and the Management Company to the transfer of Membership
Interests and the lease of the Swissotel Projects in connection with the REIT
Conversion (collectively, the "Swissotel Consent"). If the Swissotel Conversion
Election has been exercised and the Swissotel Consent obtained, then
(i) BRE/Swiss L.L.C., a Delaware limited liability
company, shall be deemed a Property Owning Entity;
(ii) Schedule 1 shall be amended to delete BRE/Swiss L.L.C.
as a Contributor and to add Blackstone Real Estate Partners II L.P., a Delaware
limited partnership, Blackstone Real Estate Partners II.TE.1 L.P., a Delaware
limited partnership, Blackstone Real Estate Partners II.TE.2 L.P., a Delaware
limited partnership, Blackstone Real Estate Partners II.TE.3 L.P., a Delaware
limited partnership, Blackstone Real Estate Partners II.TE.4 L.P., a Delaware
limited
2
<PAGE>
partnership, Blackstone Real Estate Holdings II L.P., a Delaware limited
partnership (collectively, the "BREP II Partnerships") as Contributors in its
place;
(iii) Schedule 1.1(ii) shall be amended to list BRE/Swiss
L.L.C. as a Property Owning Entity and to list the BREP II Partnerships and
Swissotel Holding, Inc., as the members therein and to reflect that Swissotel
Holding, Inc., is a Nonparticipating Member;
(iv) the BREP II Partnerships shall be deemed Membership
Interest Contributors for purposes of the Contribution Agreement;
(v) Schedule 1.1(a) shall be amended to delete the
Swissotel Projects from the list of Asset Projects;
(vi) in accordance with Section 2.1, to reflect that only
99% of the membership interests in BRE/Swiss L.L.C. are being contributed to the
Operating Partnerships, the Exchange Amount shall be reduced by 1% of the
difference between (x) $633,000,000 (being the aggregate Exchange Amount
allocated to the Swissotel Projects on Schedule 2.1(e)) and (y) the aggregate
outstanding amount of Third Party Loans encumbering the Swissotel Projects on
the Closing Date (including accrued interest);
(vii) notwithstanding anything to the contrary in the
Contribution Agreement, the portion of the Exchange Amount allocated to the
Swissotel Membership Interests shall be paid only in Units and the other
consideration provided for in Section 2.1(b)(ii) and Section 2.1(b)(iii); and
(viii) Schedule 7.1(f) shall be amended to add the consent to
the transfer of the Management Interest by the Management Interest Contributor
by Swissotel Services L.L.C.
The BREP II Partnerships have executed this Second Amendment to Contribution
Agreement to evidence their agreement to be bound by the terms of the
Contribution Agreement with respect to the contribution of their respective
membership interests in BRE/Swiss L.L.C. to the Operating Partnership in the
event the Swissotel Conversion Election becomes effective.
(b) Notwithstanding anything to the contrary contained in
the Contribution Agreement, if the Swissotel Conversion Election never becomes
effective and the Swissotel Projects are contributed as Asset Projects, the
portion of the Exchange Amount allocated to the Swissotel Projects in the amount
of $633,000,000 less the amount of the Third Party Loans encumbering the
----
Swissotel Projects as contemplated by Section 2.1(b)(ii)(A)(2) and 2.1(b)(iv)
shall be payable as follows: (i) 99% in the form of Units and the other
consideration provided for in Section 2.1(b)(ii)
3
<PAGE>
and Section 2.1(b)(iii) of the Contribution Agreement and (ii) 1% in cash (the
"Swissotel Cash Amount").
3. Exchange Amount Allocation. Section 2.1(e) of the
--------------------------
Contribution Agreement is amended by deleting the reference to words "within 30
days after the date hereof" in the first sentence thereof and inserting the
words "on or before June 30, 1998" in lieu thereof.
4. SLSC Election. Pursuant to Section 2.1(b)(iii) of the
-------------
Contribution Agreement, the Contributors make the following elections:
(i) with respect to 2,200,000 Units issued pursuant to
Section 2.1 (b)(ii), the Contributors elect not to receive any of the Non-SLSC
Amount and the SLSC Amount otherwise payable to them and to accept a
corresponding increase in the number of Units issued; and
(ii) with respect to the balance of all Units issued pursuant
to Section 2.1 (b)(ii), the Contributors elect to reduce the SLSC Amount and
accept a corresponding increase in the number of Units issued pursuant to
Section 2.1(b)(ii) in an amount equal to the minimum reduction necessary in the
SLSC Amount, if any, so that the Contributors are in compliance with the
limitation on ownership of SLSC common stock set forth in Section 2.2.
5. Cash Election. Pursuant to Section 2.1(b)(i) of the
-------------
Contribution Agreement, the Cash Amount to be received by the Contributors as
part of the Exchange Amount shall be in the amount of the sum of (x) $72,000,000
and (y) the Swissotel Cash Amount; provided, however, if the Beverly Hills Loan
-------- -------
is repaid prior to Closing, the amount set forth in clause (x) above shall be
deemed $17,000,000.
6. Revised Schedules. The Contribution Agreement shall be
-----------------
amended by substituting the Schedules attached to this Second Amendment as
Exhibit A in lieu of Schedule 1, Schedule 1.1(ii) and Schedule 1.1(a).
7. Operating Partnership Agreement. (a) Section 7.11 of the
-------------------------------
form of the Operating Partnership Agreement attached to the Contribution
Agreement as Exhibit A is amended by adding the following sentence at the end
thereof:
"The preceding sentence shall not apply to any limitation
or prohibition in this Agreement as to which the General Partner is expressly
authorized to take action (either in its discretion or in specified
circumstances) so long as the General Partner acts within the scope of such
authority."
(b) Section 7.4.B of the Operating Partnership Agreement
attached as Exhibit A is amended by deleting it in its entirety and substituting
therefor Exhibit B attached to this Second Amendment.
8. Closing Date Distributions. The parties to the
--------------------------
Contribution Agreement acknowledge that one or more of the Contributors may
distribute to its
4
<PAGE>
members or partners a portion of the Property. Any such distribution shall not
be effective unless and until the Closing under the Contribution Agreement shall
occur and shall not in any manner relieve any of the Contributors of their
respective obligations under the Contribution Agreement. In the event of any
such distribution, the portion of the Property so distributed shall be
contributed by the members or partners receiving such distribution directly to
the Operating Partnership or its designee.
9. Contribution Agreement Exhibit. Notwithstanding anything
------------------------------
to the contrary contained in the Contribution Agreement, to the extent the
Exhibits to the Contribution Agreement have not previously been agreed to by the
parties thereto, HMC and the Contributors shall in good faith agree upon the
form of all such Exhibits on or before June 30, 1998.
10. Ratification. The Contribution Agreement, as amended
------------
hereby, is and shall remain in full force and effect and is ratified and
confirmed.
IN WITNESS WHEREOF, the parties hereto have executed this
Second Amendment as of the date written above.
HOST MARRIOTT CORPORATION
By: /s/ C.G. TOWNSEND
---------------------------------
Name: C.G. Townsend
Title: Senior Vice President
HOST MARRIOTT, L.P.
By: HMC Real Estate Corporation, its
general partner
By: /s/ C.G. TOWNSEND
---------------------------
Name: C.G. Townsend
Title: Senior Vice President
HTKG DEVELOPMENT ASSOCIATES
LIMITED PARTNERSHIP
By: BRE/Burlingame II, L.L.C.
By: /s/ JONATHAN D. GRAY
---------------------------
Jonathan D. Gray
Vice President
5
<PAGE>
BRE/BURTON WAY L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/SWISS L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/LAFAYETTE INC.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/SWISS MANAGEMENT L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/HT L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/CAMBRIDGE L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/GRAND L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
6
<PAGE>
BRE/AMELIA PARTNERS L.P.
By: BRE/Amelia L.L.C., general partner
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/AMELIA L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------------
Jonathan D. Gray
Vice President
OLS HOTEL PARTNERS L.P.
By: BRE/Logan Hotel Space Inc.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
RTZ MANAGEMENT CORP.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/RITZ BOSTON, L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
BRE/Burlingame II L.L.C.
By: /s/ JONATHAN D. GRAY
-----------------------------
Jonathan D. Gray
Vice President
7
<PAGE>
HT-BURLINGAME LIMITED PARTNERSHIP
By: HT-Burlingame, Inc.
By: /s/ GLEN MILLER
-----------------------------
Name: Glen Miller
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS I
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS II
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
8
<PAGE>
BLACKSTONE REAL ESTATE PARTNERS III
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS IV
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE RE CAPITAL PARTNERS
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
9
<PAGE>
BLACKSTONE RE CAPITAL PARTNERS II
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general
partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE RE OFFSHORE CAPITAL
PARTNERS L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates L.P., a
Delaware limited partnership, general partner
By: BREA L.L.C., a Delaware limited
liability company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE HOLDINGS
L.P., a Delaware limited partnership,
By: BREA L.L.C., a Delaware limited liability
company, general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS II
L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates II L.P.,
a Delaware limited partnership, general
partner
10
<PAGE>
By: Blackstone Real Estate
Management Associates II L.P., a
Delaware limited partnership, its general
partner
By: BREA II L.L.C., a Delaware limited
liability company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS
II.TE.1 L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates II L.P.,
a Delaware limited partnership, its general
partner
By: Blackstone Real Estate
Management Associates II L.P., a
Delaware limited partnership, its general
partner
By: BREA II L.L.C., a Delaware limited liability
company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS
II.TE.2 L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates II L.P.,
a Delaware limited partnership, its general
partner
By: Blackstone Real Estate
Management Associates II L.P., a
Delaware limited partnership, its
general partner
11
<PAGE>
By: BREA II L.L.C., a Delaware limited
liability company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS
II.TE.3 L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates II L.P.,
a Delaware limited partnership, its general
partner
By: Blackstone Real Estate
Management Associates II L.P., a
Delaware limited partnership, its
general partner
By: BREA II L.L.C., a Delaware limited
liability company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
BLACKSTONE REAL ESTATE PARTNERS
II.TE.4 L.P., a Delaware limited partnership
By: Blackstone Real Estate Associates II L.P.,
a Delaware limited partnership, its general
partner
By: Blackstone Real Estate
Management Associates II L.P., a
Delaware limited partnership, its general
partner
By: BREA II L.L.C., a Delaware limited
liability company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
12
<PAGE>
BLACKSTONE REAL ESTATE HOLDINGS
II L.P., a Delaware limited partnership
By: Blackstone Real Estate Management
Associates II L.P., a Delaware limited
partnership, its general partner
By: BREA II L.L.C., a Delaware limited
liability company, its general partner
By: /s/ GARY M. SUMERS
------------------
Name: Gary M. Sumers
Title: Vice President
13
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF HOST MARRIOTT, L.P.
None
LIST OF SUBSIDIARIES OF HOST MARRIOTT TRUST
None
<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.
September 10, 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
September 10, 1998
<PAGE>
Exhibit 99.27
[FRONT]
[Name of Partnership] ("[Partnership Abbreviation]") CONSENT FORM
Reference is made to the Prospectus/Consent Solicitation Statement dated
September __, 1998, and the Transmittal Letter attached hereto, sent with this
Consent Form to obtain consent to Host Marriott, L.P.'s proposed acquisition by
merger (the "Merger") of [Partnership Abbreviation] and up to seven other
limited partnerships that own full-service hotels in which Host or its
subsidiaries are general partners. This Consent Form incorporates by reference
the representations and covenants set forth in the Transmittal Letter. The
undersigned hereby votes as set forth below with respect to all Partnership
Units which the undersigned may be entitled to vote. Please put an "X" in the
appropriate box to vote "FOR" the Merger, "AGAINST" the Merger or to "ABSTAIN"
from voting with respect to the Merger. Please put an "X" in the appropriate box
to vote "FOR" the amendments to the partnership agreement, "AGAINST" the
amendments to the partnership agreement or to "ABSTAIN" with respect to the
amendments to the partnership agreement.
[_] "FOR" my Partnership's participation in the Merger.
[_] "FOR" the amendments to the partnership agreement.
[_] "AGAINST" my Partnership's participation in the Merger.
[_] "AGAINST" the amendments to the partnership agreement.
[_] I wish to "ABSTAIN" from voting with respect to the Merger.
[_] I wish to "ABSTAIN" from voting with respect to the amendments to the
partnership agreement.
In order to make certain that the Merger is approved, a [Partnership
Abbreviation] Limited Partner must vote FOR the Merger and FOR the amendments to
the partnership agreement.
- --------------------------------------------------------------------------------
Signature of Limited Partner Date
MAILING LABEL
(Includes name of the Partnership)
- --------------------------------------------------------------------------------
Signature of Co-Owner (if any) Date
PLEASE DATE; SIGN EXACTLY AS YOUR NAME APPEARS ON THE MAILING LABEL, UNLESS YOUR
NAME IS PRINTED INCORRECTLY; AND MAIL THIS CONSENT FORM IN THE ENVELOPE
PROVIDED; NO POSTAGE REQUIRED IF MAILED IN THE UNITED STATES.
(PLEASE COMPLETE ELECTION ON REVERSE)
[BACK]
Limited Partners in [Partnership Abbreviation], if [Partnership
Abbreviation] participates in the Merger, will receive and retain OP Units,
unless one of the following elections is marked:
I wish to exchange my OP Units for Common Shares of Host REIT as
described in the Prospectus/Consent Solicitation Statement.
I wish to exchange my OP Units for a Note of the Operating
Partnership as described in the Prospectus/Consent Solicitation
Statement.
This election can be revoked or an alternative election can be made by
submitting to [Partnership Abbreviation] in writing such revocation or
alternative election prior to the later of November __, 1998 or, upon notice,
such later date as may be selected by the General Partner and the Operating
Partnership.
If you sign and return this Consent Form without indicating a vote, you
will be deemed to have voted "FOR" the Merger and "FOR" for the amendments to
the partnership agreement, and you will receive and retain OP Units if
[Partnership Abbreviation] participates in the Merger.
By signing this Consent Form, you hereby acknowledge receipt of the
Prospectus/Consent Solicitation Statement dated September __, 1998, furnished
herewith.
Each person signing this Consent Form affirms and makes the other
representations, warranties, covenants and agreements set forth in the Letter of
Instructions.
IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE IN COMPLETING THE CONSENT
FORM, PLEASE CALL _________________, THE INFORMATION AGENT, AT ________________.
<PAGE>
IMPORTANT TAX INFORMATION
All holders of interests in the Partnerships ("Holders") should review
the important tax information that is provided below regarding information which
each Holder is required to provide to Host Marriott, L.P. ("Operating
Partnership") and Host Marriott Trust ("Host REIT"). This information must be
provided in order to avoid the withholding of taxes on amounts received from the
Operating Partnership or Host REIT by such Holders. Terms not otherwise defined
herein have the meaning set forth in the Consent Solicitation.
Substitute Form W-9. Under federal income tax law, a Holder who elects
to tender his interest in a Partnership to the Operating Partnership in exchange
for units of limited partnership interest in the Operating Partnership ("OP
Units"), with the right to exchange such OP Units for a note issued by the
Operating Partnership (a "Note") or common shares of beneficial interest of Host
REIT ("Common Shares") in connection with the Mergers, may be subject to backup
federal income-tax withholding with respect to amounts received from the
Operating Partnership or Host REIT, as the case may be. To prevent this
withholding, a Holder must provide the Operating Partnership and Host REIT with
such Holder's correct Taxpayer Identification Number ("TIN") by completing the
attached Substitute Form W-9 certifying that the TIN provided on Substitute Form
W-9 is correct (or that such Holder is awaiting a TIN) and that (1) such Holder
has not been notified by the Internal Revenue Service that he is subject to
backup withholding as a result of the failure to report all interest or
dividends received by him or (2) the Internal Revenue Service has notified the
Holder that he is no longer subject to backup withholding. If such individual,
the TIN will be his Social Security number. The TIN of a Holder which is an
entity will be that entity's Employer Identification Number. The attached
Certificate of Awaiting Taxpayer Identification Number should be completed if
the Holder has not been issued a TIN and has applied for a number or intends to
apply for a number in the near future. If the Operating Partnership and Host
REIT are not provided with the correct TIN, the Holder may be subject to a $50
penalty imposed by the Internal Revenue Service as well as withholding taxes.
Additionally, foreign taxpayers who receive investment income from U.S.
sources are subject to income tax withholding at a rate of 30% of the gross
amount of such U.S. investment income. Failure to provide the information
required on the attached Substitute Form W-9 may result in the Operating
Partnership or Host REIT, as the case may be, being required to withhold 30% of
any payments made to the Holder or other payee which represent either such
Holder's share of the Operating Partnership's investment income (in the case of
a Holder who retains his OP Units received in the Mergers) or dividend payments
(in the case of a Holder who elects to exchange his OP Units for Common Shares.
Certificate Of Non-Foreign Status. The Internal Revenue Code requires
that taxes be withheld on certain amounts payable to foreign persons by domestic
partnerships or by reason of a sale of certain U.S. real property interests
(including distributions by the Operating Partnership or Host REIT, as the case
may be, attributable to gain from the sale or exchange or U.S. real property
interests. In order for a Holder to avoid having withholding taxes deducted from
payments that will be received from the Operating Partnership or Host REIT, as
the case may be, such Holder must certify under penalties of perjury the
following information on the attached Certificate of Non-Foreign Status: 1) the
Holder is not a foreign person; 2) the Holder's TIN; 3) the Holder's address;
and 4) the Holder will notify the Operating Partnership or Host REIT, as the
case may be, within sixty (60) days of a change in Holder's foreign status. A
failure to provide the Operating Partnership or Host REIT with a complete and
signed copy of the Certificate of Non-Foreign Status may result in the required
withholding of up to 39.6% (with regard to an individual) or 35% (with regard to
an entity) of any payments made to the Holder or other payee.
The attached Certificate of Non-Foreign Status must be completed by all
Holders regardless of whether such Holders retain the OP Units received in
the Mergers
<PAGE>
or elect to exchange such OP Units for Notes or Common Shares in connection with
the Mergers.
What Number to Give the Operating Partnership and Host REIT. As
discussed above, the Holder is required to give the Operating Partnership and
Host REIT the Social Security number or employer identification number of the
record holder of the partnership interests tendered hereby. If the interests are
held in more than one name or are not held in the name of the actual owner,
consult the enclosed "Guidelines for Certification of Taxpayer Identification
Number" for additional guidance on which number to report on the attached
documents.
EACH HOLDER IS STRONGLY URGED TO CONSULT WITH HIS OWN TAX ADVISORS TO DETERMINE
THE APPLICATION OF THE TAX WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS TO
HIS PERSONAL TAX SITUATION.
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
- --------------------------------------------------------------------------------
CERTIFICATE OF NON-FOREIGN STATUS
for Individuals
To inform Host Marriott, L.P. and Host Marriott Trust that withholding of tax is
not required under Sections 1445 and 1446 of the Internal Revenue Code upon
amounts received by me from Host Marriott, L.P. or Host Marriott Trust, I, the
undersigned, hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation;
2. My U.S. taxpayer identifying number (Social Security Number) is:
________________________; and
3. My current home address is as follows:______________________________________.
I hereby agree that if I become a nonresident alien, I will notify Host
Marriott, L.P. (if I hold units of interest in, or a note issued by, Host
Marriott, L.P.) or Host Marriott Trust (if I hold common shares of beneficial
interest in Host Marriott Trust) within sixty (60) calendar days of doing so.
I understand that this certification may be disclosed to the Internal Revenue
Service by Host Marriott, L.P. or Host Marriott Trust and that any false
statement I have made here could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct, and complete.
SIGNATURE ______________________________ Date _______________
PRINT NAME _____________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN WITHHOLDING OF UP
TO 39.6 PERCENT OF ANY PAYMENTS MADE TO YOU BY HOST MARRIOTT, L. P. OR HOST
MARRIOTT TRUST. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER FOR ADDITIONAL DETAILS.
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
- --------------------------------------------------------------------------------
CERTIFICATE OF NON-FOREIGN STATUS
for Entities
To inform Host Marriott, L.P. and Host Marriott Trust that withholding of tax is
not required by Sections 1445 and 1446 of the Internal Revenue Code upon amounts
received by ________ from Host Marriott, L.P. or Host Marriott Trust, the
undersigned hereby certifies the following on behalf of ____________________:
1. _______________ is not a foreign corporation, foreign partnership, foreign
trust, or foreign estate (as those terms are defined in the Internal Revenue
Code and Income Tax Regulations);
2. ___________'s U.S. employer identifying number is: __________________; and
3. _____________'s office address is: _______________________________________.
_______________ hereby agrees to notify Host Marriott, L.P. (if _______________
holds units of interest in, or a note issued by, Host Marriott, L.P.) or Host
Marriott Trust (if _______________ holds common shares of beneficial interest in
Host Marriott Trust) within sixty (60) calendar days of the date _______________
becomes a foreign person. _______________ understands that this certification
may be disclosed to the Internal Revenue Service by Host Marriott, L.P. or Host
Marriott Trust and that any false statement made here could be punished by fine,
imprisonment, or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct, and complete,
and I further declare that I have authority to sign this document on behalf of
________________________.
SIGNATURE ______________________________ Date _______________
PRINT NAME _____________________________
TITLE ______________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF UP TO 35 PERCENT OF ANY PAYMENTS MADE TO YOU BY HOST MARRIOTT, L. P. OR HOST
MARRIOTT TRUST. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER FOR ADDITIONAL DETAILS.
<PAGE>
HOST MARRIOTT, L.P.
HOST MARRIOTT TRUST
- --------------------------------------------------------------------------------
________________________________
Social Security Number
or
________________________________
Employer Identification Number
SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN ABOVE AND
CERTIFY BY SIGNING AND DATING
BELOW.
Form W-9
----------------------------------------
Department of the Treasury Part 2 - Certification - Under Penalties of
Internal Revenue Service Perjury, I certify that:
(l) The number shown on this form is my
correct Taxpayer Identification
Number (or I am waiting for a number
to be issued to me) and
Payer's Request for Taxpayer
Identification Number ("TIN") (2) I am not subject to backup
withholding either because I have
not been notified by the Internal
Revenue Service ("IRS") that I am
subject to backup withholding as a
result of failure to report all
interests or dividends, or the IRS
has notified me that I am no longer
subject to backup withholding.
Part 3 - Awaiting TIN "
- --------------------------------------------------------------------------------
Certificate Instructions - You must cross out item (2) in Part 2 above if you
have been notified by the IRS that you are subject to backup withholding because
of underreporting interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup withholding you
received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
SIGNATURE _______________________________ Date ___________
PRINT NAME ______________________________
ADDRESS _________________________________
_________________________________
- --------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN WITHHOLDING OF UP
TO 31 PERCENT OF ANY PAYMENTS MADE TO YOU BY HOST MARRIOTT, L.P. OR HOST
MARRIOTT TRUST. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within sixty (60) days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
Signature ________________________ Date ____________
- --------------------------------------------------------------------------------
<PAGE>
GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER
Guidelines for Determining the Proper Identification Number to Give the
Payer.--Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
insert on the applicable form.
- --------------------------------------------------------
Give the
For this type of account: SOCIAL SECURITY
number of--
- --------------------------------------------------------
1. An individual's The individual
account
2. Two or more The actual owner of the
individuals (joint account or, if combined
account) funds, any one of the
individuals(1)
3. Husband and wife The actual owner of the
(joint account) account or, if joint
funds, either person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if the
account) minor is the only
contributor, the minor(1)
6. Account in the name of The ward, minor, or
guardian or committee incompetent person(3)
for a designated ward,
minor, or incompetent
person
7. a. The usual The grantor-trustee(1)
revocable savings
trust account
(grantor is also
trustee)
b. So-called trust The actual owner(1)
account that is not
a legal or valid
trust under State
law
- --------------------------------------------------------
Give the EMPLOYER
For this type of account: IDENTIFICATION
number of--
- --------------------------------------------------------
8. Sole proprietorship The owner(4)
account
9. A valid trust, estate, or The legal entity (Do not
pension trust furnish the identifying
number of the personal
representative or trustee
unless the legal entity
itself is not designated
in the account title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership account held The partnership
in the name of the
business
13. Association, club, or The organization
other tax-exempt
organization
14. A broker or registered The broker or nominee
nominee
15. Account with the The public entity
Department of
Agriculture in the name
of a public entity (such
as a State or local
government, school
district, or prison) that
receives agricultural
program payments
- --------------------------------------------------------
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
